How can a broker support mass copytrading with a $100 investment when there is a larger account minimum for day-trading?

Question

My understanding of the U.S. rules for day-trading is that you must have $25,000 in equity at the time you make a day-trade.

Yet, a broker like eToro offers "copytrading", which mimics another investor's trades autonomously — with a much lower minimum. Essentially it is an "automatic copycat" of the trades of another investor or investors who have good track records.

If one were to sign up for an account with eToro and use this service, would they not be limited or, otherwise in violation of the rules, if the trader who they are copying is in the habit of day-trading?

Let's hypothetically assume the advertised minimum to join of $100.

Answer 1

The service you are asking about does not let you buy stock directly. Rather than brokering or dealing in actual equities, they deal in financial betting instruments known as "contracts for differences", or CFDs. Notably:

[in] the United States, where due to rules about over the counter products, CFDs cannot be traded by retail investors unless on a registered exchange and there are no exchanges in the US that offer CFDs.

Basically, with CFDs you'd be placing bets, and typically employing considerable leverage with those bets. Since there are no day trades made in real stock—just paper bets—an account could not be circumventing U.S. rules specifically about stock day trading. Your account would hold nothing more than house promises to pay you if your bets in stock movement are winners, or else take your money if your bets are losers. Plus various fees, of course, such as spreads, overnight interest charges, and withdrawal fees.

It is important to stress (if it isn't already apparent) that buying CFDs involves considerable risk, and counterparty risk is one in particular that you should understand thoroughly with respect to CFDs and other derivatives. Assuming you are in the U.S., know that any bet you place with CFDs (I won't use the term "investment") would not be insured, and I expect the situation is similar when betting from any other jurisdictions.