Social trading

Social trading refers to the exchange of market and stock exchange information between private investors . Investors publish their opinions on securities or their entire portfolio on social networks or on special platforms so that other investors can view them, comment on them or use their own assets to replicate them. The investment process should thereby - z. B. towards investment funds or professional asset managers - become more transparent, since investment decisions are published immediately and can also be commented on.

In a broader sense, social trading generally refers to the exchange of opinions and information on social networks or specialized platforms among private investors for the purpose of making investment decisions. Social trading requires little or no knowledge of the financial markets and has been described as an inexpensive, sophisticated alternative to traditional asset managers.

species

There are basically two types of social trading:

• Copy trading : Trader A follows individual, self-selected trades from trader B.
• Mirror Trading : Trader A automatically follows all trades of Trader B.

Some platforms offer users further variants with which the entire portfolio of another trader can be copied (Copy Portfolio) or their dividends can be followed (Copy Dividends): As soon as the leading trader withdraws an amount from his account, his followers automatically receive a proportional one Cash back from their own accounts.

Replication of portfolios

There are now numerous platforms on which one can automatically replicate the portfolio or the purchases and sales of other investors. This process, similar to other social platforms, is called “following [a trader]”. To do this, you pay the desired amount into the platform and determine the amount with which you want to follow a particular trader.

Some providers work with independent brokers , while others are brokers themselves, with whom you have to open an account. Still others securitize the portfolios in their own certificates , which in turn can then be traded.

chances and risks

The concept of social trading forms a kind of " Web 2.0 counterpoint" to traditional investments in actively managed products such as investment funds. Typically, with an automatic mapping of sample portfolios, the investment is made exclusively in exchange-traded and partly also regulated products such as stocks , ETFs , commodities or currencies . However, the managers of these portfolios or their investment decisions are not subject to any supervision. There are no legal requirements that require relevant training or professional experience in the investment field. Anyone can publish portfolios and have others follow them. There are also no regulations regarding the allocation of assets . Most of the platforms have implemented a certain form of self-regulation so that only investors whose portfolio has been published for a few months and whose identity has been verified can be followed.

The accumulated loss of the signaling device portfolio in a certain period (English term drawdown ) is considered to be a significant risk . This loss measures the willingness of the signaler to take risks in phases of loss; it is often limited by social trading platforms in order to limit the possible losses for the followers.

Since there is no supervision or regulation, it is quick and easy to offer a product that certifies a certain investment strategy - be it by (profitable) private investors or professional asset managers, for example in the form of a certificate. However, certificates are exposed to bearer bonds and the credit risk of the issuer . In contrast to this, the fixed assets of funds are special assets that continue to belong to the investors even if the fund company becomes insolvent .

research

The MIT Informatics and researcher Yaniv Altshuler described social trading networks as complex adaptive systems, and wrote in his study of 2014 on the Open Book of eToro :

“The inherent ability to share ideas and information with one another gives OpenBook users a new resource that they can use to improve their trading performance. Since users are not playing against each other but against the market, this situation becomes a 'non-zero-sum game' and motivates users to exchange as much information as possible. "

His contribution concludes that "social trading offers much better opportunities for profit compared to retail," but that users make "excellent, but sometimes suboptimal, decisions when selecting experts, even though they can see the decisions of others."

A 2015 World Economic Forum report described social trade networks as disruptors that "emerged to offer low-cost, sophisticated alternatives to traditional asset managers." These solutions contribute to a broader client base and allow clients to have more control over their wealth management and "pose a tangible threat to traditional wealth management industry practices".

In 2016, the think tank of economist Nouriel Roubini predicted that “newer forms of investment such as socially responsible investments and social trading” will lead to the highest growth rates in the industry in the coming years.

A 2017 study by St. John's University found that "leading" traders or those with followers are more prone to a phenomenon known as the disposition effect than investors who are not tracked by any other trader. The authors note that the observation can be explained by the fact that “the leaders feel responsible towards their followers and do not want to disappoint them for fear of losing followers if they allow a bad investment decision and want to trust their original one Signaling investment choice or through the attempt of newly chosen leaders to shape their self-image ”.

See also

• Algorithmic trading
• Trading strategy
• Managed futures

credentials

1. ^ YY Liu, JC Nacher, T. Ochiai, M. Martino, Y. Altshuler: Prospect theory for online financial trading. In: PLOS ONE . Volume 9, number 10, 2014, p. E109458, doi : 10.1371 / journal.pone.0109458 , PMID 25330203 , PMC 4198126 (free full text).
2. ↑ Damian Chmiel: eToro Expands Social Trading with copy Dividends ( s ) In: Finance Magnates . February 8, 2016. Retrieved November 7, 2018.
3. ↑ http://boerse.ard.de/anlagestrategie/social-trading/wikifolio-zuendet-die-naechste-stufe100.html
4. ^ Yaniv Altshuler: Social networks influence the decisions of financial traders ( en ) Institut de technologie du Massachusetts . January 10, 2014. Retrieved November 28, 2018.
5. ^ Decoding Social Influence and the Wisdom of the Crowd in Financial Trading Network ( en ) Institut de technologie du Massachusetts . 2014. Retrieved November 28, 2018.
6. ↑ R. Jesse McWaters: The Future of Financial Services: How disruptive innovations are reshaping the way financial services are structured, provisioned and consumed ( en ) World Economic Forum . June 2015. Retrieved November 28, 2018.
7. ↑ Wealth and Asset Management 2021: Preparing for Transformative Change ( en ) Roubini Thoughtlab . 2016. Archived from the original on November 16, 2018. Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. Retrieved November 28, 2018.  
8. ^ About the Fear of Reputational Loss: Social Trading and the Disposition Effect ( en ) St. John's University . October 15, 2017. Archived from the original on November 16, 2018. Info: The archive link has been inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. Retrieved November 28, 2018.