Follow the Money

On Covestor, Copycat Traders Auto-Buy as Mirror Trading Takes Off

Got a brain? You could be a star.
tim sykes covestor On Covestor, Copycat Traders Auto Buy as Mirror Trading Takes Off

Mr. Sykes. (timothysykes.com)

The camera opens on a young man leaning on a balcony overlooking Central Park. His brow is furrowed; from the side he resembles Matt Damon. The voiceover comes in, underscored by a cello: “My name is Tim Sykes, and I teach people to trade stocks. I am a self-made multimillionaire and I am the No. 1 ranked trader out of 60,000 on Covestor.”

If you were a discerning customer searching for stock advice, you might pause here. What the hell is Covestor?

The site, run out of London and New York, has been around since 2007, and allows “self-directed” investors to broadcast their trades online.

Covestor requires users—small-time, independent professionals as well as guys at home in their bathrobes watching E*TRADE on two monitors—to connect their online brokerage accounts or submit audited records. Every trade, bad or good, is posted online. In other words, it’s oversharing for traders.

A few years ago, Covestor pivoted to emphasize an even weirder business: mirror trading. In addition to merely watching Mr. Sykes make his millions from his Columbus Circle apartment, one can share the wealth by automatically mirroring his moves. Just as television made celebrities out of Jim Cramer and other prognosticators with good cadence, Covestor hopes to make stars out of any old schmucks who prove they can beat the Street.

The Boston-based research firm Aite Group named “copy trading” one of the top ten trends in wealth management in a 2012 report, perhaps because Covestor is just one of many companies allowing such investing. Los Angeles-based Ditto Trade launched in 2010. Currensee, eToro and other sites support mirror trading for currency traders.

“It’s a very emerging space,” said Michael Giles, a 28-year-old Australian who launched New York-based Roboinvest in January. “I think it’s going to be a significant part of online investing in the future.”

Roboinvest, a verified leaderboard for self-directed traders, introducedone-click copy trading,” in April. The function was inspired by the college friends who were always prodding Mr. Giles for stock tips. He’s currently No. 1 on Roboinvest’s leaderboard.

Whether it’s leaderboards or discount trading platforms, the Internet had a profound effect on those working in the financial industry—especially after new regulations from the Securities and Exchange Commission required companies to disclose to the public information that was previously confined to backrooms and Bloomberg terminals. Traders started to gossip and share tips anonymously online. Traders today also blog at Seeking Alpha and tweet on StockTwits under their own names.

As the number of traders on the physical trading floor dwindled—also thanks to technology—they reassembled online. “We were accustomed to working in these massive football stadium-sized boardrooms or working on floor with all these people,” said Josh Brown, the industry veteran behind the book Backstage Wall Street and the blog The Reformed Broker. The Internet is like “a virtual trading floor, with all the good and the bad that comes along with that,” he said.

There’s one crucial difference. On the web, the pros can mix with the amateurs: everyone is as good as their last trade. Or, as good as they claim their last trade was.

Traders love to brag about their returns, but they also have a terrible aversion to admitting losses. StockTwits executive editor Phil Pearlman pointed Betabeat to his post on April 23: “When You See a Trader Take a Loss on StockTwits, Give ‘em a Like for the Most Noble of All Tweets.”

On Covestor, there’s no way to hide a loss.

Within three years of the site’s launch, a few hundred finance bloggers had added the shield-shaped Covestor badge to their websites, and for a time, our old friend Tim Sykes was the frontrunner. The resulting leaderboard became the oracle for a certain webby set of market watchers. “Top Trader,” said his badge, with a giant gold “1.”

“This is how I validate myself,” he said. “Without Covestor, I would have had no business. I owe them everything.”

Mr. Sykes became famous early in the millennium for investing his bar mitzvah money in penny stocks and becoming a millionaire by the time he was 21. Trader Monthly named him one of the most promising young stars in the industry and he starred in Wall Street Warriors, a reality series. Around the same time, the New York Observer ran a puckish profile that opened with Mr. Sykes, a “modern-day Bateman,” stumbling into the Spotted Pig hung over after a night at Tenjune.

But by the end of 2007, Mr. Sykes’s star had dulled. “I was kind of thought of as like a one-hit wonder because I had made a million dollars back in the crash,” the trader, now 31, recalled. “I was really trying to get credibility, no thanks to the Observer.

His hedge fund, Cilantro Fund Partners, had lost around 35 percent. Mr. Sykes publicly pledged to earn it all back and chronicle the journey online. “Failed hedge fund manager tries again on Internet,” wrote Reuters. Shortly thereafter, Mr. Sykes discovered Covestor.

