Financial innovators have long sung the praises of fintech’s ability to democratise modern finance by making it more affordable and accessible for the average consumer. The key caveat made by leading practitioners, however, is that fintech development must incorporate first-hand human experience in order to best fulfil its potential in terms of real world applications.
The best forms of financial innovation involve the merging of the latest technological developments with the time-honed knowledge and insight of human beings. One area of fintech which embodies this notion is copy trading, which has seen the creation of automated platforms and algorithms that enable investors to emulate the performance of successful human traders.
The birth of copy trading
Copy trading first emerged around 2005 as an offshoot of mirror trading. As the name implies, mirror trading entails the ‘mirroring’ of strategies implemented by human traders, and the development of algorithms based upon their history of market decision-making.
Where copy trading differs from mirror trading however, is that it precisely follows the actions of the traders that are being emulated on a proportional basis, as opposed to just implementing their specific strategies. Online brokers now offer a range of copy trading software that permits investors to perfectly replicate the positions of other traders that have successful track records. This software covers a variety of asset classes including stocks, commodities and even crypto, but is most frequently utilised with forex markets due to their vast size and liquidity.
I have been there in the trenches so I know the mistakes that traders make, whether quantitative or emotional
Some may view copy trading as a form of time-saving automation that outsources the investment decision-making process to algorithms, for the purpose of reducing or even removing the need for direct human action. The development of effective copy trading technology nonetheless remains heavily dependent upon judgement and decision-making by humans, that is based upon the accumulation of real world experience. This is not just because copy trading itself involves the emulation of skilled human traders with proven track records. It is also because the screening and selection of these traders is a process in which human judgement and experience can play an essential role.
Developing copy trading innovations
Michael Berman, the former CEO of Ditto Trade and now Head of Products at FXTRADING.com following its acquisition of Ditto, spoke to World Finance. He attests to the importance of combining practical trading experience with technical expertise in the development of successful copy trading platforms.
Berman, who has more than two decades of experience in the financial sector, points out that while it’s easy to enlist academic experts to develop the algorithms for a copy trading platform, without real-world knowledge of markets they will struggle to create breakthrough innovations. “Any broker who thinks they can just get a PhD fresh out of graduate school to create a scoring system is unlikely to develop something meaningful and industry-changing,” he said.
“This is not something that can be developed in a day, or even several years – it takes decades.” In Berman’s case, his background as a trader and fund manager would turn out to be essential in the development of cutting-edge copy trading innovations. Berman first commenced his career in investment banking and commercial property asset management, before accumulating years of experience in both prop trading and hedge fund management. This lengthy spell in the trenches gave Berman a deep, first-hand understanding of trading and financial markets, which would prove invaluable in his subsequent move towards the development of copy trading technology.
Traders know traders best
In 2012, Berman made his first major foray into copy trading with the creation of RAPA (Risk and Profit Analyser) Cap Intro – an online portal that matches trading talent with emerging manager capital. RAPA employed a highly quantitative approach, which saw the year-long development of an advanced scoring algorithm for measuring the trading skill of candidates. In addition to software innovations however, RAPA also required advanced human capabilities for the recruitment of the first-rate trading talent that would lay the foundations for its success. To this end, Berman booked a round-the-globe trip in order to recruit the best traders that the world then had on offer. According to Berman a key factor in any successful effort to recruit this top-flight talent lay in his background as a trader himself. “I wasn’t just an academic who came out of a laboratory or university and didn’t really understand them,” he said.
“I have on-the-ground experience – I speak their language, I understand what they are doing and their pain points.” Before long Berman managed to persuade 10 of the world’s leading traders to join the undertaking, enabling RAPA to take off with a flying start.
Scoring trader performance
In 2015 Berman co-founded PsyQuation with Vladimir Krouglov, as a cloud-based software platform that provides automated performance, risk and behavioural advice to traders. This next stage in Berman’s journey as a copy trading innovator took the opposite tack to RAPA, adopting a bottom-up instead of a top-down approach to identifying trading talent.
Instead of focusing on the recruitment of traders already renowned for their talent, PsyQuation involved the use of technology to coach and train better traders, while also identifying undiscovered talent.
“PsyQuation was intended to be the world’s first behavioural-based robo-trading coach,” Berman continued. “People make mistakes, which are costly as traders, so if you can help people to avoid those mistakes you will help them to make more money.” As with RAPA, Berman’s background as a trader played a critical role in the successful development and application of the technology.
“I have been there in the trenches so I know the mistakes that traders make, whether quantitative or emotional,” said Berman. Over the years Berman built up one of the world’s biggest retail trading databases, which provided the basis for validating theories about trading errors using a combination of behavioural science as well as finance, mathematics and computer science. In addition to aiding the development and maturation of emerging traders by warning them of their errors, PsyQuation also resulted in the creation of an ecosystem for identifying trading talent.
Berman then further honed his skills for the identification and management of trading talent by successfully running the AxiSelect programme for more than three years.
Rigorous screening
Berman’s efforts to create the ultimate copy trading platform have since culminated in the founding in July 2021 of Ditto, which has since been acquired by FXTrading.com and rebranded as FXTHub.com. Ditto was developed as a smart investment and multi-asset trading platform, capitalising upon Berman’s considerable experience in the incubation of emerging traders and his loyal team of longstanding collaborators, to provide investors with smarter ways to copy trades. As compared with other copy trading platforms, the big point of difference with Ditto is the robustness of the screening process, as well as the ongoing monitoring and management of the traders that clients will copy. “Ditto differentiates itself from everyone else in that you need to pass far more stringent tests than what is typically required in the copy trading industry,” said Berman.
“You first need to satisfy a bunch of criteria including a two year track-record, a Sharpe ratio of one, and managing a minimum of $2m. Traders that pass through this initial screening are then further analysed quantitatively and qualitatively by an investment committee of seasoned experts, before they finally receive the thumbs up,” Berman explained to World Finance.
Berman typically interviews applying traders to acquire a sense of who and what they are about, bringing a critical qualitative perspective to bear upon the selection process. While Berman’s years of copy trading innovation have long involved quantitative approaches that make extensive use of maths, behavioural science and computer science, it’s this qualitative approach based on personal experience that gives Ditto’s selection process the edge.
Democratising finance
For Berman, copy trading platforms can play a critical role in the democratisation of finance, by granting the average investor access to powerful knowledge and tools that are typically the exclusive preserve of the big institutions.
By thoroughly screening and selecting only the best talent available, FXTHub grants investors access to some of the world’s greatest traders at an affordable cost. Prior to the emergence of affordable copy trading, investors would need to pony up millions of dollars to tap comparable trading talent. “We are democratising finance by giving people not just tools, but access to the best talent available as well,” said Berman.
“We are offering our client base access to the highest-quality traders, giving people who use the platform a far better chance of making money than other platforms that don’t have the guard rails of strict talent screening in place,” Berman concluded.
