(Corrects May 29 item to clarify firms' relationship with AlphaClone)
By Atul Prakash
LONDON (Reuters) - When Noa Strijbos picks a financial asset to trade on her smartphone whilst taking her dog for a walk, almost 26,000 people pay close attention.
The 30-year-old Dutchwoman is among the top-ranked traders on eToro.com, one of several mobile apps and websites that allow budding investors to copy the most successful trades out there rather than come up with their own.
About 25,900 people follow her profile on eToro, which has 4.5 million members overall, whilst nearly 5,000 have signed up to become her "copiers" – essentially creating a giant investment club - routing funds directly in the hope of profiting automatically from her trades.
Like any investment, this phenomenon has its risks and the stars of the apps can also lead people into losses, however good their records may appear.
Regulators are cracking down on the murkier parts of tech-driven trading, and recently a trader from the London suburbs has been accused of helping to trigger the 2010 "flash crash" on the U.S. stock market. The trader says he did nothing wrong.
Still, the storey of Strijbos shows how the spread of smartphones has revolutionised trading for those who believe more in the wisdom of their peers than of fund managers who charge heavy fees. This trend should also open up investment decisions to the public, rather than keeping them hidden.
eToro members can see each investment decision that Strijbos makes using the site.
"Every bit of trading I do is online," said Strijbos, who pocketed nearly 600 percent profits last year. "The Internet has helped me in transforming myself into becoming a professional trader from an amateur observer in a few years."
Online copy trading is growing fast but remains a niche in the overall retail trading market which, according to research and advisory firm Aite, is worth $2.8 trillion in the United States - with close to a quarter of U.S. adults who have Internet access trading online. Some industry estimates put the volume of retail trading in Britain at about $700 million a day.
Online trading and information providers including Zulu Trade, Ayondo, Tradency and FxPro's Super Trader have popularised concepts such as "copy trading", all having a basic idea that investors can profit from the apparent wisdom and talent of others.
Sites typically highlight their most successful members whose strategies others would want to copy. Less prominent are the members who have failed badly, possibly leading others astray.
On the eToro network, investors can search and select other traders by assets, countries or performance etc., whilst another website gurufocus.com offers people the option to choose trading strategies of famous and successful fund managers.
Even the professional asset-management industry is starting to take copycat trading strategies seriously, at a time when active fund managers face competition from passive exchange-traded funds that track market indexes for lower fees.
One top European wealth management firm recently back-tested the investment strategies of star investors such as Warren Buffett, with a view to possibly incorporating them into their investments.
"The (copycat) strategy often works," said a source familiar with the study.
MULTIPLIER EFFECT
Market professionals naturally warn of the risks, with some saying amateurs copying trades of other novice players were prone to heavy losses because of the volatile nature of the markets. A bad decision by a top-ranked trader could have a multiplier effect on followers and spread losses far and wide.
"In some ways these tools help in democratising market access, but equally there are inherent dangers in people trading underlying securities which they don't really understand," Peter Dixon, equity strategist at Commerzbank (XETRA:CBKG), said.
"People may get sucked into these kinds of trades and get their fingers badly burnt."
However, top officials of many trading sites said they had safeguards in place. AlphaClone's chief executive Mazin Jadallah said it employed a hedging mechanism that is automatically triggered when an index falls below some technical levels, whilst eToro's founder and CEO Yoni Assia said it asks investors to specify in advance the percentage of losses they could bear.
The relatively new trading apps and websites have grown rapidly. AlphaClone, which runs an exchange-traded fund (ETF) and also enables investors to invest in strategies derived from the holdings of top managers, has expanded five fold in the past 15 months.
Thomson Reuters data based on the filing date of March 31 shows those who had held shares in the ETF included JP Morgan Securities, Constellation Wealth, Raymond James and RBC.
Modern technology is increasingly being used to create new products for both novice and experienced investors.
John Fawcett, founder and chief executive of Quantopian.com - which provides a platform to build, back-test against live or 13 years of data and execute algorithms - said its users included a defence contractor, a hedge fund executive and a telecom engineer.
Careers as professional quantitative analysts, who use mathematics and statistics to come up with trading strategies, may even beckon. "We've even seen an industry outsider score a job as a 'quant' at a top hedge fund with his Quantopian track record," said Fawcett.