He quickly rose to the top ranks on every one of Covestor’s metrics: 90-day returns, 30-day returns, 365-day returns. He began touting his Covestor ranking to promote his instructional videos and articles. “It became like my calling card,” he said.

rikki tahta On Covestor, Copycat Traders Auto Buy as Mirror Trading Takes Off

Mr. Tahta. (Photo: WallStrip)

Covestor is the brainchild of Rikki Tahta, an affable Brit who founded and sold a few tech and financial information companies, one to Thompson Financial Services and one to Merrill Lynch & Co. “I was sitting on the trading floor of Merrill Lynch in London,” Mr. Tahta recalled to Betabeat. “It dawned on me that what was happening was, there was this move toward brains.”

Institutional investors were becoming less interested in brand names like Merrill Lynch or Goldman Sachs, he said, and more about the individual analysts making recommendations.

“I’m a huge believer in brains,” he continued. “Someone who looks at a balance sheet and deconstructs the financial statements. Covestor is in the brains business.”

Mr. Tahta and his cofounders successfully built Covestor, originally a sort of Facebook for investors, into a trusted meritocracy. Amateurs could use it to brag to their friends, self-made investment gurus could use it to promote their newsletters, and professional traders could show it to clients.

But Covestor wasn’t growing as fast as hoped, so in 2009 the company pivoted. You want your advisor to have skin in the game, the theory went. Better to mimic the moves of someone who is trading for himself than trust a mercenary asset manager.

Covestor still ranks users based on their verified, personal trades, but the site has whittled its members down to 174, now called “model managers.” Unfortunately Mr. Sykes can no longer claim to be No. 1 out of 60,000 (though he hasn’t taken the badge off his site). Nonetheless, he remains highly ranked among Covestor’s model managers. When he buys or sells a stock, the 10 people following him on Covestor automatically make the same trade. When Covestor’s model managers update the site with blog posts explaining their trades, Covestor’s editors like to adjust the pronoun from “I” to “we.”  “Here’s why we sold off Apple and McDonald’s,” “Why we cut loose our Microsoft position and like Frontier.”

If you find a trader you like on Covestor, which is a registered investment advisor with the SEC, you can mirror their strategy for a fee.

“I don’t care if these guys are professionals or individuals, so long as they are doing it with their own money,” Mr. Tahta said. “Frankly, today’s professional is tomorrow’s amateur and tomorrow’s amateur is today’s professional.”

Covestor’s model managers include a homeopathic doctor in California and a corporal in the Marines, as well as some professional traders and retired brokers.

Each model manager uploads a headshot, short bio, “investment style” and “personal interests.” The managers describe one to three strategies others can mirror. The models have pedestrian names like “Undervalued Opportunities” and “TenStocks.” Covestor pays model managers a fee for each subscriber, the amount varying depending on whether the manager is registered with the SEC.

Covestor also promotes its traders on its blog, YouTube channel and during its webinar-esque “virtual conference,” Next Invest. “You might call it a marketing platform for the brains,” Mr. Tahta said.

Bob Gay, a career quant who now runs his own financial research firm, is a top-rated model manager and one of Covestor’s favorite spokesmen due to his deliberate and patient way of explaining things. “Typically when you make an investment, you pool your assets with other investors,” he told Betabeat, “and that pool then gets managed by a professional asset manager hopefully to the benefit of the pool. In Covestor, there is no pool. You maintain your assets in a private account. You just mirror the model manager. That makes it pretty radical.”

The approach also brings certain tax benefits, he said.

Covestor, Roboinvest and similar sites may be on their way to disintermediating asset managers with their herds of copycat traders. But Covestor is still so small that most managers don’t have more than a dozen followers, and the fees generated from mirror trading amount to less than a few thousand dollars a year each. Its assets under management were just $10.9 million in February.

But eventually, Covestor hopes successful traders can earn a secondary living just by trading in public. According to Covestor, its target demographic of retail traders with between $10,000 and $2 million in assets is worth about $3 trillion. The company also considers itself a good alternative to mutual funds, a market Covestor estimates would add an extra $13 trillion to its market opportunity just in the U.S.

Bob Freedland is a 57-year-old eye surgeon living in La Crosse, Wis. who collects Pez dispensers. He started trading stocks with $300 in bar mitzvah money. “That’s such a common story that it almost sounds phony, but it’s really a true story,” he told Betabeat.

Dr. Freedland’s most successful investment model, “Buy and Hold Value,” looks for solid companies that are undervalued by the market. It has 12 subscribers. “It’s like a funhouse mirror,” he said. “If I say jump, then 12 people jump. If I go out tomorrow and buy Microsoft, then 12 people go buy Microsoft.”

His success on Covestor has earned him a profile in Opthamology Times and a mention in Kiplinger’s. “I just love it. It’s sort of my alter ego,” he said. “Knowing that I do this publicly makes me hyper aware of what I’m doing, kind of like when I’m taking care of people as a physician. The mirroring process makes me feel like I have kind of a fiduciary responsibility. I take it very, very seriously.”

A version of this story appeared in the New York Observer the week of May 7, 2012.

Follow Adrianne Jeffries on Twitter or via RSS. ajeffries@observer.com