Timo Nieminen, a 50-year-old from London, started financial trading six years ago and soon began mirroring other people’s trades, in a practice known as copy trading.
“At the start it was promising,” Nieminen says. But then an equity trader, who Nieminen followed, abruptly abandoned his cautious strategy and opened up controversial short positions. “I emailed and asked [him], he said the market would turn around . . . People following his account started getting margin calls. He lost half of my account.”
Nieminen’s experience is only one of many. The rollercoaster financial markets of the past few years have sucked in millions of novice investors globally, at the same time as the relentless growth of online services has made investing and trading more accessible.
The popular enthusiasm for equities has waned a little since the meme stock frenzy which swept the world at the height of the Covid pandemic, delivering some rich rewards to early investors while hitting latecomers — often the least experienced people — with heavy losses.
However, online trading has retained much of its appeal, especially among younger internet-savvy investors.
Apps such as Follow in the US and Gather in the UK are only the latest to join the likes of eToro, the industry leader, in enabling users to view other people’s portfolios and even set their accounts to automatically mimic other users, known by academic finance experts as a signal providers.
After seeing active user numbers soar during the pandemic from 500,000 globally at the end of 2019 to 2mn at the end of 2021, eToro posted further increases last year to 2.8mn.
Supporters say that, at their best, online trading platforms offer clients unprecedented access to wide ranges of stocks at keen prices and low commission rates. EToro says it is “a trusted broker” offering a “friendly platform” with 3,000 products.
But critics say they can also lure novices into risky activities, notably day trading, where clients make short bets, and copy trading, where they try to follow the moves of so-called experts.
UK and other regulators license the platform providers and are keeping a close eye on their activities. But they are under pressure to do more to protect consumers from the risks, particularly in copy trading.
“My general view is that a worrying number of people doing this are not well qualified to do so,” says Holly Mackay, founder of consumer website Boring Money, which labels copy trading “bad news and dangerous”. “How are people to know if they’re following a fantastic brain or an overinflated ego?”
FT Money looks into the realities of copy trading.
Investors have long been able to follow the advice of financial forecasters whether for a short-term punt or a long-term portfolio move.
In principle, today’s copy traders are similar to savers of previous generations who clubbed together to share views in evening meetings in pubs or social centres. Others have tried to mimic well-known investment gurus such as Benjamin Graham, John Templeton or Warren Buffett.
As with today’s cohort, previous generations were also prey to bad decisions and bad advice. And they fell victim to scams, all the way back to the 18th century South Sea Bubble.
The difference now is that the digital revolution has transformed the reach of investment gurus, and the speed with which they can spread their message and with which followers can react.
Copy trading platforms try to fill a longstanding information gap among novice investors who don’t use professional advisers or read the financial media and instead rely on the internet for guidance.
It’s a lucrative business for companies providing the service, headed by Israel-based eToro, the largest copy-trading platform. Other apps are also generating interest.
These companies carry the tips and comments of users — whether expert or not — for others to follow. In this they differ hugely from established do-it-yourself investment platforms, such as market leader Hargreaves Lansdown, which do not give recommendations. They are also distinct from trading-only services such as Robinhood.
“Our investment platform does not look like an investment platform, it looks more like a social site. We’re a little bit more accessible,” says Dan Moczulski, UK managing director at eToro. He says that investors start out by following some of the platform’s 2,600 “popular investors” (PIs) — the company rejects the phrase signal providers — before deciding whether to copy their portfolios. “It encourages education, it encourages learning about assets,” Moczulski adds.
Mackay says this may appeal to investors who rely on friends and family for investment tips, particularly as most people are reluctant to undertake their own research. “We want someone else to tell us what to do, or to validate our thinking,” she says.
But, as she points out, it becomes crucial to understand the financial incentives that can influence the signal providers.
Follow the leader
Signal providers are often compensated by platforms based on a combination of their returns and the number of followers they attract. On eToro, top providers, called elite and elite pro, receive 1.5 per cent a year of the value of assets being copy traded if investors mirror their trades to the tune of at least $500,000 combined.
Critics say this provides incentives for signal providers to make outrageous trades in an effort to boost their follower count. “It’s important for signal providers to attract attention,” says Matthias Horn, chair of finance at Bamberg University in Germany. “If you succeed, you make more money, but it doesn’t matter if you fail as you can delete your account and gamble again.”
But eToro rejects this argument. Moczulski says traders designated as PIs on eToro invest their own money and don’t necessarily make risky bets. “If you look at our most copied PIs, their risk scores tend to be low,” he added. “[They] are also under risk restrictions and automated restrictions on leverage, preventing them from taking excessive risk.”
eToro requires its most popular traders to pass chartered qualifications. But that is not true for every platform: Greece-based ZuluTrade does not set knowledge requirements for its traders who rarely supply their real names, images of themselves or credentials. ZuluTrade did not respond to a request for comment.
