Find out more about copy trading, which allows investors to trade by automatically copying another investor's trades, and when this is classed as portfolio or investment management.
Typically, retail traders mimic the trades of other users through contracts for difference (CFD) platforms. These platforms integrate information sharing and social media with online CFD trading.
We classify copy trading as portfolio or investment management where no manual input is clear from the account holder. This entails standard regulatory obligations for authorised management.
Mirror trading and copy trading
Mirror trading is like copy trading but with minor differences.
Mirror trading, an evolution of automated trading, simply implements fixed strategies based on trading preferences. Mirror trading may involve copying experienced and successful traders.
Copy trading typically involves setting a proportion of funds to execute the trades of the copied trader from the allotted funds. Platforms vary in their minimum copy trading amounts and the proportions between copied and copying accounts. Some also allow traders to control their risk through Stop Loss orders. The copying trader may disconnect their funds and manage their investments – in other words, closing the copy relationship.
Mirror trading and copy trading have both led to ‘people-based portfolios’ – portfolios that invest funds in other investors rather than watch the market.
Copy trading, mirror trading and portfolio management
We support the view set out in the question nine of European Securities and Markets Authority's (ESMA) MiFID Questions and Answers: Investor Protection & Intermediaries (PDF, 15 pages) as to how copy and mirror trading fit within the MiFID Directive. It considers them an automatic execution of trade signals.
A platform may allow its clients to choose one or more third parties who provide trade signals (shared on the website). Once the client chooses a signal provider and authorises the service provider to issue orders on their behalf, the service provider transforms each signal into a buy or sell order to be executed by the service provider itself or transmitted for execution to another firm, without further intervention from the client.
Definition of portfolio management
This service falls within Article 4(1)(9) of MiFID. This article defines ‘portfolio management’ as ‘managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments’. In copy trading and mirror trading, investment decisions are implemented with no intervention by the client other than an agreement (‘mandate’) between the service provider and the client on the discretionary service provided.
Portfolio management authorisation
Where the service described above is provided through MiFID financial instruments, it requires portfolio management authorisation from us. In the model described, the service provider exercises investment discretion by automatically executing the trade signals of third parties. Where MiFID applies, this triggers associated ongoing regulatory obligations including the suitability assessment, other conduct of business requirements and providing periodic reports to clients and regulators.
Where the client sets trading parameters, such as the sum they wish to invest or are prepared to lose, this will not affect the characterisation of the service as portfolio management.
Where no automatic order execution occurs because client action is required before executing each transaction, the activity performed will not amount to portfolio management. However, depending on the interaction with the client, other investment services may still be relevant (eg investment advice with personal recommendations, and reception and transmission of orders).
The client may take investment decisions rather than the service provider to buy or sell the individual investments. For example:
- The trade signals are investment advice (or a general recommendation), and the client must confirm each recommendation before any order is executed or transmitted for execution on their behalf.
- The trade signals are fully determined by the client, who must set the detailed limits for each signal/order/transaction, such as the precise market conditions that will trigger a particular signal (eg purchase or sell instrument A when its price on market B reaches level C).