What if there were a shortcut to investing—one that eliminated the cost, effort, and risk of individual investment decisions while providing access to expertise, superior knowledge, and inside opportunities? This is the promise made by copy trading. Copy trading allows investors to link their portfolios to ‘leaders’ and replicate those leaders’ portfolios automatically. Every time the leader buys or sells, so does the follower investor. The promise is tantalizing: simply link your portfolio to that of an expert, and let the expert make all your investment decisions for you.
Not so fast. In a new article, I argue that copy trading has given rise to an army of shadow intermediaries, where financial middlepersons offer unregulated portfolio management services. The article’s contribution is twofold. First, it provides an explanation for the rise of copy trading: copy trading responds to the sense of distrust in traditional financial institutions and a belief that those traditional means will not be sufficient to grow wealth, and offers a low-cost means for ordinary investors to ‘be in the club’ of crypto, of private equity, and of powerful political and economic insiders. Second, the article explores conflicts and costs presented by copy trading: conflicts of interest, behavioral and cognitive biases, and poor information. Yet copy trading suffers from a lack of oversight. Thus, the article argues that copy trading is a dangerous form of delegated portfolio management without the traditional guardrails of investment adviser protections.
Consider the copy trading platform dub, which prominently features the following message on its homepage: ‘Stop underperforming like an average investor. . . And start copying real investors instead’. Allowing users to copy politicians, asset managers, and other traders, dub claims that ‘unlike traditional investing apps where you select individual stocks yourself, dub centers around copy-trading . . . We’re creating a community where investment talent is discovered and everyone can learn and grow together’. ZuluTrade laments that the ‘Truth is . . . Trading is not easy’, so ‘Beat the odds with Copy Trading’. These are two of many platforms. The messaging across copy trading platforms is strikingly similar: trust us, join our community of experts, and make money. No particular credentials are needed to become a leader, and leaders include Wall Street titans, government insiders, financial influencers (‘finfluencers’, or those who have amassed a following on social media), and ordinary investors.
Copy trading purports to bring together investing communities and link beginners and experts, seamlessly and effortlessly. This kind of social investing is nothing new; seeking investment advice from one’s community is as old as markets themselves. But traditionally, those who seek financial advice through social channels still must take independent action. They must still manually initiate trades. For example, someone claims on TikTok that a stock is ‘going to the moon’, and their followers go out and purchase that stock. This is a two-step process. Copy trading, by contrast, removes that second step. In other words, copy trading automates social trading.
Why is this appealing? The article demonstrates that the phenomenon of copy trading taps into a number of deeper shifts in investment behavior and market sentiment. Copy trading responds to widespread financial disillusionment and promises something easier, cheaper, and more lucrative. The ‘manifesto’ of Autopilot illustrates this point. It reads: ‘At the core of today’s most pressing challenges lies a critical issue: trust. The pervasive mistrust toward key institutions—be it government bodies, politicians, corporations, banks, or the media—underscores a collective yearning for reliability and integrity’. One supposed reason for lack of trust is: ‘A sense of exclusion from elite investment opportunities that are readily available to the affluent, leaving the average person feeling shortchanged by receiving what appears to be a substandard service, wondering “Can I do better myself?”’
Copy trading offers apparent simplicity, in contrast to the complexity of navigating myriad financial institutions and assets and sifting through huge amounts of information and data. It promises transparency and trustworthiness, in contrast to the opacity in ceding control to traditional money managers. And finally, it offers the tantalizing prospect of unmatched financial returns, in contrast to many Americans’ lived inability to grow wealth through traditional means. Copy trading has a powerful message, and that message is particularly resonant because it responds to deeply entrenched socioeconomic issues.
Yet is copy trading really more effective, and is it really less risky? As currently formulated, the answer appears to be no. Copy trading claims that it ‘can do better than traditional finance’. But a close look reveals striking similarities to traditional finance, with fewer regulatory protections and all the same (and potentially worse) problems. Copy trading is plagued by conflicts of interest, misleading data, the potential for fraud and manipulation, and lack of transparency. These are classic problems of financial intermediation, deeply familiar to the financial industry. They also help highlight what copy trading really is: delegated—but insufficiently regulated—portfolio management.
Consider the following. Traditional money managers owe stringent duties to their clients. Leaders on copy trading platforms are generally not subject to these duties because their copiers’ funds typically remain in linked, but separate, brokerage accounts. However, the automated mechanism of copy trading complicates the distinction between maintaining control and ceding control to a leader. In particular, although the copier is acting through a self-directed brokerage account that is linked to a leader’s portfolio, at what point does that automated copying mechanism cross that line? If a copier’s account exactly and automatically mirrors a leader’s account, the leader is effectively making investment decisions for the copier and arguably directly managing the copier’s money. Framed in this way, a leader’s behavior looks a lot like that of a traditional money manager or financial advisor: the client (or copier) grants the manager (or leader) some amount of control over the client’s (or copier’s) funds, and the manager (or leader) makes decisions governing those funds. Perhaps unsurprisingly then, one such platform, Collective2, goes so far as to advertise the ability to ‘start a hedge fund, without actually starting a hedge fund’.
The line here is so thin that it has all but disappeared. Though copiers may keep their funds in linked brokerage accounts, they effectively cede control to the leader through the automated copy mechanism. The leader then basically runs a fund in which copiers have placed their money.
In this way, copy trading has created shadow intermediaries, who effectively offer financial advice masquerading as something else. Any reform must be clear-eyed about what copy trading actually is. A strong argument exists for regulating copy trading platforms and leaders as investment advisers, money managers, or at the very least, broker-dealers making recommendations under Regulation Best Interest. Other reforms can and should target leader and platform incentives, compensation models, and transparency. Copy trading curries investor trust; those investors deserve to have that trust be backed by clear laws that protect their money.
The author’s article is available here.
Sue S. Guan is an Associate Professor of Law at Santa Clara University School of Law.
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