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Social trading is a form of investing that allows investors to observe the trading behavior of their peers and expert traders. The primary objective is to follow their investment strategies using copy trading or mirror trading. Social trading requires little or no knowledge about financial markets. [1]
One of the first social trading platforms was Collective2] which began offering a social trading functionality to retail traders as early as 2003 (preceding ZuluTrade by four years). [2] [ unreliable source? ] In 2010, social trading started to achieve a greater degree of mainstream appeal with eToro, [3] [4] followed by Wikifolio in 2012. Europe-based NAGA, listed on Frankfurt Stock Exchange since 2017, claims more than EUR 27 billion was traded on its platform in the second half of 2019. [5] Some of the contemporary social trading platforms other than the ones mentioned already are Trading Motion, iSystems, and FX Junction, among others. [6]
MIT Computer Scientist and researcher Yaniv Altshuler described social trading networks as complex adaptive systems, and in his 2014 research on eToro's OpenBook, wrote that "Having the inherent ability to share ideas and information between each others, OpenBook's users are given a new source of information they can use in order to enhance their trading performance. As the users are not playing against each other but rather – against the market, this situation becomes a non zero-sum game, hence incentivizing the users to share as much information as possible." [7] His paper concludes that "social trading provides much better opportunities for profiting compared with individual trading," but that users make "excellent but sometimes not optimal decisions in selecting experts when they can see others' choices." [8]
A 2015 World Economic Forum report described social trading networks as disruptors, which "have emerged to provide low-cost, sophisticated alternatives to traditional wealth managers. These solutions cater to a broader customer base and empower customers to have more control of their wealth management," and "pose a tangible threat to the traditional practices of the wealth management industry". [9]
Economist Nouriel Roubini's thinktank predicted in 2016 that "newer forms of investment, such as socially responsible investments and social trading will bring some of the largest industry growth in the coming years." [10]
A 2017 St. John's University study found that 'leader' traders, or those with followers, are more susceptible to the disposition effect than investors that are not being followed by any other traders, with the authors suggesting the observation may be explained by "leaders feeling responsible towards their followers and an urge to not let them down, by fear of losing followers when admitting a bad investment decision and signaling confidence in their initial investment choice, or by an attempt of newly appointed leaders to manage their self-image." [11]
Social trading may potentially also change how much risk investors take. A recent experimental study argues that merely providing information on the success of others may lead to a significant increase in risk taking. This increase in risk taking may even be larger when subjects are provided with the option to directly copy others. [12]
Social trading is an alternative way of analyzing financial data by looking at what other traders are doing and comparing and copying their techniques and strategies. [13] Prior to the advent of social trading, investors and traders were relying on fundamental or technical analysis to form their investment decisions. Using social trading investors and traders could integrate into their investment decision-process social indicators from trading data-feeds of other traders. Social trading platforms or networks can be considered a subcategory of social networking services. [14]
Social trading allows traders to trade online with the help of others and some have claimed shortens the learning curve from novice to experienced trader. [15] Traders can interact with others, watch others take trades, then duplicate their trades and learn what prompted the top performer to take a trade in the first place. By copying trades, traders can learn which strategies work and which do not work. [16] Social trading is used to do speculation; in the moral context speculative practices are considered negatively and to be avoided by each individual. [17] [18] who conversely should maintain a long term horizon avoiding any types of short term speculation.
Social Media has permeated the trading world such that two main types of trading has evolved: [19]
Traditional Trades
Social Trading
There are two main types of social trading:
Other variations offered on some platforms allow users to copy another trader's portfolio (copy portfolio), and follow a trader's dividends (copy dividends), where whenever a followed trader withdraws money from his or her account, a proportional amount of money will be withdrawn from the balance of their follower, in real time. [20]
eToro is a social trading and multi-asset investment company that focuses on providing financial services. Its headquarters are located in Central Israel, and the company has registered offices in Cyprus, the United Kingdom, the United States, and Australia.
A stock trader or equity trader or share trader, also called a stock investor, is a person or company involved in trading equity securities and attempting to profit from the purchase and sale of those securities. Stock traders may be an investor, agent, hedger, arbitrageur, speculator, or stockbroker. Such equity trading in large publicly traded companies may be through a stock exchange. Stock shares in smaller public companies may be bought and sold in over-the-counter (OTC) markets or in some instances in equity crowdfunding platforms.
Electronic trading, sometimes called e-trading, is the buying and selling of stocks, bonds, foreign currencies, financial derivatives, cryptocurrencies, and other financial instruments online. This is typically done using electronic trading platforms where traders can place orders and have them executed at a trading venue such as a stock market either directly or via a broker.
In finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets.
