Unbiased eToro Forex Broker Review

Overall Conclusion:

eToro is not a recommended forex broker. While eToro has some interesting features, its service offering also has problems to be wary of, most notably:

  • eToro has had regulatory action taken against it by CySEC for weaknesses in following applicable laws
  • eToro trading spreads are uncompetitive

Please read further below for more details.Contrary to most other forex review sites, Forex Scam Alerts does not receive any financial compensation from eToro.

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Brief Background:

eToro is an online forex broker with headquarters in Limassol, Cyprus and London, UK. The eToro brand includes the following companies:

  • eToro (Europe) Ltd is based out of Cyprus, and is regulated by CySEC, the Cyprus Securities and Exchange Commission
  • eToro (UK) Ltd is based on of London, UK and is regulated by the Financial Conduct Authority (FCA)

This forex broker review is a review for eToro (Europe) Ltd only, as dealing with eToro (UK) Ltd is only available to clients who are both UK citizens, and have deposits of over $20,000.

eToro was founded as RetailFX in 2006 in Tel Aviv. Its founders later launched as eToro in 2010, along with its copy trading features. eToro allows trading of a wide variety of CFDs, including forex, stocks, indices, commodities and cryptocurrencies.

 

CrossSummary of Regulatory Status:

Cyprus flag for eToro reviewUK flag for eToro review

eToro, under eToro (Europe) Ltd, is regulated by CySEC under license # 109/10. CySEC is not as reputable a regulatory body as the FCA. However, in recent years they have strengthened their monitoring and enforcement efforts, such that many firms in Cyprus have been fined by CySEC, including eToro. CySEC does not tend to publish many details regarding its regulatory actions against forex brokers, so it is often difficult to judge the severity of the regulatory violations.

eToro, under eToro (UK) Ltd, is regulated by the UK's FCA under license FRN 583263. The FCA is a strong and reputable forex regulatory body. 

Warning: eToro has had regulatory action taken against it by CySEC. On February 12, 2013, CySEC announced it had reached a settlement for eToro (Europe) Ltd to pay €50.000 regarding weaknesses in the application of the laws under which eToro must operate. The specific articles of the law concerned are sections 18 and 36. The requirements under these sections of the law are far reaching, and unfortunately, CySEC did not give details about the exact concern with eToro. CySEC has acknowledged that eToro has since rectified the areas of concern. We are left knowing that there was a problem, but uncertain as to how serious a problem this was, and whether it was a deliberate attempt by eToro to harm clients for their own gain. We recommend strong caution when considering eToro, and remind prospective clients that there are many forex brokers with a stronger regulatory record. 

 

​Counterparty Risk:

There is some significant counterparty risk with eToro, and also some measures available to mitigate that risk. eToro is the counterparty to all retail client trades. This means that if eToro goes bankrupt, your account is at risk and you could lose some or all of your account balance.

However, eToro is a member of the Investor Compensation Fund for Customers of Cypriot Investment Firms (CIFs) (the “Fund”). In short, this is a fund designed to compensate clients of a forex broker, if that forex broker is unable to meet its financial obligations to its clients. A typical example would be if the forex broker goes bankrupt, the clients can recover their account balances via the fund. It is important to note that the maximum payout by the fund is EUR 20,000 per client.

During the SNB crisis of January 2015, eToro suspended trading of the Swiss Franc pairs for a few hours. However, after that time they reported that their systems were fully operational and it was "business as usual". Other forex brokers had serious financial difficulty and others went bankrupt. This should give some measure of comfort to potential clients of eToro if a similar situation happens in the future.

 

Broker Type:

eToro uses the market maker business model. This means they are the counterparty to your trades. Their website advises that they use Straight Through Processing (STP) and no manual intervention, suggesting that there is no conflict of interest ("NO CONFLICT ecosystem"). However, their contract terms and conditions tell a different story. The terms and conditions make clear that eToro need not acquire the underlying security you are trading. This means that you may open a trade with them, and they have no underlying security to offset their risk. In those circumstances, they make money when you lose money. The terms and conditions also explicitly disclose that there may be conflicts of interest inherent in the market maker model.

In the end, eToro's market maker model may be similar to other forex brokers, but concerns remain about the disclosures in the contract terms and conditions, as well as the regulatory framework of CySEC to provide protection. If eToro was still operating in the USA, this business model would not be an issue due to the very strong regulatory environment of that country. If eToro was operating this model in Australia, there would also be less concern due to the regulatory framework of Australia requiring stronger disclosures. But eToro's offering out of Cyprus is not subject to as strong a regulation, and so we have less confidence in it.

