As I explained in my earlier article, social investing is not a totally new idea as seeking for help, advice, and tips have been part of investing as long as people could invest money. The ongoing trend of democratizing investing and banking for the masses is closely tied to the rise of fintechs (e.g., robo-advisory), newly emerged business models, the ever-wider distribution of new financial products, and the trust gap created by the recent global financial crisis.
Also, as Dan Schutzer highlights, there are new ways to effectively fund new ventures, incumbents are still struggling with various environmental changes and credit is tight, technology-assisted solutions are everywhere, and our means utilizing and accessing information are changing. Social trading and social investing represent the new trend of technology-assisted, socially-driven, and DIY models of investing. We also have some concrete evidence on the effects of social media on retail and institutional investor behavior and trading activity as well as the quality and precision of crowdsourced earnings predictions. 1)Drogen, L. A. & Jha, V. (2013). “Generating Abnormal Returns Using Crowdsourced Earnings Forecasts from Estimize“. 10.10.2013; Wang, S. et al. (2014). “The wisdom of crowds: crowdsourcing earnings estimates“. Deutsche Bank Markets Research, 4.3.2014; Chen, H., De, P., Hu, Y. & Hwang, B.-H. (2014). “Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media“. Review of Financial Studies 27(5): 1367-1403; Paul, T. (2015). “The Effect of Social Media on Trading Behavior: Evidence From Twitter“. Wharton Research Scholars 131; Jame, R., Johnston, R., Markov, S. & Wolfe, M. C. (2016). “The Value of Crowdsourced Earnings Forecasts” Journal of Accounting Research 54(4): 1077-1110; Nikolic, B., Bliss, B. A. & Kumar, A. (2016). “Geography, Diversity, and Accuracy of Crowdsourced Earnings Forecasts“. 5.10.2016; Siikanen, M. et al. (2017). “How Facebook drives investor behavior“. eprint arXiv:1709.07300, September 2017; KelloggInsight (2017). “When Companies Tweet, Investors Listen“. 5.1.2017.
What is new, on the other hand, is the way people can now effectively utilize other peoples knowledge, ideas and insights thanks to new social investing platforms that in practice bring different people together with the help of new technology and digital platforms. Perhaps the most important rationale for the rise of social investing platforms, one-stop platforms for (retail) investors, is the fact that they reduce the transaction costs for tips and tricks, and as Alex Pentland explains in the context of original research on social learning taking place through these social investing communities, “The fascinating thing was that we could actually see social learning happen, track the effect it had on people’s actions, and measure whether or not each action was profitable. There are few (if any) other data sets where you can see social exploration so clearly and determine which patterns of it work best.”
Social investing: Amalgamation of social media, wisdom of the crowds and investing
Just think the challenges facing a novice wishing to start investing. The novice investor needs to learn a lot before actually investing any money, and doing the initial desk research takes a lot of time. The significant advantage of social investing platforms and communities built around them is that investors can interact with each other, and find like-minded people to help them out. Social investing is not just a marketing gimmick but a real change in the way investors engage each other and can relatively quickly obtain access to the collective intelligence of other investors.
Also, social investing platforms and services can bring about a new era of (peer-to-peer) market transparency, and this, on the other hand, might increase financial literacy as well. As Celent’s 2016 report on social trading points out, there has been enormous progressive development in the way these platforms can support “the self-directed, hybrid, and collaborative investing model” as social investing combines traditional investing with various social functionalities and capabilities. eToro, for example, has been hailed as the pioneer of transparent social trading. Whether a particular social investing platform or social trading network offers all the imaginable social functionalities is beside the point. The critical thing to keep in mind is the speed of ongoing evolution, i.e., as Celent’s report highlights, it has been less than a couple of years that various platforms are now actually offering excellent mobile trading apps, price notifications, different simulation tools, and increased the number of (pseudo)tradable asset classes.
By creating digital platforms that bring different people from various backgrounds together, and by allowing peer-to-peer interaction take place between multiple individuals, social investing platforms can steepen the learning curve and provide valuable learning experiences for novice and master investors alike. Although social trading (i.e., copy trading, mirror trading, etc.) is not without inherent dangers, there is a lot of potential in these social investing communities and the way they distribute and filter information. 2)“Top 5 Reasons Why Most People Lose Money with Copy or Social Trading“, “Social Forex Trading – Hidden Dangers Exposed“, “The risk factor in Social Trading“
By bringing various people together or infusing the core service with various kinds of social functionalities, as is the case of, for example, eToro (social investing, digital brokerage & trading), TD Ameritrade’s thinkorswim (digital brokerage & trading, social mentions analytics) 3)TD Ameritrade Holding Corporation (2016). “TD Ameritrade’s thinkorswim Platform Now Enables a Deeper Level of Social Research“. Businesswire, 20.7.2016. and Seeking Alpha (social research & investor media), we are witnessing the rise of very different kinds of hypersocial solutions for (retail) investors.
