Mirror trading

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Mirror trading is a trading selection methodology that can be carried out in both the foreign exchange and the stock markets; however, this is much more common in trading in the foreign exchange market. [1]

Contents

The mirror trading method allows traders in financial markets (and, to a lesser degree, stock markets) to select a trading strategy and to automatically "mirror" the trades executed by the selected strategies in the trader's brokerage account. [2]

There are two specifics of mirror trading. The first is connected with fundamentals of trading: to execute trades, investors copy signal services and auto-trading services. The second factor relates to the investment amounts, as mirror trading is linked to large investments. [3]

Traders can select strategies that match their personal trading preferences, such as risk tolerance and past profits. Once a strategy has been selected, all the signals sent by the strategy will be automatically applied to the client's brokerage account. The trades are delivered and executed automatically with entry and exit points on multiple currency pairs. No intervention is required by the client as all the account activity is controlled by the platform. [1]

Clients may trade one or more strategies concurrently. This enables the trader to diversify their risk while maintaining trading control of their account.

History

Since its inception in the early 2000s, mirror trading has become widespread on financial markets. Mirror trading has influenced the development of copy trading and social trading. [1]

Mirror trading and copy trading were preceded by automated and algorithmic trading. There existed an automated trading system (ATS) that allowed brokers to share their trading history with others. [4] Mirror Trader was one of the first auto-trading systems that was introduced in 2005. It was developed by Tradency. [5]

With the development of financial instruments and digital tools, mirror trading gradually entered the portfolios of companies.

Since 2007, ETX Capital has made publicly available on its platform a range of financial instruments, including mirror trading. [6]

The same year, IC Markets (International Capital Markets) began offering mirror trading, later growing to 200 countries globally with a trading record of USD 1.016 trillion per month in 2021. [7]

In 2010, eToro launched an electronic trading platform that started offering mirror trading operations in 130 countries, in 15 languages, to 25 million users globally, administering clients' assets totaling USD 10.6 billion. [8] [9]

In 2012, FXCM (Forex Capital Markets) released an app-based trading platform with mirror trading. [10] The same year, the European Securities and Markets Authority (ESMA) stated that mirror trading and copy trading constitute automated execution of trade signals and operate without client interaction. [3]

Mirror trading vs Copy Trading

Mirror trading is sometimes also referred to as copy trading although copy trading differs slightly from mirror trading in the way that accounts are linked. In copy trading, the trader directly copies the moves of an individual successful trader; whereas in mirror trading, investment decisions are based on algorithms developed from trading patterns of number of successful traders. [11] Forex brokers that offer mirror trading typically review, verify, and validate the trading results of strategies they add to their platform, which aids in identifying and eliminating losing trades. Before accepting a new strategy, a broker may require it to have a 12-month track record of profitability and a certain maximum drawdown limit. [12] [13]

Traders might be system developers, individual investors, or financial organizations. [1]

Differences from Copy Trading and Program Trading

Mirror Trading and Copy Trading are both examples of Social Trading, which utilizes social networks and websites such as Twitter, Youtube, and Facebook to enable users to communicate and trade investment-related information. Social trading is a relatively new method for obtaining investment ideas and trading advice, as compared to the traditional utilization of the opinions of professionals and experts. While engaging in social trading, there are always two alternatives users could choose from: Mirror Trading and Copy Trading. [3]

Misperception regarding Fraud

Due to the mirror-trading money laundering scheme performed by the Deutsche Bank’s Moscow, New York and London branches in 2017, [14] [15] [16] the term mirror trading began to be associated with fraudulent activities. [17] In contrast, legitimate mirror trading is not fraudulent and is considered to be advantageous for novice investors. This outcome could be explained by the usage of algorithmic key elements in mirror trading. They replicate successful trades and patterns of experienced traders without depending on individual emotions. The process of mirror trading involves participants aligning their financial decisions with those of an established trader. This means that not everyone who engages in mirror trading is required to have expertise or experience with the assets they choose to trade.

In the decade preceding the Russian mirror-trading scheme, Deutsche Bank was informed of substantial and widespread compliance concerns. The offsetting trades in this instance lacked economic purpose and could have been used to facilitate money laundering or other illegal activity. [18]

See also

Related Research Articles

Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of computers relative to human traders. In the twenty-first century, algorithmic trading has been gaining traction with both retail and institutional traders. A study in 2019 showed that around 92% of trading in the Forex market was performed by trading algorithms rather than humans.

