Stock market: better understand the risks of copy-trading – 10/22/2021 at 11:20 am

Copy-trading consists of automatically copying the activity of one or more traders.  The AMF warns investors who think they have discovered the martingale with this investment method.

Copy-trading consists of automatically copying the activity of one or more traders. The AMF warns investors who think they have discovered the martingale with this investment method.

In his 2020 report, the AMF mediator warns retail investors against the risks of copy-trading, which causes significant losses for savers. Regulators are also concerned about “social trading” practices, namely trading recommendations on social networks, underlines Claire Castanet, director of relations with investors at the AMF. The opportunity to take stock of the risks associated with this practice.

Copy-trading consists of automatically copying the activity of one or more traders. This investment method, supervised in Europe, makes it possible to duplicate investment choices on a trading account. Sometimes presented as the martingale, copy-trading minimizes the effort required to learn the basics of stock market investment and understand what you are investing in. Which is “disempowering and problematic”, points Claire Castanet, director of relations with savers within the Autorité des marchés financiers (AMF).

1. A strictly supervised practice

Who says risky activity, says iron regulation. Brokers offering copy-trading are strictly supervised in Europe and must obtain authorization to manage portfolios on behalf of third parties in order to operate. This approval is issued by the French regulatory authority or by one of its European counterparts. Various criteria must be respected, such as duly established skills or the presentation of an activity program for each of the services involved.

Once this approval has been obtained, the service provider must meet several obligations such as conducting a “suitability test”, which makes it possible to determine the client’s profile, his experience, his appetite for risk… A mandate of management must also be signed to ensure that the limits in terms of risk taking are respected. The broker is also required to notify his client if the value of his portfolio falls by 10%.

2. Potentially very risky blind investments

By automatically copying the investments of a trader, or even a robot, savers can buy, without being aware of it, very risky financial products, with leverage, such as CFDs (“contracts for difference”).

These financial products are so risky that the European authority of the financial markets, the Esma (European Securities and Markets Authority) has seen fit to put in place in 2018 protective measures for European savers, measures made permanent by the AMF in France in 2019. For example, the leverage effects are capped and a warning must indicate the percentage of losing clients on this type of products at this broker.

“You should know that this percentage generally varies between 70 to more than 80%”, underlines Claire Castanet. “The majority of investors therefore lose money by investing in these products”.

To know

Leverage

Leverage is a way of multiplying your gains – or losses – on the stock market. The investor is asked to deposit only a part of his initial investment (called “the margin”), the rest being provided by the service provider. If the margin is 5% and the initial investment was to be €40,000, then only €2,000 will be required. The leverage effect here will be 20. This means that the investor can potentially multiply his gains by 20, but also his losses.

The leverage limits on CFDs in Europe are:

– 30 for major Forex currencies

– 20 on major indices and gold

– 10 for commodities (excluding gold)

– 5 for stocks

– 2 for crypto-currencies.

This list also gives a measure of the risk of each investment, from the least risky to the most risky. It should be noted that the leverage effect makes it possible to invest large sums of money without having to immobilize a substantial part of its capital.

3. Actors who bend the rules

Through a set of subsidiary companies, orders can be executed in countries outside the European Union, therefore not subject to the legislation in force. Exit therefore the limits on the leverage effects and all the rules of protection. Savers then find themselves without the slightest protection.

European law allows European investment companies, authorized in their country, to carry out their activity throughout the European Union. This is called the “European passport”. These players are said to act under the freedom to provide services. They are supervised by the authority of their country of origin.

The AMF has observed a significant number of complaints against brokers under the freedom to provide services, in particular those established in Cyprus. Circumvention of European protection rules is the main problem.

“The majority of players who provide copy-trading services in France operate under the freedom to provide services,” explains Claire Castenet. “They are not approved or monitored by the AMF, which has no control over them. If tomorrow a dispute takes place with a company under the freedom to provide services, the AMF does not have the competence to intervene”. In the event of a problem, the client must contact the mediator of the country of origin, therefore in a foreign language.

4. Always be on the move with your investments

Alongside fully automated copy-trading, “social trading” practices are also developing: the sharing of informal trading recommendations on social networks or forums. ESMA had sounded the alarm last February on the risks posed by these practices, such as that of the reliability of information.

“Beware of the many influencers on social networks whose real skills in finance and whether they are paid are unknown,” warns Claire Castanet. “An investor must always be in control of his investments. It is important to gradually build a stock market culture, build a diversified portfolio, train and learn rather than follow fashions.

5. Choose your broker well and avoid scams

Investing in the stock market requires choosing the right investment service provider and “not giving in to the false promises of easy trading, to training that makes you believe that you will become a trader in a few hours”, warns the director of relations with savers.

A register of investment services providers exists and lists all providers approved by the AMF and those under the freedom to provide services. This is the Registry of Financial Agents, Regafi.

But recently, a wave of usurpation of approved companies has hit, informs the AMF in its report for the year 2020. company for which he worked was on the register of financial agents (Regafi)”. The best solution to stay away from scams is not to follow up on canvassing attempts and to choose your service provider yourself.

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The AMF Protect Epargne application

At the end of 2019, the French regulatory authority developed an application, AMF Protect Epargne. It offers a section “Am I the victim of a scam?” which, following a questionnaire, indicates the probability of being confronted with a scam. The questionnaire offers multiple-choice questions and is completed in one minute.

The application also includes the AMF blacklists. It lists all players not authorized by the AMF by category (crypto-assets, Forex, usurpations, etc.). A blacklist is never exhaustive since there is always a delay between its appearance and the moment when it is registered on this list.

However, not all copy-trading platforms are scams. Some are duly approved by the AMF, without this avoiding the associated risks. Others circumvent the established rules and are to be watched. The key word remains caution.

Auguste Grignon Dumoulin (redaction@boursorama.fr)

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