Like any investment guru, a signal provider has good years and bad. A former management consultant, Jeppe Kirk Bonde, has the largest following on eToro with some 22,000 copiers with more than $5mn in assets, according to the site. His portfolio is over 90 per cent public equities, with stakes in Microsoft, Meta and Swiss bank UBS.
Returns for Bonde peaked in 2017, when his portfolio gained 148 per cent. In 2022 he experienced his biggest decline, losing 19.2 per cent. Since the start of last year, he has underperformed a low-cost S&P 500 tracker. Several other of the most-followed copy traders have also started to lag behind after doing well before the pandemic.
“You can argue that popular investors are incentivised to be too conservative . . . If you increase your risk score, experience drawdown, or somehow ‘seem risky’, the copiers leave, and you completely stop gaining new copiers,” says Bonde, who has a masters degree in finance and strategic management from Copenhagen Business School.
However, novice savers may be following a name rather than an investment strategy and be unaware of the risks involved. Bella Caridade-Ferreira of comparison site Compare+Invest says platforms give investors a “false sense of security” and can “reinforce the cult of the finfluencer”.
Carlos Noyola, an art dealer from Mexico, started copy trading on eToro in 2017 after his savings were knocked by the weak peso valuation against the dollar. However, the following year his portfolio crashed by 52.8 per cent.
“In 2018 when we had a big downturn, I didn’t know how to use eToro, so my stop losses were too high. I learnt that the popular investors could make up their losses much quicker than I could make up my own,” he says.
The risks of copy trading platforms are a cause of concern for regulators. The European Securities and Markets Agency (Esma), the EU watchdog, released a supervisory briefing in March, stating that a copy trading service requires authorisation under Mifid II rules if trading is automated to the point where little or no intervention is required by the investor.
Although the guidelines are not new, the continent-wide agency says since the retail trading boom two years ago it felt it important to remind firms of their legal obligations.
“One of the concerns we have is the potential risk that copy trading platforms might see themselves as purely technological platforms,” says Esma. “We wanted to remind these firms that they are often actually providing investment services.”
In the UK, the Financial Conduct Authority raised concerns about copy trading two years ago after it found that 58 per cent of under-40s invested in high-risk products did so based on news and social media content. It has since introduced a set of measures aimed at online influencers, but copy trading’s “popular investors” are not covered.
The FCA declined to comment but has mirrored Esma in classifying copy trading as portfolio management, meaning it is a regulated activity like other investment services.
EToro says its copy trading service is “fully regulated” and it holds portfolio management licences in various jurisdictions, including Britain.
Ultimately, investors decide what is right for them. Noyola says he would still recommend copy trading despite shouldering significant losses.
“I think it’s worth it if you’re a person who likes passive investment, as you don’t have to pay fees and can learn in real time what the trader is doing,” he says. “But it’s been a heck of a ride.”
Offering an alternative?
Festival-goers flock between the stands, spilling cocktails and swallowing oysters in the summer heat, the air filled with the smoky smell of barbecued shellfish and throwback acoustics from noughties pop group Sugababes.
The private members’ club Soho House’s annual gathering in London’s Gunnersbury Park sets its members back £275 for a day’s fun.
Networking among the food and drinks brands on offer are executives from a new copy trading platform targeting young professionals.
“There’s never enough confidence [about how to invest]. That’s a fact. No matter how wealthy you are,” says Giovanni Bonaccorso, founder and chief executive of Gather. “But in an environment where the cost of living and inflation is really high, there is a sense of urgency [to start investing].”
In a crowded field of new investment platforms, companies are eager to inject some vim into the market.
Gather builds on other copy trading platforms, bringing together “investment experts” and customers, who can follow other people and view their portfolios alongside details of their non-app investments and personal interests.
The company claims its social media-like feel helps build trust between investors and the “experts” whose portfolios can be copied.
Though users can view other people’s portfolios, they will only be able to copy allocations from a select group of finance professionals, including Richard Lightbound, chief executive of indexing company Robo Global, and Tom Pelc, chief investment officer at fintech Fortu Wealth and a shareholder.
Gather adds that unlike most copy trading platforms it does not offer users the chance to buy individual stocks, focusing instead on funds. The company says funds expose customers to less volatility and discourage day trading.
“It’s about following somebody that’s got lots of experience and you’re fairly comfortable with,” says Bonaccorso. “You don’t have to copy in full, you can do it when you want. You can just follow and build up confidence.”
It’s yet to convince industry critics such as Bella Caridade-Ferreira of Compare+Invest, who warns the app does not adequately demarcate “expert” and “influencer” profiles.
She says novice investors are also unlikely to be drawn to the app’s “experts” over its more popular influencers, including celebrities such as Arsenal footballer Jorginho, who is also a shareholder, and this poses a risk where they opt to copy the portfolios manually of those without any investment expertise.
Gather maintains that the app is fully compliant with UK rules and regulations.
“Everything that we launch right now has all been tested, has all been researched, also from a target market perspective, from a Consumer Duty perspective,” says Bonaccorso, referring to the FCA’s new consumer rules for firms which include provisions around transparency and customer value.