This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Social trading shifts the decision-making from the account owner to a third party (a trader, an algorithm, or a platform). The account owner remains legally and financially responsible for all trades made through the account, regardless of who made the decision. The liability is not transferred with the decision-making; the account owner is the sole responsible party for the tax consequences, the regulatory compliance, and the financial losses.
The risks of social trading go beyond the financial losses. The legal liability for the trades, the regulatory implications of following an unregistered advisor, and the platform's terms of service are all sources of risk that the social trading participant should understand.
The liability structure
The account owner is the party that signs the brokerage agreement, and the account owner is the party that is legally responsible for all trades in the account. The social trading platform is a service that copies the trades from the followed trader to the follower's account, and the platform does not accept any liability for the trades or for the losses.
The followed trader is also not liable for the follower's losses, unless the followed trader is acting as a registered investment advisor (RIA) and the follower has a formal advisory agreement with the trader. Most social trading platforms do not have an advisory agreement between the followers and the followed traders; the followed trader is simply a user of the platform, not an advisor.
The account owner who is using social trading should understand that the liability for the losses, the tax consequences, and the regulatory compliance rests with the account owner, and the account owner cannot hold the platform or the followed trader responsible.
The regulatory risks
The regulatory risk is the risk that the social trading platform or the followed trader is not properly registered with the regulator, and the account owner is using an unregistered service. In most jurisdictions, providing trading signals or copying trades for a fee is a regulated activity, and the provider must be registered with the regulator.
If the provider is not registered, the account owner is using an unlicensed service, and the account owner has no regulatory protection if the service fails or if the service causes a loss. The account owner should check the regulatory status of the social trading platform and the followed trader before committing funds.
The financial risks
The financial risks of social trading are the same as the financial risks of any trading strategy, with the added risk that the follower does not control the timing, the sizing, or the risk management of the copied trades. The follower's losses are determined by the followed trader's performance, not by the follower's own skills or decisions.
The follower should also be aware of the copy delay risk. The follower's trades are copied with a delay (a few seconds to a few minutes), and the delay can produce a significant difference in the entry and the exit prices. The delay is most significant in a fast market, where the price can move by several percentage points in the time it takes to copy the trade.
The platform risks
The platform risk is the risk that the social trading platform goes offline, goes out of business, or changes the terms of service. The follower who is copying a trader through the platform has a relationship with the platform, not with the followed trader. If the platform changes the fee structure, the copy ratio, or the availability of the strategies, the follower's trading is affected.
The platform risk is most significant for the followers who have a large balance on the platform, because the follower cannot easily switch to another platform without closing the existing positions and re-entering through the new platform.
How to manage the liability
The account owner should treat social trading as a learning tool, not as a delegation tool. The account owner should monitor the followed trader's performance, understand the trader's strategy, and maintain the ability to close the copied positions manually if the trader's performance deteriorates.
The account owner should also keep a separate account for social trading and a separate account for the personal trading. The separation allows the account owner to track the performance of the social trading strategy independently of the personal strategy, and the account owner can stop the social trading without affecting the personal account.
Common questions about social trading liability
Can I sue the followed trader for my losses? In most cases, no. The followed trader is not acting as a registered investment advisor, and the follower has agreed to the platform's terms of service, which usually disclaim any liability for losses.
Does the platform cover losses from copying errors? The platform's terms of service usually disclaim liability for copying errors, delays, or failures. The follower should check the platform's terms before committing a large balance.
Is social trading regulated? Social trading platforms are regulated in some jurisdictions, and the regulation covers the platform's operations and the platform's handling of the client funds. The trader's activities on the platform are not regulated.
Related resources
Where to start
If you are evaluating social trading, the most useful first step is to check the regulatory status of the platform and the followed trader, to read the platform's terms of service, and to start with a small deposit. Our broker comparison lists the brokers that offer social trading and the available features, which together tell you what the platform looks like before you follow your first trader.