A social affair

The traditional world of stock markets and trading is colliding with social networks. Will this be a marriage made in heaven or a quick fling? Hannah Prevett investigates

Trading floors are frenetic, fast-paced environments where the onus is on technology to provide top quality, real-time information to inform decision-making. Meanwhile, the biggest phenomenon to hit the technology world in the past decade has been social, from early contenders like Bebo and MySpace to current must-haves Facebook, Twitter and LinkedIn. The two are now mid-collision, but can the traditional world of trading embrace the social revolution?

Social trading is a somewhat murky term, and there seem to be two definitions in our midst: the first is sentiment analysis of tweets and data on social networks to predict the stock market. Vagelis Hristidis, an academic at UC Riverside in California, recently conducted research into the relationship between tweets and the financial markets to see what sort of influence one might have on the other. And sure enough, he found a correlation between Twitter activity about a company one day and the volume of trading of that company’s stock the next day. Furthermore, he also found that the relationship extended to stock price, meaning Twitter traffic one day tended to mean higher stock prices the next. It is no coincidence of course that companies such as Dell have begun posting their earnings to StockTwits before releasing them to mainstream news sources.

And secondly, and of most relevance to this feature, is social trading as a ‘follow the crowd’ mentality, where traders are using a social experience, or network, by which to observe and emulate other people’s trading patterns.

Making headlines
One of the most high-profile companies to enter the fray is eToro. The Cyprus-based company has made the news (sometimes for the wrong reasons) in the last two years thanks to its OpenBook solution. It has a flashy, sexy interface, where it runs a live stream showing which traders are winning and which are losing in real-time, as well as trade-specific information such as how often, and how much they’ve put up. Users can follow top traders or ‘gurus’ and the system will allow them to copy trades automatically, as they sit back and wait for the cash to roll in.

Sound too good to be true? IDC’s Alex Kwiatkowski believes so. “Because it’s got the word ‘social’ in it, people jump on the bandwagon. They think it must be a gold mine. But just because it’s got social in its description, it doesn’t mean it’s automatically going to be a success.” Kwiatkowski is also sceptical about the concept of following the site’s ‘gurus’. “It feels like you’re risking your capital to follow someone and you don’t really know who they are.”

He may have a point there. The gurus are selected by other users of the site, so the more followers they have, the higher up the guru rankings they climb. They will be monitored for consistency of behaviour, but eToro doesn’t conduct any in-depth background checks, for example. The gurus will post information about themselves on their page, but it’s a question of trust at this point, as it’s impossible to know if the person pertaining to be behind the computer screen tallies with the reality.

But social trading isn’t all about copy trading; there’s the social network part of the equation too. “There is definitely an appetite for this,” says Dr John Bates, SVP and CTO at Progress Software. “Ask yourself why Bloomberg is so successful. It’s because it was one of the original social networks. It was ahead of its time.”

One company that has really focused on the social network component is Tradeo. Unlike eToro, which hopes to attract professionals and non-professionals alike, Tradeo admits it is focused on the retail customer, not those in the trading room. “We started by building a full social network
where users and traders could meet and chat to one another,” says Jonathan Adest, founder and CEO at Tradeo. “Then we added financial information such as charts and quotes, news aggregation, a calendar, and social trading, which means we read in real-time and historically all of our users’ trading activities.”

Social trading is a difficult concept for stalwarts of the trading world to get their heads around. Until the concept surfaced about four years ago, much of the investment process ostensibly went on behind closed doors, conducted in smoke-filled rooms by men in suits, with clients paying many thousands to have their portfolios managed by teams of financial advisors, hedge funds, guru traders and so on. Questioned about the notoriously secretive nature of the City, Adest says that it is only a matter of time before the banking community acknowledges the social revolution: “Social is taking over the world. Who knew we’d be sharing every picture on Instagram or every location on foursquare 10 years ago?”

Unsurprisingly, Yoni Assia, founder and CEO at eToro agrees. “A decade ago nobody would share photos of their family online. Now the standard is to have a Facebook account and share every photo online,” he argues. “The world is changing and we’re embracing it. I think our users are probably the smartest traders there are because they’re embracing something new that’s harnessing the wisdom of the crowds. The older ‘professional’ traders might be so late to the game they lose all of the profits in copy trading.”

Assia’s certainly presents a strong case for copy trading, and, indeed, eToro. Despite some negative press, (Assia says he loves it when detractors say eToro is “too good to be true”) the company has more than two million users signed up. But for the most part, these are retail customers. Whether or not this is likely to be adopted by the banks and professional traders remains to be seen.

A few commentators have likened the effect of social trading on the banking and investment worlds to the impact of the birth of online brokerages in the 1990s. But others are a little more cautious. “I don’t see any evidence of that yet,” says Dr Bates. “These social networks are going to continue to grow and there’s going to be lots of innovation. But can people be comfortable with the combination of transparency and money? The jury’s still out.”

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