Fin Tech

Social Trading and Its Implications: A Financial Technology Market Research Perspective

Summary: Knowledge and tactics play an important role in trading. The one who possesses it will move forward. Others can mimic and benefit from it!

Written by Ju Jian Ngiam on  Digilah (Tech Thought Leadership).

Social trading is a form of investing that enables individuals to observe the trading behavior of their peers and expert traders, and to follow their investment strategies using copy trading or mirror trading.

It democratizes access to financial instruments such as options, as traders can make decisions based on other traders’ actions rather than analyzing raw financial data, which they may not have the time or ability to do so accurately.

While social trading provides a platform for investors to learn from and mimic other traders, copy trading is a specific subset of this broader concept.

Copy trading is an automated process where an investor’s account mimics the trades of a chosen trader automatically.

Social trading requires more involvement and understanding, allowing investors to pick and choose specific trades to follow rather than copying all trades from a specific trader. In some cases, social traders can make the opposite trade of the expert they are following if the trader has a bad reputation.

An example would be the anti-ARK Innovation Fund (ARKK) exchange traded fund, Turtle Short Innovation ETF, otherwise known as SARK. The ARKK Fund was once a respected exchange traded fund, but due to poor performance in recent years, an exchange traded fund called SARK was created to short the ARKK. The fund went up by 75%, while ARKK dropped by 50% in 2022, proving its mettle in the financial industry.

Key players in the social trading space include eToro, Moomoo and Robinhood, among others. These platforms provide a wide array of investment options, from foreign exchange and stocks, Exchange Traded Funds (ETFs) to cryptocurrencies, and attract traders of all skill levels. High Frequency Trading (HFT) firms like Tower Research, Domeyard are also relevant, as they employ sophisticated algorithms that execute large quantities of trades within split seconds, often at the expense of retail investors.

Social trading’s main benefit is its ability to leverage the collective knowledge and experience of a community of traders, otherwise known as the wisdom of the crowd.

It allows inexperienced investors to learn from more seasoned traders, potentially mitigating some risks associated with lack of knowledge.

However, social trading also carries significant risks. Copying a strategy without understanding its underlying mechanism can lead to substantial losses, especially in volatile markets. There’s also the risk of following traders who themselves may not be competent or who may be driven by emotions.

Furthermore, the tactics of HFT firms can distort market information, leading to accusations of market manipulation through their tactic of “Quote stuffing”.

“Quote stuffing” in essence is placing mass orders of trades and cancelling them last minute, with the intention of overwhelming competitors by having them process the orders and cancellations.

At its worst, this tactic caused the Dow Jones Industrial Average to fall by 1,000 points in a few minutes in 2010. However, these firms are necessary market liquidity providers, accounting for 50% of all equity trades in the United States as of the present.

Hence, social trading platforms such as this company, FollowTrade should have risk management features that can safeguard consumers such as stop limit orders for their own good.

My deep fascination with the intersection of finance and technology is my primary motivation for being in this space.

It led to me completing a certificate in Financial Technology at HarvardX, an online learning initiative by Harvard before matriculating. I learned about strategies like High Frequency Trading and intend to delve deeper.

My understanding of the industry’s intricacies, such as the tactics employed by HFT firms and the complexities of trading as a finance undergraduate has equipped me with a unique perspective.

This offers an unparalleled opportunity to further my knowledge and contribute to the dynamic fintech landscape. I am excited to apply my skills and passion to real-world research and look forward to the valuable experience this promises.

Most searched questions

What is copy trading?

Is copy trading legal?

Most searched queries

Exchange Traded Funds (ETFs)

High Frequency Trading (HFT)

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