Sock puppets and Lifeline ads: Welcome to the wild world of copy trading
American actor Alec Baldwin is hamming it up with a sock puppet in advertisements playing on high rotation on social media to explain a hot new trading trend – copy trading.
He explains that it’s oh-so-easy to make a motza trading crypto or shares even if you’re a hipster food blogger and know nothing about the market.
The ad is for the hugely popular online trading platform eToro, a company that has used clever marketing devices like the ads with Baldwin to cash in on the growing interest in trading by younger investors.
Assuming the role of an inexperienced trader through the sock puppet, Baldwin squeaks: “Sir, my head can’t handle more than 140 characters, is there some way you could make things even easier for me?”
Responding, Baldwin switches to his own husky voice (his description, not ours) and responds: “Why yes, you can, with CopyTrader. Just find a top investor on eToro… and hit copy. From now on whenever they make a trade, you make the same trade automatically.”
Copy trading is an increasingly popular and sometimes dangerous form of trading stocks and making bets on the price of commodities and currencies, using high risk financial derivatives known as contracts for difference (CFDs).
Some young people borrowed money off their parents because the trader they were copying had done so well, they were certain it was a sure bet.
As in the Baldwin ad, the new trend is marketed to young people as a safe way of trading if they don’t understand markets and the products they’re using, or don’t follow financial news. It’s sold as being so simple that you just click a button to copy a trader and all the trades that follow are completed without you doing a thing. And whatever the trader you are replicating wins, you win; but if the trader loses, you also lose.
As The Age and The Sydney Morning Herald has revealed, the CFD market in Australia has become overrun with rogue operators in recent years due to our world-lagging regulation of these complex leverage products.
The Australian Securities and Investments Commission (ASIC) is also looking at that market, though reports on the sector so far haven’t identified any issues with groups like eToro and IC Markets. ASIC in October announced new rules to limit leverage on such products, which from March will bring Australia into line with most other developed markets. A senior industry source from a major broker said their company did not offer copy trading and it was a product they had serious concerns about for more than a decade.
Robinhood and Superhero
Yet in the meantime, the COVID-19 restrictions on sports and social activities and the wild market swings have driven a boom with young traders in Australia. This boom has been fuelled by a range of platforms focused on Gen Y and Gen Z markets such as Robinhood, Superhero and eToro.
EToro declined invitations to answer questions about the benefits of its product. In an interview this month with The Australian, its local managing director Robert Francis said: “We’ve been allowed to offer this product from the very beginning, at [ASIC’s] consent, but they’re now looking to say, ‘OK, well, we need to know a little more about it. And we want to find out about the client experience and the popular investors’.
“And frankly, ASIC was tarred and feathered recently, so they’re now taking a very close look at everybody,” Mr Francis added.
According to research by analysis website Compare Forex Brokers, Google searches in Australia for terms such as social trading were up 25 per cent over the year to October 2020, while searches for copy trading were up by 68 per cent over the past year.
But the big new trend in trading is already causing grief for Australian investors, sparking an ASIC investigation. In recent weeks, an estimated 1200 mostly young Australians, some in their teens, have been caught up in a copy trading disaster when a copy trader they were following went rogue and wiped out their investments in 48 hours.
Sources said the trader told his followers he would only invest in Australian shares and did not trade in overseas currencies and would not trade in the week before the week of the US election due to market volatility risk. They were also told the trader had a “stop-loss” order in place to ensure that any trades that were losing too much would be stopped and cancelled before too much damage was done.
“None of that was true”, a source familiar with the group and its problems said. “He did trade that week. He traded currencies, there was no stop-loss. When it started going badly, he dug in and lost everyone’s money.”
The rogue trader’s actions have led a popular Australian-administrated Facebook group set up for online traders to discuss the sharemarket to place Lifeline ads on its page.
“I have been made aware of people losing large amounts of their portfolio using a copy trader program. Please, if you are having thoughts of self-harm, contact Lifeline on 13 11 14,” the post on the page with 50,000 followers reads.
The rogue guru is the first public example in Australia of the dangers of copy trading.
On social media and on the copy trader software platform CTrader the guru held out to be an experienced trader with 25 years experience and a staff of more than 20 people aiding him in reading financial news, data prints and company reports to pick his trades. The followers were largely using IC Markets as their broker, though CTrader is offered through a range of other brokerages. CTrader could not be contacted for comment. It is not a holder of an Australian Financial Services Licence.
But when The Age and The Sydney Morning Herald called the guru this week he insisted he wasn’t the rogue trader. The real estate agent from one of Melbourne’s lowest socio-economic areas, St Albans, said his name and his company name had been used by people he did not know.
It is important to note that it is perfectly possible that someone else has been impersonating the real estate agent, and that raises even more questions and risks for people engaged in copy trading. IC Markets said it did not directly offer copy trading, saying instead the product was offered by third parties. It said it had received no complaints from the guru about his identity being stolen and stood by its “know your customer” requirements.
Sources say a recent virtual meeting of amateur traders following the collapse of the scheme included very young adult traders in their late teens and early 20s, some of whom were accompanied to the meeting with their parents.
“Some young people borrowed money off their parents because the trader they were copying had done so well, they were certain it was a sure bet,” a source who attended the meeting said. “Others have lost all the money they had set aside for their wedding, it’s really sad.”
The scheme’s ads didn’t mention the inherent risks in this increasingly popular type of trading, though the risks are explained when people do sign up to the platform.
Justin Grossbard, who runs Australian trading comparison site Compare Forex Brokers, has serious concerns about copy trading. (Grossbard and his business partner Noam Korbl set up the site out of frustration there was no way to compare good brokers to bad brokers in the market, both in favour of CFD and forex trading.)
“The first concern is that copy trading can be done with a non regulated entity. When this is the case, traders can be susceptible to scams and/or following individuals that trade in unexpected patterns.”
“The second is copy trading can give a false sense of security by publishing traders past success rates. As is published widely among those advertising in finance, past success is not indicative of future performance. Among retail traders in this sector, success is rarely achieved.”
Influencers instead of qualified advice
In Australia, the influencers that copy traders follow are not required to be licensed financial services professionals and instead are often ordinary joes who are existing users of these platforms. And the advertisements here don’t have to carry heavy warnings about the rate of customer losses – often as high as 80 per cent – as they do in Europe and UK.
Sources at the corporate watchdog say it is concerned about the wild popularity of the trading trend and the potential for people to make unwise investment decisions and take risky trades.
ASIC put out a regulatory guide in 2016 on digital financial advice addressing the topic for industry participants. It does not have warnings specifically about copy trading or social trading on its consumer-facing money smart website.
A spokesman for the regulator said copy trading was like any financial product or service and that it was focused on offers being appropriately licensed and were acting in the best interests of clients.
“We are engaging with firms on their practices and implications for clients.” the spokesman said. “We note there has been increased levels of retail investor activity in securities this year and an increase in advertising of copy trading services.
With that in mind, maybe we’ll be seeing less, not more, of Alec Baldwin and his sock puppet next year.
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Source: Thanks smh.com