An Introduction To Social Trading
Don’t let us forget that the causes of human actions are usually immeasurably more complex and varied than our subsequent explanations of them — Fyodor Dostoyevsky, The Idiot
This article introduces users to a decade old but relatively unknown trading methodology that relies on adopting someone else’s trading strategy on social trading platforms (A Facebook equivalent for traders). The relentless search for alpha or superior returns has created many alleyways that traders pursue to remove any iota of market inefficiency. From High Frequency Trading (HFT) and algorithmic trading to dark pools, crowd sourcing trading models and prediction markets, — tremendous amount of human ingenuity has been employed to create wealth. This is one such story which, at once, is new and perhaps as old as human nature. (Note: Bombay, a city in Western India has been renamed to Mumbai)
Gatherings Under A Banyan Tree
The oldest stock exchange in Asia is the Bombay Stock Exchange (BSE). It’s history dates back to 1855 (much before the emergence of independent India in 1947) when 22 stock brokers used to gather under a huge Banyan Tree to execute trades.
Founded by Premchand Roychand (an influential businessman in 19th century Bombay), the group of traders would move locations many times until they moved to Dalal Street in 1874. Dalal street is the Mumbai version of Wall Street, New York. The exchange evolved from a gathering under a tree to an open outcry (bullpen) method of trading.
Finally, in 1995, the Bombay Online Trading (BOLT) system replaced open outcry and in a sense transferred the traders under the tree to a computer based order matching system.
Reminisces of A Teenage Boy
I share deeply personal memories with the Bombay Stock Exchange. As a teenager, I and my dad would travel in the local train bound for the Chhatrapati Shivaji Terminus (CST) train station. We would then take a local bus to Dalal Street. After spending a few hours at the exchange library, we would meet brokers at the end of the trading day (at the BSE) around 330 PM at a local ‘Paan’ shop (a small shop that serves betel leaves, tea and assorted goods to patrons). The Paan shop represented my first brush with ‘Social Trading’.
It was a place where traders would discuss political events, market response to the news, stocks traded and sometimes their own trades. Although, brokers were very hesitant to reveal their exact positions, some of them would boast a healthy profit and then go on to reveal their trade. Other members in the audience would then go and copy the same trade next day hoping to make a quick buck himself. This is the essence of social trading.
“Wikipedia defines Social trading as the process through which online investors rely on user generated financial content gathered from various Web 2.0 applications as the major information source for making financial decisions”
In my words, the Banyan tree just went online and expanded to cover the whole world. Now you could also leave post it notes with “likes” and “comments” on the tree.
Social Trading Techniques
The practice of social trading is quite simple. You register yourself on a social trading platform of choice. The platform publishes a periodic ranking (monthly, quarterly, yearly) of traders.
As per eToro, a popular trading platform- “These traders are segmented by their percentages of gains and winning ratio, which is how many of all positions opened or closed with profits”
Once you chose a trader, you simply ‘copy’ his trades by clicking “copy trader” and voila-your trades will be on autopilot in line with the trader you chose. The trades are usually proportional i.e. if you invest $1,000 and the trader you chose has invested $10,000, your trading outcomes (profit/loss) will be 10% of his.
Copy trading and Mirror trading are the most common social trading techniques. Mirror trading is an evolution of Algorithmic Trading and was first used in the Foreign Exchange markets where traders could ‘Mirror’ trades of other successful forex traders.
Social Trading Platforms
I like to call social trading platforms as the “Facebooks of Trading” i.e. they are online, social networks of traders and investors who follow successful traders and their trades, “like” their trades (just like leaving ‘likes’ on a Facebook post), leave comments and ultimately copy the trades.
eToro is a social trading platform founded in 2006 by brothers Yoni Assia and Ronen Assia together with David Ring in Tel Aviv. Today, eToro offers social trading in currencies, commodities, CFD stocks. Ayondo is a similar platform. Other popular platforms include Zulutrade for foreign exchange trading.
Potential regulatory concerns include authorities in the UK deeming social trading as unregulated investment managers. The study of financial innovation can never be studied in isolation of regulations that promote a safe environment for investment and trading.
See You When You Get There
I think about trading, irrespective of the platform involved, as a gateway to find teachers:
The shortest distance between you and wisdom is a teacher
Successful traders have a lot to teach. Just like a good teacher, the most important lesson a trader can teach you is emotional detachment. Perhaps, not many experienced traders can practice such restraint continuously. One of the best books I have read on trading is Edwin Lefèvre’s Reminisces of a Stock Operator.
Markets seem to be constantly mocking traders to rise higher to gain greater wisdom.
Markets are seldom about beating the streets. Instead, they are about beating the old ‘you’ by controlling your vices (primarily greed). The constant teacher as I like to think about them.
To all my readers who love to trade or invest, I like to think of markets as an agglomeration of human emotions. I have always been fascinated by stock markets all my life. It is a love affair that doesn’t seem to end. While I have invested in equities all my life, my greatest profit from equity markets has been my own growth as a human being and I wish it for as you well. I wish to see you when you get there. I leave you with these words:
Money is valuable but character is invaluable.
Disclaimer: This article is meant for purely educational purposes only. This article is not meant to be an endorsement of social trading, any specific platform and should certainly not be construed as investment advice.