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. 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. [11] [12]

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 Wikipedia, 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, [13] [14] the term mirror trading began to be associated with fraudulent activities. [15] In contrast, legitimate mirror trading is neither 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. [16]

See also

Related Research Articles

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A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. Financial regulators like Securities and Exchange Board of India (SEBI), Bank of England (BoE) and the U.S. Securities and Exchange Commission (SEC) oversee capital markets to protect investors against fraud, among other duties.

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. It is widely used by investment banks, pension funds, mutual funds, and hedge funds that may need to spread out the execution of a larger order or perform trades too fast for human traders to react to. A study in 2019 showed that around 92% of trading in the Forex market was performed by trading algorithms rather than humans.

Direct market access (DMA) is a term used in financial markets to describe electronic trading facilities that give 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.

<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 automated 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.

<span class="mw-page-title-main">MetaTrader 4</span> Electronic trading software

MetaTrader 4, also known as MT4, is an electronic trading platform widely used by online retail foreign exchange speculative traders. It was developed by MetaQuotes Software and released in 2005. The software is licensed to foreign exchange brokers who provide the software to their clients. The software consists of both a client and server component. The server component is run by the broker and the client software is provided to the broker’s customers, who use it to see live streaming prices and charts, to place orders, and to manage their accounts.

City Index is a global spread betting, FX and CFD Trading provider. City Index is part of the Nasdaq listed StoneX Group and is regulated by the Financial Conduct Authority in the UK, The Australian Services and Investment Commission in Australia and Monetary Authority of Singapore (MAS) in Singapore. The company has offices in the United Kingdom, Australia, Singapore, and Poland.

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 is a US-based provider of online trading services, headquartered in Bedminster, New Jersey. The company provides market access and trade execution services in foreign exchange, contracts for difference (CFDs) and exchange-based products to retail and institutional investors. Trading is provided via one of two electronic trading platforms, its own proprietary FOREXTrader PRO, or MetaTrader 4. GAIN Capital allows retail and institutional clients to speculate on global foreign exchange markets in what is known as ‘margin forex trading’.

<span class="mw-page-title-main">Social trading</span> Form of investing

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">FxStat Group</span>

FxStat Group or FxStat, is an online social networking service in financial services headquartered in United Kingdom, London and the name FxStat comes from a combination of Forex and Statistics. FxStat was founded in April 2010 and focusing on the foreign exchange market, Stock market, and Commodity market. The focus was initially on social networking only, but later expanded to trading statement track record assessment, following successful traders portfolio, copying top performing traders, reading news, and sharing trades through a single platform to FxStat Group, Facebook, and Twitter.

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

<span class="mw-page-title-main">Merrill Edge</span> Electronic trading platform provided by BofA Securities

Merrill Edge is an electronic trading platform and investment advisory service that provides self-directed and guided investment options for individuals and businesses. It is a subsidiary of Bank of America and was launched in 2010 after the merger between Merrill Lynch and Bank of America. Merrill Edge offers a wide range of investment products, including stocks, bonds, exchange-traded funds (ETFs), margin lending, mutual funds, and options.

Hirose Financial UK Ltd. is a UK-based retail foreign exchange broker that provides foreign exchange trading on margin through its own online trading platform called LION Trader. It is a subsidiary of Japanese FX company Hirose Financial that provides online trading solution to forex traders.

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.

ActivTrades is a UK-based brokerage firm providing an electronic trading platform to trade Forex, Contracts for Difference (CFDs), and spread betting. It provides services to retail and institutional traders via the electronic trading platforms ActivTrader, MetaTrader 4 and MetaTrader 5.

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

Interactive Brokers LLC (IB) is an American multinational brokerage firm. It operates the largest electronic trading platform in the U.S. by number of daily average revenue trades. The company brokers stocks, options, futures, EFPs, futures options, forex, bonds, funds, and some cryptocurrencies.

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 2013-07-05.
  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.
  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. 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. 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". FCA. 2016-01-29. Retrieved 2022-11-23.
  12. ↑ 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.
  13. ↑ "DFS FINES DEUTSCHE BANK $425 MILLION FOR RUSSIAN MIRROR-TRADING SCHEME". January 30, 2017. Archived from the original on 2017-02-16.
  14. ↑ Vullo, Maria T. (June 15, 2018). "2017 Annual Report" (PDF). Department of Financial Services. Archived from the original (PDF) on 2022-06-24.
  15. ↑ Scott, Gordon; CMT. "Mirror Trading Definition". Investopedia. Retrieved 2020-04-10.
  16. ↑ "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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