Why you should care
When it comes to investing your dough, who doesn’t want a leg up?
On Christian Fahrner’s desk sits a small figurine of a bull. When the currency trader from Stuttgart, Germany, makes a trade betting that the British pound, the euro or another currency is going to slump in value, he places the bull facedown. But if he thinks a currency’s price is poised to rise, then he turns the bull up with confidence.
And why shouldn’t he? After all, Fahrner isn’t just responsible for his own money. About 4,500 other people follow his every move — and, quite literally, copy his every trade — through eToro, a social-trading site that says it has around 80,000 copycats who make trades every month from a pool of very savvy traders, says Ronen Assia, eToro’s chief product officer. When all goes well, it’s one of those super-rare, win-win steps in investing, both for the clueless investor who does all the copying and for the trader who pockets some nice “expert-trading” fees. And did we mention how cool some of these gurus are? Fahrner is a 25-year-old economics student who trades from the bedroom of his four-person apartment.
The average currency trader makes money just a third of the time, while copycat traders do so about half of the time.
Of course, it’s just as easy to copy a good trade as it is a bad one, and currency trading is especially risky. A country’s currency can shift much faster than stocks typically do. But for a growing number of people, it’s the best game in town, at least for now. In recent months, daily trade volumes have hit an average of around $340 billion, up 18 percent over the summer and near a record set back in June 2013, according to research firm LeapRate. About one in every 10 is generated through a copycat trade, says Gerald Segal, managing director of LeapRate.
The mechanics of getting into this kind of trading are pretty straightforward: You sign up for a copy-trading account at a brokerage firm that offers this particular feature, select one or more experts from a list, and then watch your account automatically tick upward — or downward — every time your designated guru makes a trade from his or her account. But does this strategy, if you want to even call it that, actually work? The average currency trader makes money just a third of the time, LeapRate says, while copycat traders do so about half of the time. The reason: Along with being smarter, copy traders typically borrow less money to finance their trades, and they trade less often.
For his part, Fahrner says he got started when he was just 18 and working for a bank; that’s where he learned the ins and outs of finance. “I was very interested, so I bought books and watched videos,” he says. At the beginning of this year, he joined eToro, where he trades the euro and British pound against the U.S. dollar, along with financial products. Typically, he holds a currency for between five minutes and two weeks, and he makes sure each trade is worth only a few percentage points of his portfolio. (Fahrner says his best currency trade — a bet on the euro — went up in value two and a half times, while his worst move — which he held for about a week — lost everything.)
Behind all this copycatting is a general movement by brokerage houses to boost business by encouraging them to trade, as opposed to not moving money, says Segal. One idea? Offer a way to cull Twitter and other online networks for clues as to what investors think about market movements. Another: social trading, where traders can see what currencies their friends are trading. Increasingly, they’re also moving toward copy trades, in which those who are followed typically earn between 20 and 30 percent of a trading fee whenever someone mimics their moves.
When it comes to copy trading, “the jury is still out.”
But as copy trading takes hold among regular investors, it also faces looming threats. Authorities in the United Kingdom have threatened to regulate copy traders as money managers, which would force them to register and pay fees. “That would kill the copy-trading industry,” Segal says. And some firms have decided that copy trading is not for them. Oanda Corp., the brokerage house that bought the copy-trading service Currensee last year for an undisclosed amount, announced that it would shut down this feature at the end of October after it decided to focus on people who want to make their own trades without copying others. When it comes to copy trading, says Javier Paz, a senior analyst at the research firm Aite Group, “the jury is still out.”
Indeed, some analysts think copy trading could fall victim to the same forces that dog currency trading overall: It’s difficult for regular investors to make money. “My sense is [copy trading] is just a fad,” says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. He doubts that traders like Fahrner will be able to outguess currency movements for much longer and warns that the biggest players in the market — institutions such as banks — tend to make their profits not from fluctuations in exchange rates, but by either charging a commission to execute trades or buying a currency from one trader and selling it to another for a higher price.
“Retail investors think of investing as chess,” Chandler says. “Institutions think of it like the 3-D chess they play in Star Wars.”
This OZY encore was originally published Dec. 2, 2014.