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Social Trading

Wed, 05 Feb 2014 11:36:34 GMT

This blog post will focus on the topic of “social trading” in Europe, which is a method of online, self-directed trading where users connect with each other in an online setting to share investment knowledge and copy each other’s trades.

Firms face a challenging and dynamic environment in the wake of the financial crisis. Technology continues to play a significant role in how businesses will expand their existing client base and access new clients in a cost-sensitive environment. With the proliferation of the internet, social media, and affordability of smartphones, the way in which clients prefer to perform banking or trading activities is evolving. The continued enhancement and development of online trading platforms, mobile apps, social media presence, and social trading platforms are at the forefront of firms’ strategic plans. Social technologies are an integral part of our lives and social generations are driving companies to realign their business strategies. Social media, such as Facebook, Twitter, Blogs, and Instagram to name only a few, is and will continue to be a significant mode of communication. Not surprisingly, financial firms have taken notice of this overwhelming trend and have incorporated digital strategies into their agenda.

Social trading platforms are relatively young companies, which (many) began as brokerage sites and evolved over the past several years into network-only sites.  Over the past several years, social trading has become increasingly popular, a reflection of shifting attitudes of retail investors across generations and throughout Europe in a post-financial crisis world. Like any other firm, social trading platforms face challenges to their international reach and business models, such as regulations, building trust among its users, and near-term limitations to the retail-only market.

What is Social Trading?

Social trading provides retail traders with access to the financial markets and other traders of varying levels of expertise. Social trading incorporates relatively expert-led guidance, while the investor still maintains control of investment decisions. Social trading has evolved from the idea of online social networking sites where users interact, engage, and share experiences with one another; the foundation of social trading is the concept of “two brains are better than one”, although in this case, thousands. Social trading connects traders from all over the world in one online location where real-time local knowledge, investment advice, and trades are shared and in some cases copied (i.e. auto-trade). Investment classes that are traded through social trading platforms are Forex currency pairs, indices, commodities, interest rates/bonds, individual company stocks, and CFDs.

Where Does Social Trading Take Place?

Social trading was founded on the same concept as Facebook of Twitter – an online social network that connects people from all over the world and allows them to share information.  In terms of geography, social trading is a global trend, particularly the G7 countries (U.S., Japan, France, Germany, Italy, U.K. and Canada), however in Europe, social trading is relevant to Western Europe and is seen in pockets across Eastern Europe and the Nordic region. Investment minimums to begin trading on a social trading site range from $50 to $1000. The cost to trade is usually based on the spread and/or commission price; there is rarely a management fee. In only a couple of cases are traders required to trade with real money, which can be viewed as a sign of trust that trades are being made with a vested interest.

Social trading websites are revolutionizing the retail online trading market by challenging traditional online trading platforms.  According to some social trading platform providers, social trading is described as more fun and more engaging than trading with traditional brokers, and is more transparent by negating information arbitrage, which is commonly seen with traditional brokers.  In other words, social trading enables its globally-based users to share local market information with each other in real time, thus democratizing information.

The following conclusions have been drawn based on Celent’s research in the social trading space:

  • New business opportunities are emerging due to client demands. Smaller and niche brokers are emerging throughout Europe, such as in the case of social trading platforms and acquisitions of trading platforms throughout the market.
  • Technology continues to plays a substantial role in how businesses connect with tech-savvy clients in a cost controlled environment.
  • The continued enhancement and development of online trading platforms is at the forefront of firms’ strategic plans while firms’ presence in social media and their social trading features are projected to become further developed in the near future as niche firms emerge across the market.
  • Investment and financial education are of chief importance to self-directed investors.  This is particularly notable of the younger generation of investors is generally more tech-savvy than older generations and seeks a hands-on, social trading experience.
  • Transparency is still of foremost concern to investors and regulators. As a result of the events following the financial crisis, investors remain uncertain about the market and economic climate. Investors’ demands for increased visibility and control of their investment decisions continue to challenge brokerage firms.  Investors are gradually becoming sophisticated and desire high quality and timely reporting in addition to choosing their own investment strategies.
  • Social trading negates information arbitrage that traditional banks and traders typically hold over their clients and industry players by allowing members to share local knowledge.
  • The growth of self-directed channels combined with shifting attitudes towards web-based tools is driving consolidation of traditional bank branches and new client portal requirements. Firms are faced with keeping up with consumers’ progressive use of technology, and are finding solutions that enable clients to trade at their convenience while operating in a cost sensitive environment.
  • Regulations around social trading are unclear in Europe, but increased scrutiny is expected to take place as more firms enter the market and grow their client base.

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