Not all new digital and social services in the investment and wealth management market are, of course, created equal. Not all of them are actually directly about social trading but instead designing and building communities of interest and practice. So, for example, even that Folio Investing, TradeIt, Openfolio and Motif Investing offer complementary and supplementary solutions for investors and traders, they compete in very different space than social investing and trading platforms. My view is that social investing is an umbrella term for various conceptualizations of what it means to be a social investor, i.e., crowdsourcing and the wisdom of crowds. So, if the investor or saver can directly rely on their peers, ask their advice and share their insights with others through the platform, we are talking some form of social investing, and therefore it’s important not to judge any service solely based on its external characteristics but rather from the value creation point of view.
So, we need to understand (1) what kind of jobs the users have, (2) what kind of assets, processes, and resources can be used to get the jobs done, (3) what kind of social and other types of processes take place in the community, and (4) what are results obtained thanks to the community. So, let’s say that I would like to understand better what kind of ETF portfolio I should have, and as a DIY investor, I have already done some investigation into the matter. Now I go to a specific social investing community, give some necessary background information about my investment strategy and ask the question in some discussion group, and possibly tag couple of persons to it with some hashtags. So, now other members of the community can engage with me, and perhaps some people will directly answer my question with caveats, some will criticize other people’s suggestions, and someone could possibly even send me a list of some ETFs to consider or just a link to their own ETF portfolio. So, is this a form of social investing? Yes, I think it is. Not directly in the sense that I must do as other community members say but instead I can take some inspiration from other people’s suggestions and insights. Maybe I even end up following some members of the community, and as I already pointed out in my earlier article, social interaction and collaboration regarding your investments (and not only social sentiment per se) can be considered as one form of social investing.
Mirror trading, copy trading and social investing
So, in the end, there are various forms of social investing and socially-inspired trading that are best exemplified by three generic business models we have. I want to emphasize the fact that these business models can come in many shape and sizes, i.e., mirror trading, copy trading, and social investing can be mixed together in various ways. At the same time, mirror, copy and social trading platforms and services tend to share three common features build around the basic idea of trading and investing: (1) emphasis on co-creative activities and crowdsourcing, (2) some kind of simple or complex social media (functionalities) or social media-like features such as publishing groups, sharing, following, wikis feeds and profiles integrated as part of the platform, and (3) real or funny money trading. The basic idea of any kind of autotrading, whether it’s really automatic or not, is the idea that investors have the “ability to follow and copy trade leaders”. 4)Please note that copy trading usually involves automatic position copying, but this doesn’t need to be the case. In this article, copy trading can also take place manually although this is not the conventional definition of the term.
First of all, there is the prevalent practice of mirror trading. Mirror trading, in its most brute form, might not actually involve any kind of social interaction and collaboration as such. As Efi Pylarinou explains, mirror trading is kind of “dark asset management” as its “like automatic cruise control handed over to the Trader that we decide to mirror”. A mirroring trader, the one who replicates all the trades of the mirrored trader, automatically replicates all the trades executed by the primary signal generator. Tradency’s Mirror Trader, MetaTrader 4 and 5, Sirix Trader, and Spotware’s cMirror are distinct kinds of technology platforms that allow users to mirror trade, and Dukascopy, collective2, FXCM, X-Trade Brokers, Pepperstone, Forex.com and various other online brokers offer their clients the possibility to integrate mirror trading capabilities via technology platforms. 5)There are multiple of business models in the mirror trading business, but they are irrelevant in the context of this article. In the end, the mirroring trader, the one who replicates the mirrored trader, can, in theory, manage positions and trades with a single trading technology platform.
Secondly, we have copy trading that Efi Pylarinou perceives as “a broader development of the mirror trading technique, which has been around informally.” Copy trading has become widely popular amongst traders as it offers more flexibility in terms of risk management and portfolio management as the user has more to say how the automatic copying is actually done, e.g., the copying traders can easily follow multiple strategies at once and some platforms offer more sophisticated means to adjust risks and exposures between different copied strategies. As one can expect, there are platforms that offer mirror trading and copy trading capabilities, and the most well-known copy trading platforms/networks are eToro, ayondo, ZuluTrade, Darwinex, and MyDigiTrade. 6)Both mirror trading and copy trading have been deemed as a form of asset and investment management by certain financial supervision authorities, e.g., FCA.
