In copy trading, not everyone is paid for being right
The trader you copy is paid in two very different ways: on performance, and on the volume your account generates whether they are right or wrong. What ESMA asked supervisors to check in 2023, and the question that orders all the others.
Copy trading mirrors someone else's trades into your account. What it is and how it is set up is covered in what copy trading is and how it works; this article is about something else.
It is about who makes money along that chain, and when. Because there is a silent assumption underneath the whole product: that the person you copy earns when you earn. That is true of only part of what they collect.
Who gets paid, and for what?
A copied trader typically has two very different sources of income.
- Performance fee: a share of the profit they make for you. Here you really are aligned: if you lose, they collect nothing.
- Volume rebate: a slice of the spread or commission the platform takes on every trade your account executes. This is collected whether they are right or wrong.
The second one changes the product. Platform affiliate programmes pay copied traders for the activity of their audience, independently of their performance. More trades, and bigger ones, mean more income.
Add that more followers mean more aggregate volume, and you have a clear pull towards trading more and risking more. No bad faith needs to be assumed: it is enough to look at where the money comes from.
Why is this not the same as a managed account?
In a PAMM or MAM managed account there is a manager with a mandate and, depending on the jurisdiction, fiduciary duties. In ordinary copy trading you are following someone who, in many cases, owes you nothing at all.
That difference is precisely what European regulators sat down to look at.
What ESMA asked supervisors to look at in 2023
The European Securities and Markets Authority, ESMA, published on 30 March 2023 a supervisory briefing on copy trading services. Among the things it asks national supervisors to examine:
| Area | What is examined |
|---|---|
| Client information | Marketing communications, and the full cost of the service |
| Product governance | Which kind of client the product is designed for |
| Suitability and appropriateness | Whether the product fits the person buying it |
| Remuneration and inducements | How the copied trader is paid |
| Qualifications of the copied | What the person on the other side can show |
Those last two rows are the ones almost nobody checks before pressing "copy".
That same year, on 11 July, ESMA published a further briefing on the definition of advice under MiFID II addressing when a service like this stops being a technical function and becomes portfolio management or investment advice — regulated activities, with requirements many providers do not apply.
Notice what ESMA did not do: it did not ban it. Unlike binary options, the message here is "this is a serious activity, supervise it as one", not "this should not be sold".
What the evidence says
There is academic research on social trading platforms, and it is worth quoting with its exact scope.
The study Losing by Learning? A Study of Social Trading Platform, published in Finance Research Letters, found that trades an investor makes after following a signal perform worse than the trades that same investor made independently, and that over time followers increase their trading frequency and their preference for volatile assets.
⚠️ That study was run on stocks, on a Chinese platform. It is not forex, not European and not recent. We bring it because it describes a mechanism — following others pushes you to trade more and take more risk — that is exactly what a volume-based incentive rewards. Do not read it as a number about your broker.
What to ask before copying anyone
None of this makes copy trading a fraud. It makes it a product to buy with your eyes open, and these are the questions ESMA's own framework points at:
- How exactly does the person I copy get paid? Performance only, or my volume too?
- What can they show? An audited track record, or a pretty curve of the last few months?
- What is the total cost — spread, commission, rebate, performance fee — on each of my trades?
- Which entity am I signing with, and what does it cover me for? What a licence protects and what it does not is in why a regulated broker matters.
- Does the record I am shown span a full cycle, or only a favourable stretch? That is the same problem as with fake signal services.
What this article does not tell you
It does not say copying someone is worse than trading yourself. It can be better, particularly if your alternative was improvising.
It also does not assess specific platforms, or say how much an average follower gains or loses: we do not have that figure and we are not going to estimate it. And it does not cover crypto copy trading, which sits under a different framework.
What it does give you is the question that reorders all the others: of everything the person you copy collects, how much of it arrives only if you win.
If you want the machinery for judging a track record properly, it is in expectancy, Sharpe and Sortino.