Saxo Bank is a Danish investment bank specializing in online trading and investment. It was founded as a brokerage firm in 1992, under the name Midas Fondsmæglerselskab, by Lars Seier Christensen, Kim Fournais, and Marc Hauschildt. The name was changed to Saxo when the company obtained a banking license in 2001. Saxo offers trading through its online platforms in Forex, stocks, CFDs, futures, funds, bonds, and futures spreads. The company functions as an online broker with a bank license, without offering traditional banking products. According to Saxo, roughly half of its activities are derived from partnerships with institutional trading partners. More than 100 financial institutions globally service their end clients with Saxo Bank's platforms on a white-label basis
The carry of an asset is the return obtained from holding it, or the cost of holding it. For instance, commodities are usually negative carry assets, as they incur storage costs or may suffer from depreciation. But in some circumstances, appropriately hedged commodities can be positive carry assets if the forward/futures market is willing to pay sufficient premium for future delivery. This can also refer to a trade with more than one leg, where you earn the spread between borrowing a low carry asset and lending a high carry one; such as gold during financial crisis, due to its safe haven quality.
Direct market access (DMA) is a term used in financial markets to describe electronic trading facilities that give investors wishing to trade in financial instruments a way to interact with the order book of an exchange. Normally, trading on the order book is restricted to broker-dealers and market making firms that are members of the exchange. Using DMA, investment companies and other private traders use the information technology infrastructure of sell side firms such as investment banks and the market access that those firms possess, but control the way a trading transaction is managed themselves rather than passing the order over to the broker's own in-house traders for execution. Today, DMA is often combined with algorithmic trading giving access to many different trading strategies. Certain forms of DMA, most notably "sponsored access", have raised substantial regulatory concerns because of the possibility of a malfunction by an investor to cause widespread market disruption.
Retail foreign exchange trading is a small segment of the larger foreign exchange market where individuals speculate on the exchange rate between different currencies. This segment has developed with the advent of dedicated electronic trading platforms and the internet, which allows individuals to access the global currency markets. As of 2016, it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market.
In finance, an electronic trading platform also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary. Various financial products can be traded by the trading platform, over a communication network with a financial intermediary or directly between the participants or members of the trading platform. This includes products such as stocks, bonds, currencies, commodities, derivatives and others, with a financial intermediary such as brokers, market makers, Investment banks or stock exchanges. Such platforms allow electronic trading to be carried out by users from any location and are in contrast to traditional floor trading using open outcry and telephone-based trading. Sometimes the term trading platform is also used in reference to the trading software alone.
Forex autotrading is a slang term for algorithmic trading on the foreign exchange market, wherein trades are executed by a computer system based on a trading strategy implemented as a program run by the computer system.
Matchbook FX was an internet-based electronic communication network for trading currency online in the Spot-FX or foreign exchange market. It operated between 1999 and 2002.
ZuluTrade is a Greek financial technology company that operates an online and mobile social and copy trading platform. The platform allows users to copy other traders in the forex. As of 2014 ZuluTrade had around one million users and an executed trading volume of over $800 billion.
Currensee was a financial services company based in Boston to serve as a social network for foreign exchange traders. The company provided mirror trading services to its clients that allowed them to make trading decisions based on other traders actions. The company was acquired by Oanda in 2013, which decided to close down the service a year later in October 2014.
MRC Markets is an Austrian financial brokerage firm offering on-line trading in Forex and contracts for difference. It has membership of the Vienna Stock exchange and licensed in Russia and Lithuania. It has offices in Russia, the UK and India.
Mirror trading is a trading selection methodology that can be carried out in both the foreign exchange and the stock markets; however, this is much more common in trading in the foreign exchange market.
FxStat Group or FxStat, is an online social networking service in financial services headquartered in United Kingdom, London and the name FxStat comes from a combination of Forex and Statistics. FxStat was founded in April 2010 and focusing on the foreign exchange market, Stock market, and Commodity market. The focus was initially on social networking only, but later expanded to trading statement track record assessment, following successful traders portfolio, copying top performing traders, reading news, and sharing trades through a single platform to FxStat Group, Facebook, and Twitter.
Copy trading enables individuals in the financial markets to automatically copy positions opened and managed by other selected individuals.
Yaniv Altshuler, is an Israeli computer scientist and entrepreneur. He is a researcher at the MIT Media Lab, at the Human Dynamics group headed by professor Alex Pentland.
Voleo is a Canadian-based financial services company, headquartered in Vancouver, BC. Voleo is transforming retail investing through its collaborative investment club platform. Voleo enables users to form investment clubs with people they trust to democratically manage a portfolio in publicly traded securities. Voleo has increased retail investor participation in the stock market by breaking down barriers to entry, facilitating trust and improving financial literacy.
TradingView is a social media network, analysis platform and mobile app for traders and investors. The company was founded in 2011 and has offices in New York and London. As at 2020, the company ranks in the top 130 websites globally according to Alexa.
