Social trading: taking the market’s pulse

Joe Kennedy, the father of JFK, made and kept most of his money by investing in the stock market in the roaring 20s. Famously, he sold his portfolio days before the 1929 crash. The turning point? Joe became convinced to go against the crowd after a shoeshine boy gave him stock tips. These days you don’t need shiny shoes and sharp instincts to do the same…just an internet connection.

One of the more interesting recent developments in the investment world is the emergence of social trading, where users make their investment decisions transparent and others can copy them. Whilst it’s a great platform for those starting out in the investment world, it could have an unforeseen benefit for the more experienced: social trading could yield insight into market mentality and momentum.

As an industry, investing has long fostered a herd mentality, with handsome rewards on offer for those who skilfully anticipate trends and contrarians who go against the market only to be proven right ultimately.

Twenty years ago, the overriding model of investing for the person on the street was that you bought into an investment fund run by a well-remunerated and highly respected fund manager, supported by expert researchers and analysts who unearthed investment opportunities for the manager. Essentially, retail investors bought access to team of highly-paid experts within a centralised function all working towards the growth of a specific fund.

The rise of the Internet means more people can make individual investment decisions (such as buying equities for a given listed company) with relative ease. As a result, more people can choose their own, personal investment strategy, as opposed to buying into a fund. Investment hobbyists have taken to sharing their investment tips and strategies with each other, leading to the rise of ‘social trading’ platforms – where social media and investing collide.

With social trading, everyone from the man on the street to the professional investor makes their investment decisions and performance transparent. It enables customers to replicate other users’ portfolios and trading activity automatically, providing those with perhaps less knowledge to either follow the herd or go with the contrarian.

So instead of having a team of highly-paid experts all over the world researching the best ideas for consumers to invest in, you have millions of ordinary people all over the world investing their own money, making their own choices, and a clear window into everyone’s performance.

This model offers clear advantages for retail and professional investors.

A key benefit is transparency. Because all actions and outcomes are visible users learn from each other. A clear trend on social trading platforms is for people to openly discuss investment ideas, successes and failures, meaning the community educates each other, as a truly social activity. More traditional investing is a one-way channel of communication, with an investment manager sharing monthly updates via a factsheet.

However, there may also be an as-yet unexplored left-field advantage for professional investors.

Just like the public pulse can be taken through analysing content shared on Twitter, Instagram and Facebook, the same could be made of social investment platforms. As social investing platforms grow, and users enter the tens of millions, the data from them could provide a new insight into market mentality and momentum.

Additionally, data from social trading platforms could be used to augment other sources of non-traditional data for analysis. Whilst professional investors have long used fund flow analysis to see momentum in the market, they’ve had very few ways of predicting where that momentum might head next. By analysing the active conversation flows on social trading sites, investors might be able to find data patterns that help them anticipate price runs. Take the incredible price run in Bitcoin last year. Professional investors were largely left out of the gains made in December, but the accelerating levels of Bitcoin related chatter on social trading platforms throughout 2017 might have offered some clues.

In the future, professional investors could turn to social trading platforms to mine for information on market sentiment, using the platforms to supplement their investment decisions and advice.

The sheer volumes of data and views being shared will only increase as platforms become more popular and could cause social trading platforms to be the first point of contact for those wishing to understand the views of the market.