FX trading: Mirror, mirror on the wall, who is the juiciest of them all?
Mirror trading, copy trading, and social trading; are they the same? Are we talking Twitter lingo, following traders or piggy back trading others that declare themselves “Traders” by virtue of spending more time than we do on the screens?
Personally, I learn by making distinctions. So, let me share with you my process in the Forex market, since mirror-copy-social trading is extremely popular in that space.
In a mirror-copy-social trading relationship, there is the copying trader (the user who has less time to manage his/her financial assets) and the copied Trader (the “Expert” whose trades and performance is shared – and I capitalize his Trading component because it reminds us of who is the driver).
Mirror trading is literally, like automatic cruise control handed over to the Trader that we decide to mirror. All orders placed by the Trader will be automatically applied to our brokerage account. No intervention is required on our part and all account activity is controlled by the platform. Mirror trading in a way, is dark asset management. There are no social capabilities, no chats and likes. Some mirror trading platforms have their own brokerage businesses and others also offer multiple brokerage services. Examples of companies offering mirror trading services are, Tradency (a technology provider to brokers) and FXPro SuperTrader (an FX broker).
Copy trading is a broader development of the mirror trading technique, which has been around informally. Users have more trading strategy choices.
For example, the copied Trader can set the proportions between the copied and copying accounts. Copying traders have more risk management choices than in mirror trading. For example, copying traders may be allowed to place Stop Loss limits on the entire copy trading relationship; or set the % allocation to each strategy; or decide the number of trades that can be open at the same time. Examples of players in copy trading, are ZuluTrade and Etoro.
Copying traders can follow-copy multiple strategies at the same time. Of course, the copying trader retains the ability to disconnect copied trades. And at any time, they can close the copy relationship all together.
Copy trading services share both statistics and rankings of Traders and strategies. Most platforms offer a large choice of directly copying Traders and some offer a variety of risk adjusted investable products that are “derivatives” of the copied strategies (like Darwinex).
Social trading encompasses comments, sharing investments ideas and theses, voting on actionable strategies, sharing portfolio compositions (usually only % not amounts), sharing stop losses and limit orders etc. It is about searching for value from the crowd, interpreting the reactions of the audience of the beauty contest that is in disguise in all public markets. Examples of players in social trading, are ZuluTrade, Etoro, and Ayondo; but they are also into copy trading . I haven’t found any pure FX social networks, like StockTwits, TickerTags, Tip’dOff.
Audience
The mirror trading space targets less of the novices and the copy-social trading space targets broader levels of sophistication of retail users. FX trading is the largest liquid market and by nature always attracted day trading aficionados and offered significant leverage. Japan has traditionally been the largest retail FX market (nearly 18% of the global Forex market, despite restricted leverage use) and is seen as a great growth market for copy-social trading. Asia in general, seems promising given also the widespread use of social networks and their culture of embracing technology.
Positioning
Some of the players in the mirror-copy-social space started with an online financial trading brokerage license and subsequently, added social features, created a community and then obtained an asset management license that allows them to offer “copy-mirror trading” services. Others started by obtaining an asset manager license and started gathering assets through the “social-copy trading” venue.
FXStat and MetaTrader, are examples of FX analytics provider and a trading platform, that have added social features.
EToro is an example of a pure social trading network with a brokerage business that have became major copy trading platform. For a comparison of features of ZuluTrade and Etoro, see FXsignalfactory.
Darwinex is an example of a startup that obtained an asset manager license first and then a brokerage license.
It is also worthwhile noticing that there is already an education social trading site (not only FX) Investingoal that has a partnership with ZuluTrade. And a department store-like offering, SocialTrading-Aula, that selects a few people-to-people financial services. They have partnered with ZuluTrade, Etoro, Ayondo, and FXPro in the FX space and are already planning to offer similar services for P2P lending (TalerBox, Auxmoney, Lendico).
Regulation
Another important distinction in the mirror-copy-social is whether these activities fall under the investment management activity and thus should be regulated. Copied Traders are seen effectively as unregulated investment managers. The UK regulatory authority, the Financial Conduct Authority (FCA), has said YES. There is still a debate in the industry and some disagreement. Juan Colon, CEO of Darwinex, agrees with the FCA stance that copy trading can be considered investment advice. They belong to the camp that shares the intellectual property of their strategies with a slight delay whereas eToro shares the copied Trader moves immediately.
Mishaps
Despite, the growth in this space there have also been a couple of withdrawals already. OANDA, one of the major FX trading platforms, integrated its trading platform with the Currensee solution, a copy trading platform. This past fall, they withdrew form this market and the Currensee platform ceased to exist.
ZipSignals is an early copy trading platform that also closed the end of last year. SocialTradingGuru, an information site for social trading, still keeps a profile on them. There are some rumors about a major drawdown event that led to bankruptcy.
Value proposition
The core issue is whether there is alpha generation through this process. The first published study has been a collaboration with Etoro and MIT that presents evidence that copy trading (through Etoro) fared 6-10% better than traders who were trading manually, and 4% better than traders who were copy trading random investors of their choice. There is obviously much more to be done to demonstrate consistent evidence of success of mirror-copy-social trading techniques. Is there potential for improved risk management and higher risk-adjusted returns for retailers that dynamically switch copy trading strategies? Don’t forget that it is still the copying trader that manually decides how to “optimize” the timing of strategies and the switching.
Is automated mirroring going to dominate or semi-automated copying?
Is mirror-copy-social trading going to lead to an alternative mutual fund class?
Is mirror-copy-social trading a next generation risk management tool for retail?
Is mirror-copy-social trading a more efficient financial information management process for retail?
