Australia’s ASIC investigating copy trading: SMH
Australia’s Sydney Morning Herald posted an article over the weekend, stating that Australia’s financial regulator ASIC has launched an investigation into copy trading – a service promoted by a number of Retail FX brokers allowing novice traders to “follow” or “copy” the trades of more experienced traders.
In theory, copy trading (also known as social trading or mirror trading) allows novice traders to mimic more experienced traders; allows the more experienced traders to make money by earning a percentage of the profits their “followers” earn; and the broker gets to attract both new and experienced traders attracted to the scheme, and enjoy higher trading volumes.
In theory, a win-win-win proposition.
However like with many things (especially those “things” to which retail trader money get attracted) in practice it doesn’t always go like in theory. Apparently about 1,200 young Australians, some in their teens, were recently caught up in a copy trading disaster when a trader “leader” they were following went rogue and wiped out their investments in 48 hours.
According to the SMH, most of the followers who were wiped out had their accounts with Australian Retail FX broker IC Markets (which recently had an offshore affiliate banned in Italy, leading to the breakup of a planned €14 million sponsorship of Italian football squad Inter Milan by IC Markets). IC Markets, for its part, told the SMH that it does not even directly offer copy trading, saying instead the product was offered by third parties. Apparently the wiped-out traders were indeed using the copy functionality of a third party trading platform offered across many brokers, including IC Markets.
ASIC has felt the heat lately to be tougher on the Retail FX and CFD market, and better protect retail traders, after a number of broker bankruptcies and scams have left retail traders holding the bag. ASIC and administrator-turned-liquidator BRI Ferrier have been busy for the past few months sorting through the bankruptcy of USGFX, a mid-sized FX broker that went bust in the summer. Nearly half a year after the firm folded the regulator and BRI Ferrier are still trying to figure out how many millions in client money are missing.
That followed the bankruptcy of AGM Markets Pty Ltd, which operated the AlphaBinary brand.
Soon after AlphaBinary (although already in administration) and its introducing brokers were issued a $75 million fine, in late October ASIC announced that, starting in March 2021, it was going to introduce new rules governing Retail FX and CFD brokerage, including maximum leverage of 30x on CFDs and negative balance protection for retail traders.
No mention was made at the time of copy trading, but as noted above apparently that area is also now being reviewed by ASIC. The SMH quoted an unnamed spokesperson for ASIC who reportedly said:
“We are engaging with firms on their practices and implications for clients. We note there has been increased levels of retail investor activity in securities this year and an increase in advertising of copy trading services.”
Copy trading and offering social interaction between traders has been an area of focus for many Retail FX brokers worldwide over the past few months. eToro – also licensed in Australia – is probably the Retail FX broker which has been promoting copy trading the longest and the most. And it has worked -Israel based eToro just landed unofficial “unicorn” status, when shares of the broker changed hands at a reported $2.5 billion valuation.
eToro, which on its homepage calls for calls for traders to “join the Social Trading revolution”, was also a focus of the SMH article which noted that the broker has been using popular Hollywood actor Alec Baldwin to promote its services in a series of video commercials. In the ad promoting copy trading (see below) Baldwin explains to a simple minded sock puppet just how easy it is to copy trade.
Other brokers have been following eToro’s lead and pushing social and copy trading among their retail traders. Hamburg, Germany based NAGA Group AG, a social trading focused broker, has put up impressive growth numbers this year. Other brokers have turned to white-labeling copy trading software platforms from third party providers such as Pelican Trading.
The eToro copy trading ad starring Alec Baldwin follows: