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Social trading has gained significant traction as one of the models that newbies can leverage to get a less risky exposure in sophisticated markets. According to the latest analysis by Market Research, this industry was valued at $311.5 million in 2021. Projections show this figure will likely grow at a CAGR of 64.7% to hit $12.9 billion by 2028. The growth of this nascent niche can be attributed to the value of copy trading or other forms of social trading such as mirror or signal trading to the modern-day investor. Before the 2008 financial crisis, most of the financial market participants were established financial institutions, leaving out retail investors who wanted to get exposure in riskier assets. The Flaw in Traditional Copy Trading Models Despite the success of the copy trading model, it still has some structural flaws when it comes to the incentivization mechanisms. The gains are typically skewed in favour of the experienced traders who assume the role of ‘leaders’ in social trading platforms such as Avatrade, FXTM, Naga, and many more. Most of the copy trading platforms that exist reward expert traders based on the number of followers (copy traders) rather than performance. A good example is eToro where elite pros are eligible to receive a fixed 1.5% payment of the total Assets Under Custody (AUC) for the first $20 million, with additional increments as the capital from one’s followers increases. The problem with this model is that it creates a scenario where a trader earns fees from copiers even when their trades are not performing well. As a result, experienced traders may focus more on attracting followers than on executing profitable trades​. The Implication of Skewed Incentives in Copy Trading While it is only fair to reward the experts who share their trading strategies, there are…

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Filed under: News - @ October 21, 2024 11:24 pm