However, eToro is does have a complaints procedure. Further, the complaints procedure includes the ability to escalate complaints to the Financial Ombudsman Service (FOS). This is an independent body designed to mediate complaints between financial institutions and their customers. Clients with a complaint must first attempt to resolve a complaint with eToro, and then escalate to the FOS if they are not satisfied.

Warning about copy trading: eToro offers a copy trading feature, whereby you can set up your account to place the same trades made by another trader. The idea is that if there is a very successful trader out there, you can copy their trades and achieve similar performance. Prospective clients of eToro need to be aware of some of the limitations of this feature:

  • The past performance of a trader does not necessarily reflect the future performance of that trader. A trader may appear to perform well, but that trader may just be lucky, and their luck may run out. eToro is very clear about this in their terms and conditions.
  • Traders who are copied get paid additional money for being copied, based on the volume of trades that are copying him. Some traders see that as a better source of income than their own trading profits. This drives some traders to open small accounts and take big risks. If they perform well and get lucky, they gather a huge following and make a lot of money off other people's trades. When their luck runs out, they may lose the small amount of money in their own trading account, but they keep all the income they gained from their copy trading followers. This can be very lucrative for them, which drives them to continue to take big risks. 
  • There is a lag between when a trader executes a trade, and when the copy traders have their trades placed. This lag will usually mean that the traders doing the copy get worse pricing, and worse performance than the traders being copied. eToro is very clear about this in their terms and conditions
  • The risk tolerance of a trader being copied may be different than the risk of the trader doing the copying. This is often the case because a trader being copied may be risking only a little and does not mid taking large drawdowns on his account. However, the trader doing the copying may have a much lower risk tolerance, and quit following a trader just when the drawdown is greatest. Traders doing the copying usually have a lower risk tolerance then the people they are copying because they are not in control of the trading and often lose trust quickly.
  • Due to all of the above, there is a phenomenon whereby a trader copies trader 1, but then is unhappy during the inevitable drawdowns, then switches to copying trader 2, who will eventually encounter their own drawdown, and so on. If the trader doing the copying does not have a high tolerance for account drawdowns, he may rapidly deplete his account by always "changing horses" at the worse possible time.

Due to the above, in general Forex Scam Alerts does not support copy trading. If you don't know what you are doing enough to make your own money, you should stay away from trading altogether. Copy trading is unlikely to achieve the performance that you think it will.

 

Spreads:

The spreads offered by eToro are not competitive compared to other large, reputable forex brokers. A sample of typical spreads from 2016 are as follows:

2016 eToro Spreads

Competitive all-inclusive spreads for EUR/USD would be 1.5 pips or less. Competitive transactions costs for spreads + commissions would be equivalent to 1.0 pips or less. The uncompetitive nature of eToro spreads may not have a big impact on traders who hold trades open for days at a time. However, the wide eToro spreads will have a substantial negative impact on traders who keep trades open for short periods of time, or who have a high volume of trades.

 

Accounts and Funding:

Clients of eToro can fund their accounts using a variety of methods:

  • wire transfer
  • credit card
  • PayPal, Skrill, NETELLER, WebMoney, Yandex

eToro charges a variety of fees, some of which are unusual compared to other forex brokers:

  • Withdrawal fees of $5 - $25, depending on the amount of funds to be withdrawn. Any withdrawal greater than $500 incurs the maximum $25 fee. It is not clear whether the withdrawal fee covers the entirety of fees the client incurs, or whether there are additional fees incurred by PayPal, Skrill, NETELLER, WebMoney, Yandex or wire. 
  • Currency conversion fees of 50 - 250 pips. 
  • Inactivity fees of $5 per month for inactive accounts

 

CheckUser Interface:

eToro has a limited choice of trading platforms. It comes down to their web trading platform, accessible via any major web browser, and a mobile trading platform. There does not appear to be any option for trading robots or other algorithmic trading methods. However, the main web trading interface is very well designed. It is clean, simple and modern. Novice traders will have an easy time learning how to use the interface. Even though the interface is simple, the charting is still fairly powerful, with a wide variety of studies and indicators that can be added to a chart for analysis purposes. A sample of the interface is shown below:

Copy trading is done via the same web trading interface. It is easy to use and navigate. However, as noted above, caution is recommended if considering copy trading, as the trading performance may not be as expected.

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Broker reviewed: eToro
Review date:
Rating out of 5: 2.0
Reviewed by: