Aşağıda yayınladığımız yazılar, Prof. Dr. Selim Yazıcı’nın Özyeğin Üniversitesi, Financial Engineering and Risk Management (FERM) Yüksek Lisans Programında vermiş olduğu Financial Technologies dersinde öğrencilerin bitirme ödevi olarak hazırladıkları çalışmalardan oluşmaktadır. Yazılar kendilerinden izin alınarak yayınlanmaktadır.

Social Trading Platforms : First learn, then earn…

Hazırlayan: Uygar Kurtoğlu

I am a senior stock trader with over twenty years of experience in equity sales and trading. Remarkably, I have witnessed how fast the change in stock trading has been over the last two decades from traditional floor trading to mobile devices. Innovations in financial markets have been accelerated by FinTech. In this context, the article aims to explain why social trading can be the future of financial trading in this contemporary era.

Social trading platforms work very similarly to a regular social media network like the Facebook of the trading World. They are communities like any social network. In the previous decade, popular social media sites such as Facebook and Twitter entered our lives rapidly, thus traders were able to start sharing their transactions in this way. For this reason investors have begun to use social networks as an additional source of information. Likewise, FinTech, is a revolution in financial technology, developed a new online way of trading through social trading platforms which is combined with social networks and the finance world.

The social trading platform history starts with the company Tradency. In 2005, they proposed the first autotrading system which was called “mirror trading”. A trader could add his own trading strategy on the company systems. Then, if the strategy was accepted, the customers could observe the elements of the strategy, and, if interested, could decide to mirror-copy on their account all the transactions generated from that strategy. In a while, many more social trading platforms have joined the fray such as eToro, Ayondo, Zulutrade, Darwinex, Naga Trader, and Peeptrade. Social trading has been constantly evolving via these FinTechs for ten years. Social trading is one of the most interesting innovations of recent years in the field of capital investment and trading.

The social trading platforms are multi-asset platforms which offer the opportunity to trade many financial instruments, such as equities, indices, forex, cryptocurrencies, ETFs, and commodities globally. Users can interact as they would on Facebook or Twitter, liking, commenting, and sharing the feeds generated by other users. Notably, social trading platforms bring together traders and investors from all over the world in a network. By sharing traders’ real-time views and transactions, it aims to encourage traders to make decisions with social information rather than fundumantel or technical analysis. In particular, beginner investors often have a hard time understanding how the financial markets work. Social trading helps them share their experiences on various social platforms such as forums, community websites and blogs, as well as in the comment sections.

Social trading platforms allow the investor, even if inexperienced ones, to copy manually or automatically the financial transactions made by one or more professional investors inside a trading network. Copy trading, where traders follow the opened and closed positions by the more experienced traders, is one of the most important features of the social trading. Many of the platforms have a “member traders list” section where you can see the top traders. Successful traders usually have many followers and are copied by many. The “follower investors” can set their account to automatically copy a number of experienced traders. In addition, they can stop copy trading whenever they want. Consequently, social trading eliminates the emotional factor and thus reduces the risk of “psychological factors”. Manual trading is very time consuming. Furthermore, learning the trading process and gaining skills on technical and fundamental analysis are so difficult for newbie investors in the financial markets. The world famous investment guru Warren Buffet says that “Having money makes you rich, having time makes you wealthy”. Therefore, social trading seems to be a great way to learn about the financial markets.

Social trading platforms allow direct “peer to peer investment” between an individual and a trader. Meanwhile, rookie investors learn to trade from knowledgeable traders through copying their trades and strategy. Experienced traders can also make extra money, thanks to their followers on these platforms.

How to start social trading?

There are many platforms that offer social trading. Nevertheless, it is generally recommended to use platforms with a large number of users which means more information and a wide variety of good traders to choose from. First, it is highly advisable to open a demo account to get an idea of what kind of services they offer and how well they work. Then, the demo account’s movements can be followed and evaluated every day to see how your investment can fluctuate.

The fact is that the most traded markets on social trading platforms are forex and derivative markets which are also associated with leverage. Investors can easily open real accounts on social trading platforms even with a low deposit of around $ 200. The funds stay in your account. The majority of social trading networks either have their own broker or have agreements with a number of different regulated brokerages that can be connected to their platform. Your money is directly held with the broker firm you choose. The traders you follow and copy have no access to your money. The only costs are included in your broker bid-ask spreads which refer to between the bid and ask price. Successful traders are usually paid by social trading platforms based on their number of copiers and number of trades copied and they also have the opportunity to build prestige for themselves. Giving a good performance and producing good results attract investors eager to follow their signals, and this leads to making a profit.

Before starting to follow a trader’s investment signals, investors should consider evaluating if they are compatible with their investment objectives. Social trading platforms allow you to look at a trader’s trading strategy, investment history, current portfolio and profile description. How long he has been trading, what is the winning percentage, how many instruments he trades with, how many positions he keeps open simultaneously, how many trades he executes on average in terms of a preferred time horizon, how long he keeps them open on average, does the trader set stop levels on each open trade, these are all very crucial questions while choosing the most appropiate signal providers who are fitting your investment expectations. Even the most experienced traders can’t possibly master every market. Some specialize in certain geographical markets, such as the US or Europe, while others master certain asset classes, such as stocks, commodities or cryptocurrencies.

How does signal replication work?

When you select the traders you like to copy and allocate your funds to them, any time a trader executes a trade in their own account, this trade will be executed automatically in your account, with the size of the trade adjusted with respect to your account risk settings. You need to proportionally replicate the trades of signal providers. This process is all automatic and it takes just a few tenths of a second.

According to William Bernstein, the most important thing is not the assets in your portfolio. Your portfolio as a whole is a form of behavior. The science of mixing different classes of assets to obtain a resultant blend is called “portfolio theory” and this theory is at the center of the major investment tournament globally. (The four pillars of investment William Bernstein 2002)

Social trading is a real form of investment. In this context, it is worthwhile to consider that the followers have to decide which and how many signal providers to include in their portfolio for good money management. Similarly, risk managment is one of the other most important aspects of trading. Establishing clear trading rules like asset diversification in your portfolio, how much capital to assign to each trader, setting stop levels, and following these rules always makes your investment successful.

What are the risks?

Some social trading networks prefer to hide open trades from statistics. Sometimes traders would not close open losing trades and they would remain in their profile in order to boost their ratings. Therefore, it is important to be aware of the quality of open trades. Moreover, increasing the number of simultaneous trades can quickly increase the level of risk. Another key thing to remember is that forex market and derivatives are associated with leverage.

Some followers also complain about trades being copied with high slippage. When investors copy someone else’s trade, the trade does not happen at the exact same time, and that’s called slippage. In the worst cases, there could be a delay of a few seconds. Within that time, the price may fluctuate, and you may buy in at a higher price than the original trader.

Wisdom of Crowds

“Wisdom of crowds” is a theory that a mass of individuals are collectively smarter than a single expert when it comes to problem solving, decision making, innovating and predicting. The Wisdom of Crowds can show how large groups have made superior decisions in behavioral economics and other fields. By contrast, a negative example of the Wisdom of Crowds is provided by speculative bubbles.

Innovations in social trading by FinTechs are always mind-blowing. While Zulu Trader’s combo features offer a new way to diversify your portfolio. An estimated eight-nine million people use eToro which raises money to develop blockchain technology through receiving financing for millions of dollars from many important investment funds. SociumTrade is developing a next generation social trading platform as well. It offers unparalleled levels of trust and transparency, with every transaction recorded on the blockchain, while its smart contracts mean transactions are incredibly fast with no centralised intermediaries.

One of the recent studies about social trading, “Determinants of Leadership in Online Social Trading”, was issued by Endrit Kromidha and Matthew C. The academics’ study aims to make a theoretical, methodological and empirical contribution by exploring the research question: What determinants affect leadership in online social trading? They expected that financial factors such as performance and risk signals would play a dominant role. However, their findings suggest that traders’ personal credentials serve as the most valuable sign of trader competence. In addition, their study confirms the importance of traders’ connectivity to each other. A trader who frequently keeps you up-to-date with their strategy and market views is more likely to be following the markets closely and is likely to react and adjust their strategy when new market conditions occur. In a similar study, academicians Florian Glaser and Marten Risius focused on to investigating how trader performance can be enhanced through transparency and social interactions on social trading platforms. They collected and analyzed a panel of 178 trader profiles and their respective trade information over more than 100 days from a leading social trading platform Zulutrade. In conclusion, the result supported their underlying assumption that the trader performance is affected by behavioral and interaction features of the platform.

Finally, the regulations related to social trading in the UK and in Europe are very similar. Social trading platforms must follow regulatory obligations for licensed portfolio managers. The US are known for their restrictive financial regulation, but that does not refer to social trading. The copy trading itself is not forbidden, however under US law traders are not allowed to hedge their trades by opening the same trade in both directions simultaneously. For example, one cannot have open buy and sell positions in EUR/USD at the same time. The Capital Market Board, the Turkish regulatory authority, evaluates copy trading activities as investment consulting. However, investment advisory services are prohibited in the forex market in Turkey.

To sum up, the fact is that trading is always based on information. Even though the trading methods change, investors’ search for true information and interaction before making investment decisions will never change. Neverthless, investors can only understand by experiment how FinTech and social trading platforms will meet their needs on this issue.


References

Endrit Kromidha & Matthew C. (2019).Determinants of leadership in online social trading: A signaling theory perspective

F. Glaser & M Risius (2018). Effects of transparency

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This paper was prepared as a class work for Financial Technology course given by  at Ozyegin University, Graduate School of Business, Financial Engineering and Risk Management Program.

Sosyal Ticaret Platformları: Önce öğren, sonra kazan
İstanbul Üniversitesi, Siyasal Bilgiler Fakültesi, İşletme Bölümü öğretim üyesidir. Ayrıca, Marmara Üniversitesi, Bankacılık ve Sigortacılık Enstitüsü'nde, Sigortacılık Bölümü'nde 2009-2016 yılları arasında misafir öğretim üyesi olarak "E-Sigortacılık" dersini vermiştir. 2019 yılından beri misafir öğretim üyesi olarak Özyeğin Üniversitesi, Financial Engineering and Risk Management (FERM) Yüksek Lisans Programı'nda Financial Technologies dersini vermektedir. Teknolojiye ve teknolojinin yaratacağı fırsatlara inanmış bir akademisyen olarak, 2000'li yılların başında, teknolojideki değişimin finansal kuruluşların üretim, pazarlama, satış, dağıtım ve satış sonrası süreçlerinde yaratacağı etkileri ve e-ticaret olanaklarını değerlendiren araştırmalar yapmış ve sigortacılık sektörüne özel bir envanter oluşturmuştur. Bu çalışmaların sonuçlarını, ortak yazar olarak yer aldığı "Elektronik Sigortacılık" (2002) adlı kitabında yayınlamıştır. Daha sonra, finansal hizmetler dünyasındaki teknolojik değişimi ve müşterilerin dijitalleşmesini gözlemleyerek, özellikle bankacılık ve sigortacılık sektöründe dijital dönüşüme yönelik projeler geliştirmiştir. Teknolojinin finansal hizmetler sektöründe kullanımı ve çevik yapılar olan start-upların bu alandaki girişimcilik faaliyetlerini içeren FinTech ve InsurTech konuları ilgi alanını oluşturmaktadır. Girişimcilik, Finansal Teknolojiler, Dijital Sigortacılık, Proje Yönetimi, İş Sürekliliği Yönetimi, İşletme Yönetimi, Uluslararası İşletmecilik ve Örgütsel Davranış konularında dersler vermektedir. Finansal teknolojiler konusunda girişimcilerin ihtiyaç duyabileceği tüm alanları kapsayan ve ülkemizde ilk olarak FinTech İstanbul tarafından gerçekleştirilen "FinTech 101 Eğitim Programı"nın şekillenmesini sağlamıştır. Öğrenen Organizasyonlar (2001), Elektronik Sigortacılık (2002), E-Öğrenme (2004) ve İş Sürekliliği Yönetimi (2013) başlıklı yayınlanmış dört kitabı bulunmaktadır. TSEV ve TSPB'nin eğitmenlerinden olup bankalar ve sigorta şirketleri için çeşitli konularda eğitim programları düzenlemiştir.