Concern over copy trading grows at social FX platforms
The growing popularity of social FX trading has some platform providers worried that inexperienced traders are taking excessive risks through strategies they don’t fully understand.
Millions of individuals trade FX on platforms such as Trade360, FxPro, Tradeo, eToro, ZuluTrade and TradingFloor. In principle, social FX trading enables traders to augment the knowledge they have gleaned from their own research with insight into the strategies of successful traders, thus helping them to make better decisions.
In practice, though, many traders are simply and unthinkingly copying the moves made by individuals identified as 'successful'. This clearly irks the providers, who see themselves more as platforms for talented traders to get noticed. Francois Nembrini, co-founder of TopTradr, says the objective of his platform is to discover and support trading talent.
“Most other networks simply promote copy trading and are in essence soliciting investments from the retail community,” he adds. “We do not offer copy trading as we do not want people to blindly follow each other. Our goal is to create a community of risk-responsible traders. We want traders to use our network to learn from each other to better themselves so we can eventually back more traders and hopefully find some we can introduce to institutions.”
FX Junction allows users that want to follow other users’ trades to select a portfolio of traders and auto-copy their trades on their own account. Head of software development Matus Bajko notes, however, that the user retains full control of the broker they choose to trade with, how they decide which traders to follow and the trade amount they auto-copy on their account.
Social networks should abide by regular asset-management reporting rules and mark all positions to market - Francois Nembrini, TopTradr
“Unlike other so-called social trading platforms, which are brokers with a copy trading site, FX Junction is not a broker, asset manager or introducing broker,” he adds.
Just over 311,000 trades were processed through FX Junction in December, mostly in the large currency pairs. Nembrini acknowledges that social trading still represents a small proportion of overall FX trading volumes, though.
“Most of the large brokerages are associated with social trading networks as introducers, but very few have a significant amount of their business on those platforms,” he says. “I would say this is less than 5% of the entire retail FX business.”
“Herd behaviour is certainly a factor, and most networks heavily promote their ‘guru’ traders,” he adds. “They sell the dream that it is easy to trade and you simply have to follow one of their experts.”
Bajko explains that in order to charge fees to other traders to use the auto-copy system on FX Junction, the user providing the trade signal must have a live account with a broker. Any user auto-copying other traders has the ability to link their broker's demo account and try the system before linking their live account and can limit the amount of open positions and maximum trade size. “Regarding leverage limits, this is between the user and their broker they do business with,” he says.
Social trading platforms have been accused of being selective when it comes to publishing details of the returns achieved by their members. However, both TopTradr and FX Junction say they favour disclosure of risk-adjusted returns. Bajko states that for each user with a link account, FX Junction displays a range of return and risk performance indicators including relative and maximum drawdown, return volatility, value at risk and Sharpe ratio (which is defined as the average return earned in excess of the risk-free rate per unit of volatility or total risk).
According to Nembrini, all social trading sites should be obliged to provide details of risk-adjusted returns, as many networks only show results for closed trades and do not count open positions.
“Social networks should abide by regular asset-management reporting rules and mark all positions to market,” he concludes. “The [Financial Conduct Authority] was clear on the subject a couple of years ago and clearly stated that copy trading was a regulated activity.
“The only issue here is that most of those networks are located offshore, where regulators do not consider the activity asset management and often associate it as software sales. If you promote trading results and solicit investments, you should be a licensed asset manager.”