Copy trading and the economics of the platform

Graduate · enrolled learners

This lesson opens with eToro, 2024.

What happened

eToro is a large social and copy-trading platform that lets retail users automatically mirror the trades of others they choose to follow, presented as a way to benefit from more experienced traders without doing the work yourself. Its business earns from spreads, fees, and trading volume, so it is paid when users trade a lot, regardless of whether those users end up ahead. In 2024 eToro settled with the SEC, paying around 1.5 million dollars and agreeing to restrict most of its crypto-asset offering, over operating aspects of that business as an unregistered broker-dealer. The deeper lesson is structural rather than about that settlement: copy trading is marketed as borrowing another person's skill, but mirroring someone's trades copies their positions, not their judgment, their capital, their risk tolerance, or their reasons for entering and exiting, so a follower can hold the same trade for entirely wrong reasons and at entirely wrong size. The platform, meanwhile, profits from the volume the feature generates whether the copied trader is skilled or lucky and whether the follower wins or loses.

The decision point

A copy-trading platform makes its money from spreads, fees, and volume on the trades its users place, which means it is paid for activity regardless of whether that activity is profitable for the users, so its incentive is to maximize how much people trade, not how well they do. eToro is the case: a large copy-trading business whose revenue comes from volume and spreads, and whose 2024 SEC settlement over unregistered broker-dealer activity is a reminder that the platform's interests and its users' outcomes are separate things. Building on the prior lesson's question of how a business makes money, copy trading adds a second trap: it is sold as a way to borrow a skilled trader's ability, but copying trades transfers the positions, not the skill, so the follower inherits what the leader did without the leader's capital, risk tolerance, information, or reasons, and can end up in the same trade at the wrong size, held for the wrong length, exited at the wrong time. A trader with a genuine edge does not hand that edge to a copier; the copier gets the trades and none of the judgment that made them work. So the discipline is to read a copy-trading product by its economics, recognizing that the platform profits from your activity whether you profit or not, and to understand that mirroring another trader's positions is not acquiring their skill, so following a leader is taking on trades you do not understand for reasons you do not hold, which is not a strategy but a delegation of judgment to someone whose incentives, capital, and risk are not yours.

Recorded loss

$1,500,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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