Last but not least Efi Pylarinou recognizes social trading (or social investing) as one new form of trading and investing. These platforms, as I have previously emphasized, are not and/or kind of platforms. As Pylarinou highlights, social investing communities is about “searching for value from the crowd, interpreting the reactions of the audience of the beauty contest that is in disguise in all public markets”. There are various kinds of social investing and trading platforms currently available, and not all of them are just for fun, i.e., ZuluTrade, Tradeo 7)Golovtchenko, V. (2017). “Exclusive: Social Trading Broker Tradeo Changing Hands“. Finance Magnates, 3.10.2017., eToro, Saxo Bank’s TradingFloor, TradeCrowd 8)According to Social Trading Guru, TradeCrowd ceased its operations in Q2 2017., Crowd Trading, Motif Investing and ayondo offer real (copy) trading functionalities. 9)For example, TradeCrowd has developed a contra copy trading functionality. Some of these platforms are less trader-inclined, e.g., Shareville, SwipeStox, Openfolio, KAPITALL, invstr, BUX and PeepTrade, and they serve more as information and insight source rather than just for trading for the sake of trading. TradeHero, for example, is an example of gamified virtual trading, and although the trades are not real, the platform has a rewards program and can play a role in the social learning process. On the other hand, for example, Voleo, aims to bring co-investing and social investing. On the other hand, Wikifolio, an Austria-based company, has its own very unique approach towards trading and investing. On these various social investing platforms, users can share their comments and opinions via multiple channels (groups, forums, feeds, etc.), see and follow portfolios of other users, see trades executed by other users, and possibly (semi-)copy trade others either automatically or manually. Some of these platforms, as pointed out implicitly before, rely on Mickey Mouse trades/money while other platforms allow direct trading and/or trading via API integration.
There are different kinds of social investing tools aimed to serve the needs of retail investors, and it’s difficult to confine these to any particular matrix based on their profile. All the services have some kind of social functionalities and features. They are not all explicitly about trading as such but they can be characterized as the branches of social investing, and not all of them rely strongly only on unique social communities as such. Some examples of these new digital services are Finect 10)Zambri, C. (2013). “At-A-Glance: Finect Social Tool for Financial Services Compliance“. metalogic, 23.7.2013., SeekingAlpha, Rapunzl, Stonder, The Motley Fool, StockTwits, TradingView, Contix, TickerTags, MarketPsych, Vetr, Harvest, ClosingBell, investFeed, meetinvest, SprinkleBit, stockfuse, and nvestly. As I pointed out earlier, various different business models can also co-exist, and therefore it’s not satisfactory to make very strong demarcations between multiple service providers. Sure, eToro, Openfolio, and SeekingAlpha serve very different user needs, and in one sense they are complementary services under the broad umbrella of social investing.
As one can conclude, it’s relatively hard to position these various broker-dealers, online brokers and other social investing and social trading service providers purely based on the scope of the social functionalities and social trading/investing experience. What warrants as social investing and what doesn’t? What kind of features are required as a minimum to be categorized as social investing service? Does it have to be directly investing-related, real or fake money? What if the online service in question offers an insufficient set of interactive elements for the users? These various online service providers fulfill very different needs of their clients and users, and therefore it makes sense to group all these various service providers under the broad umbrella of social investing (and/or trading) before going a more detailed differentiation between all of them. So, in short, there is no easy way to categorize every single service into a one clear and concise technology market map.
Although it’s widely recognized that social trading was born out of FX market, and mirror trading, copy trading and social trading are still heavily influencing FX trading, there are numerous firms and brands that are offering more comprehensive approach towards the democratization and socialization of investments altogether. When one of the very first social investment communities, Zecco, launched in 2006, it didn’t have any fancy social investing and trading features as we see today. Nonetheless, Zecco had the idea of becoming a community for investors and traders. ZeccoShare probably was one of the very first social investing communities, and as Zecco was acquired by another social broker TradeKing in 2011 and TradeKing was acquired by Ally Financial in 2016, the idea of social investing and social investment networks had already been conceived.
Although Zecco’s pricing model was far from perfect, it was able to convince other innovative entrepreneurs of the opportunities offered by social trading and investing. eToro and ZuluTrade were founded in 2007 respectively, and so the wisdom of crowds had entered the investments and savings space. Incrementally, various social trading and investing platforms have evolved from pure crowdsourcing and social media-like features towards more comprehensive solutions with copy trading and mirror trading functionalities. You can see some highlights from the development of social trading and social investing, including copy trading and mirror trading, in Figure 3.