<span class="mw-page-title-main">Saxo Bank</span> Danish investment bank

Saxo Bank is a Danish investment bank specializing in online trading and investment. It was founded as a brokerage firm in 1992, under the name Midas Fondsmæglerselskab, by Lars Seier Christensen, Kim Fournais, and Marc Hauschildt. The name was changed to Saxo when the company obtained a banking license in 2001. Saxo offers trading through its online platforms in Forex, stocks, CFDs, futures, funds, bonds, and futures spreads. The company functions as an online broker with a bank license, without offering traditional banking products. According to Saxo, roughly half of its activities are derived from partnerships with institutional trading partners. More than 100 financial institutions globally service their end clients with Saxo Bank's platforms on a white-label basis

Direct market access (DMA) in financial markets is the electronic trading infrastructure that gives investors wishing to trade in financial instruments a way to interact with the order book of an exchange. Normally, trading on the order book is restricted to broker-dealers and market making firms that are members of the exchange. Using DMA, investment companies and other private traders use the information technology infrastructure of sell side firms such as investment banks and the market access that those firms possess, but control the way a trading transaction is managed themselves rather than passing the order over to the broker's own in-house traders for execution. Today, DMA is often combined with algorithmic trading giving access to many different trading strategies. Certain forms of DMA, most notably "sponsored access", have raised substantial regulatory concerns because of the possibility of a malfunction by an investor to cause widespread market disruption.

An automated trading system (ATS), a subset of algorithmic trading, uses a computer program to create buy and sell orders and automatically submits the orders to a market center or exchange. The computer program will automatically generate orders based on predefined set of rules using a trading strategy which is based on technical analysis, advanced statistical and mathematical computations or input from other electronic sources.

Strategy index is an index that tracks the performance of an algorithmic trading strategy. It is a way to measure the performance of a particular strategy over time. Like an index that tracks a particular stock market, a strategy index does the same for a trading algorithm. The trading strategy may as simple as a market sector defined by stocks that belong to one specific industry to complex such as pairs trading strategy. The strategies involved may be based on any underlying financial instrument.

<span class="mw-page-title-main">Electronic trading platform</span> Software for trading financial products

In finance, an electronic trading platform also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary. Various financial products can be traded by the trading platform, over a communication network with a financial intermediary or directly between the participants or members of the trading platform. This includes products such as stocks, bonds, currencies, commodities, derivatives and others, with a financial intermediary such as brokers, market makers, Investment banks or stock exchanges. Such platforms allow electronic trading to be carried out by users from any location and are in contrast to traditional floor trading using open outcry and telephone-based trading. Sometimes the term trading platform is also used in reference to the trading software alone.

<span class="mw-page-title-main">DBFX</span> Deutsche Bank foreign exchange trading platform

dbFX was Deutsche Bank’s online margin foreign exchange trading platform and service for individual and institutional investors including financial institutions, hedge funds, corporations, asset managers, money managers, commodity trading advisors, broker-dealers, brokerage firms, high net worth individuals, and sophisticated and professional traders, which operated from 2006-2011.

Forex autotrading is a slang term for algorithmic trading on the foreign exchange market, wherein trades are executed by a computer system based on a trading strategy implemented as a program run by the computer system.

<span class="mw-page-title-main">Matchbook FX</span>

Matchbook FX was an internet-based electronic communication network for trading currency online in the Spot-FX or foreign exchange market. It operated between 1999 and 2002.

ZuluTrade is a Greek financial technology company that operates an online and mobile social and copy trading platform. The platform allows users to copy other traders in the forex. As of 2014 ZuluTrade had around one million users and an executed trading volume of over $800 billion.

FXCM, also known as Forex Capital Markets, is a retail foreign exchange broker for trading on the foreign exchange market. FXCM allows people to speculate on the foreign exchange market and provides trading in contract for difference (CFDs) on major indices and commodities such as gold and crude oil. It is based in London.

Currensee was a financial services company based in Boston to serve as a social network for foreign exchange traders. The company provided mirror trading services to its clients that allowed them to make trading decisions based on other traders actions. The company was acquired by Oanda in 2013, which decided to close down the service a year later in October 2014.

GAIN Capital was a US-based provider of online trading services, headquartered in Warren, New Jersey until it was acquired by StoneX Group in 2020. The company provided market access and trade execution services in foreign exchange, contracts for difference (CFDs) and exchange-based products to retail and institutional investors. Trading was provided via one of two electronic trading platforms, its own proprietary FOREXTrader PRO later renamed as StoneX Pro and MetaTrader 4. GAIN Capital allowed retail and institutional clients to speculate on global foreign exchange markets in what is known as ‘margin forex trading’.

Social trading is a form of investing that allows investors to observe the trading behavior of their peers and expert traders. The primary objective is to follow their investment strategies using copy trading or mirror trading. Social trading requires little or no knowledge about financial markets.

<span class="mw-page-title-main">CitiFX Pro</span> Online foreign exchange market trading platform

CitiFX Pro was Citigroup's online foreign exchange market trading platform for retail and small institutional traders including commodity trading advisors, broker-dealers, money managers, and hedge funds. CitiFX Pro provided the service from 2009 until it discontinued offering services to clients in June 2015 and sold all U.S. accounts to FXCM, and international accounts to Saxo Bank.

