Copy trading
Definition
Copy trading: A service that replicates another trader's trades in a follower's own account, usually automatically, so the follower's results follow someone else's decisions.
What it means
In copy trading, a retail client chooses a trader to follow — the copied trader, sometimes called a signal or strategy provider — and matching orders are placed in the client's own account. The client keeps the account and the money; the decisions are someone else's. ESMA notes that most copy trading providers execute the copied trades automatically1.
Regulators look closely at the arrangement. ESMA's 2023 supervisory briefing says that where orders are copied automatically, with no action from the client, the service can amount to portfolio management; where the client must act, it may be investment advice together with order transmission. The briefing also asks how copied traders are paid — for instance by number of followers or trades copied — and whether that pay could pull their interests away from their followers'1.
The risks are those of the underlying leveraged product plus some of its own: a copied trader's past results do not predict future ones, their appetite for risk may not match the follower's, and losses land in the follower's account whether or not the follower was watching.
Example
A follower allocates part of their balance to a copied trader. When that trader opens a position, a matching position sized to the follower's allocation opens in the follower's account; when the trader's position loses, the follower's loses too.
Why it matters to an IB
An IB who offers copy trading through their broker must not present a copied trader's results as what a follower will get. Show results only if they are complete and sourced, and keep the risk warning beside the offer.
Sources
- Supervisory briefing on supervisory expectations in relation to firms offering copy trading services (ESMA35-42-1428) — European Securities and Markets Authority