As we have seen, people earn for independent news, peer-to-peer support and information sources outside the establishment, and therefore we have new more or less social services like Estimize and AlphaClone. These kinds of services for crowdsourced earnings forecasts pose a genuine threat to the incumbent sell-side analysts in the post-MiFID II environment with the necessity of unbundling research from execution. 12)See, for example, Peterson, R. L. (2016). Trading on Sentiment: The Power of Minds Over Markets. Hoboken, NJ: John Wiley & Sons.
Revenue models and pricing
There are various potential revenue models and pricing models when looking at the ways these different social investing and social trading platforms make money. I won’t be comprehensively analyzing these various revenue models, but I will lay down some basic models just for you to understand them at a bit better.
According to Celent’s Ashley Globerman, there are three principal social trading/investing business models, namely broker-only networks model, network-only model and broker-and-network model.
The broker-only network model is based on the idea that existing online brokers add social trading and other kinds of features on the top of their core offering, and they make money from bid-ask spreads and possibly from additional management fees. BelforFX, eToro, and FxPro are examples of the broker-only network business model. In the case of eToro OpenBook platform, signal providers are compensated based on some daily eligible copiers.
The network-only model relies on the negotiated deals that the social investing platforms have with external brokers, and in these cases, the pricing model can be based on various considerations ranging from trading volumes to userbase. Oanda, ayondo, Crowd Trading, MyDigiTrade, and Myfxbook are examples of the network-only model.
The broker-and-network model, also known as the hybrid model, is based on the idea that the social trading and investing platform is owned by the same company as the broker is. As it’s explained in an article published in Social Trading Guru website, ZuluTrade/AAAFx is a case example of this kind of business model. ZuluTrade, on the other hand, offers its users the possibility to integrate with a variety of different brokers, and while ZuluTrade/AAAFx has full bid-ask spread, it shares a certain amount of range with the external broker’s it hosts. 13)Tavendale, N. (2017). “Social Trading – technology opens up pathways towards smarter investing“. e-Forex Magazine 76, June 2017. ZuluTrade utilizes, like many other copy trading and mirror trading platforms, the so-called signal trading approach. Signal providers “disseminate their trade ideas to investors in the form of buy/sell signals” and in the case of ZuluTrade users are charged with a commission per trade and signal providers earn per traded lot of real money.
In addition to these three primary models, I would like to add subscription model (e.g., MetaTrader 4/5) free registration model (e.g., Shareville), data monetization models (e.g., selling aggregated data to 3rd parties as permitted by specific agreements and relevant data privacy laws, incorporating advertising, licensing platform and services for others) and order routing through negotiated exchanges (e.g., non-social Robinhood has a fascinating business model).
Is there a place for social investing and social trading networks in the future?
There is no easy way to estimate the total number of investors using various social trading and social investing services, platforms and networks around the world but based on specific proxies it can be expected that there are tens of millions of users of various autotrading platforms alone. eToro alone has over seven million users globally, ZuluTrade has above one-and-a-half million users, Tradency has grown its user base to over well over two million users, and there is a considerable number of smaller players such as ayondo with approximately 200 000 users and Collective2 with over 100 000 users. In the Nordics, Nordnet’s social investing community Shareville has acquired over 160 000 real users in less than three years. It’s hard to estimate the total amount of client funds managed by various social investment platforms throughout the globe but for example eToro alone probably has tens of billions of euros in total assets but it has been a least estimated that over $300 billion was traded in 2016 through eToro. These are minuscule sums when compared to the traditional wealth management industry, but it clearly shows that things are not stagnant, nor are these platforms without considerable user base.
The popularity of various autotrading and social investing services is clearly indicated by the sheer amount of the service providers operating in this space, and the fact that some geographical regions are poised for growth. Incumbents, on the other hand, have at least three strategies to tap into social trading and social investing trend. Primarily incumbent can develop their own in-house solutions (e.g., Nordnet’s Shareville and Saxo Bank’s TradingFloor), partner with existing solution providers (e.g., MT 4/5 integrations, the strategic partnership between eToro and Russian Sberbank), and/or acquire a current social investing platform (e.g., in 2016 alone ayondo acquired TradeHero, TradeKing was acquired by Ally Financial, and EZTD acquired a considerable stake in WinnerOption).