Copy trading enables individuals in the financial markets to automatically copy positions opened and managed by other selected individuals.

FXDirectDealer, LLC is a provider of foreign exchange trading for retail and institutional clients. The company provides access to the spot foreign exchange market through proprietary and third-party trading software, including: MetaTrader 4, FXDD Swordfish, PowerTrader, VikingTrader, Mirror Trader, and JForex.

<span class="mw-page-title-main">Interactive Brokers</span> American financial services firm

Interactive Brokers, Inc. (IB), headquartered in Greenwich, Connecticut, is an American multinational brokerage firm. It operates the largest electronic trading platform in the United States by number of daily average revenue trades - in 2023, it processed an average of 3 million trades per trading day. The company brokers stocks, options, futures contracts, EFPs, futures options, forex, bonds, mutual funds, and cryptocurrency. It offers omnibus and non-disclosed broker accounts and provides clearing services to 200 introducing brokers worldwide. It has operations in 34 countries and 27 currencies and has 2.6 million institutional and individual brokerage customers, with total customer equity of $426 billion as of December 31, 2023.

<span class="mw-page-title-main">Leverate</span> Financial software

Leverate is a software as a service provider for foreign exchange brokers. It provides both electronic trading platforms and back-office software to manage a company's operations through its various subsidiaries. It has offices in Cyprus, Hong Kong, Israel, Ukraine, China, Poland, Bulgaria and Germany.

<span class="mw-page-title-main">Forex Club</span> Financial companies in the Caribbean

Forex Club is a group of companies based in Saint Vincent and the Grenadines participating in the retail market of Contract for difference, Foreign Exchange Trading. The company uses the Libertex web and mobile trading platform in addition to MT4 and its structure includes financial and educational companies.

References

  1. 1 2 3 4 "Copy Trading Revolutionises the Concept of Mirror Trading".
  2. ↑ Surminski, Alexander; Bernegger, Marc P. (2013). "Mirror trading automates investments, reduces effort without eliminating responsibility". Archived from the original on 2013-07-07.
  3. 1 2 3 Fischer, Matthias (2021). Fintech business models : applied canvas method and analysis of venture capital rounds. Berlin. ISBN   978-3-11-070490-7. OCLC   1280542735.{{cite book}}: CS1 maint: location missing publisher (link)
  4. ↑ Khandelwal, Nitesh. "3 Myths about Algorithmic Trading". BW Businessworld. Retrieved 2022-11-23.
  5. ↑ "Mirror Trader". tradency (in Hebrew). Retrieved 2022-11-23.
  6. ↑ "ETX Capital Aims for Innovation after Rebranding to OvalX". Financial and Business News. 31 May 2022. Retrieved 2022-11-23.
  7. ↑ "IC Markets Records Highest Ever Monthly Trading Volume of USD 1.016 Trillion in November". finance.yahoo.com. Retrieved 2022-11-23.
  8. ↑ "eToro launches its own Forex Social Community - OpenBook". Financial and Business News. 12 July 2010. Retrieved 2022-11-23.
  9. ↑ Paz, Javier. "EToro Clients Up In Arms Over Forced Exit From Russian Investments". Forbes. Retrieved 2022-11-23.
  10. ↑ Clay, Kelly. "FXCM Launches Full App Platform For Forex Traders and Investors". Forbes. Retrieved 2022-11-23.
  11. ↑ "Copy Trading For Beginners 2023 | The Best Platforms & Software". www.daytrading.com. Retrieved 2023-03-30.
  12. ↑ "Copy trading". FCA. 2016-01-29. Retrieved 2022-11-23.
  13. ↑ Cham (2011). "Copy trading vs. mirror trading, which should you be doing?". Global Banking & Finance Review (FGF studies in small business and entrepreneurship ed.). Springer. pp. 7–23.
  14. ↑ "DFS FINES DEUTSCHE BANK $425 MILLION FOR RUSSIAN MIRROR-TRADING SCHEME". January 30, 2017. Archived from the original on 2017-02-16.
  15. ↑ "Deutsche fined $630 million for failures over Russian money-laundering". Reuters. 2017-01-30. Retrieved 2023-03-30.
  16. ↑ Vullo, Maria T. (June 15, 2018). "2017 Annual Report" (PDF). Department of Financial Services. Archived from the original (PDF) on 2022-06-24.
  17. ↑ Scott, Gordon; CMT. "Mirror Trading Definition". Investopedia. Retrieved 2020-04-10.
  18. ↑ "CONSENT ORDER UNDER NEW YORK BANKING LAW §§ 39, 44 and 44-a" (PDF). NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES. 2017. Archived from the original (PDF) on 2021-08-19.
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