As social investing, mirror trading and copy trading gain in popularity and reach more and more users worldwide, they can become useful ways for retail investors to learn more about trading and investing, engage their peers and gain valuable insights into the markets. On the other hand, this means no social investing platform or social trading network is safe as they need to steadily improve their core offering, come up with new products and services and make sure that they stay compliant with the new regulatory demands.
So what does the future hold for social trading and social investing? I expect the social investing trend to continue for several years to come with new innovative social trading functionalities supporting millennial and new Gen-Z investors in their pursuit of their dreams and goals.
I believe that there is still a lot of room in the social investing space, and more importantly, social trading and social investing is not just a cool buzzword for specialists to throw around, but it instead seems that social investing is here to stay for good. Traditional wealth managers and financial advisors need to understand the meaning of social media and incorporate some elements of social investing as part of their core offering.
It’s noteworthy that as investors become more connected, informed and active, the social investing business model has to change as well so the “old” FX social trading probably isn’t the only model we’ll witness in the future. So, whatever happens, socialization and democratization of online retail investing will continue, and I think that social investing and social investment platforms and networks have a major role to play in this ongoing change. So, while social investing platforms continue to incorporate new social functionalities and capabilities to their offering and create new revenue streams, our liquid expectations will determine the ultimate fate of aforementioned business model. If in the end, this new mode of investing will not live up to our expectations (i.e., it can’t live up to its value proposition), it will eventually die out but for the time being this doesn’t seem to be the case.
In my next articles on social investing and social trading, I will take look at the benefits and risks associated with social investing and social trading. In addition, I will give some indication of the changing regulatory environment around social investing, and what the future holds regarding various modes of social investing and social trading.
References [ + ]
|1.||↲||Drogen, L. A. & Jha, V. (2013). “Generating Abnormal Returns Using Crowdsourced Earnings Forecasts from Estimize“. 10.10.2013; Wang, S. et al. (2014). “The wisdom of crowds: crowdsourcing earnings estimates“. Deutsche Bank Markets Research, 4.3.2014; Chen, H., De, P., Hu, Y. & Hwang, B.-H. (2014). “Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media“. Review of Financial Studies 27(5): 1367-1403; Paul, T. (2015). “The Effect of Social Media on Trading Behavior: Evidence From Twitter“. Wharton Research Scholars 131; Jame, R., Johnston, R., Markov, S. & Wolfe, M. C. (2016). “The Value of Crowdsourced Earnings Forecasts” Journal of Accounting Research 54(4): 1077-1110; Nikolic, B., Bliss, B. A. & Kumar, A. (2016). “Geography, Diversity, and Accuracy of Crowdsourced Earnings Forecasts“. 5.10.2016; Siikanen, M. et al. (2017). “How Facebook drives investor behavior“. eprint arXiv:1709.07300, September 2017; KelloggInsight (2017). “When Companies Tweet, Investors Listen“. 5.1.2017.|
|2.||↲||“Top 5 Reasons Why Most People Lose Money with Copy or Social Trading“, “Social Forex Trading – Hidden Dangers Exposed“, “The risk factor in Social Trading“|
|3.||↲||TD Ameritrade Holding Corporation (2016). “TD Ameritrade’s thinkorswim Platform Now Enables a Deeper Level of Social Research“. Businesswire, 20.7.2016.|
|4.||↲||Please note that copy trading usually involves automatic position copying, but this doesn’t need to be the case. In this article, copy trading can also take place manually although this is not the conventional definition of the term.|
|5.||↲||There are multiple of business models in the mirror trading business, but they are irrelevant in the context of this article.|
|6.||↲||Both mirror trading and copy trading have been deemed as a form of asset and investment management by certain financial supervision authorities, e.g., FCA.|
|7.||↲||Golovtchenko, V. (2017). “Exclusive: Social Trading Broker Tradeo Changing Hands“. Finance Magnates, 3.10.2017.|
|8.||↲||According to Social Trading Guru, TradeCrowd ceased its operations in Q2 2017.|
|9.||↲||For example, TradeCrowd has developed a contra copy trading functionality.|
|10.||↲||Zambri, C. (2013). “At-A-Glance: Finect Social Tool for Financial Services Compliance“. metalogic, 23.7.2013.|
|11.||↲||If you need this map in high-res or want to improve it, drop me a note and I’ll get back to you.|
|12.||↲||See, for example, Peterson, R. L. (2016). Trading on Sentiment: The Power of Minds Over Markets. Hoboken, NJ: John Wiley & Sons.|
|13.||↲||Tavendale, N. (2017). “Social Trading – technology opens up pathways towards smarter investing“. e-Forex Magazine 76, June 2017.|