Social trading is more than just a new methodology for online investing. It is becoming a viable means of empowerment for individual investors; a way to leveling the playing field of trading financial instruments on Wall Street and other exchanges around the world. Social trading is becoming a force of enfranchisement for individual investors thanks to its high level of transparency and the way relevant information is justly shared among traders. Due to these and other reasons, social trading is not only demystifying financial exchanges for individual investors, it is also poised to become a responsible way of trading in an era when the giants of Wall Street are accused of being “out of touch” with the rest of the investing community.
How Social Trading Evens the Score
When online trading came of age in the late 20th century, the financial news media praised its glories as a long-awaited instrument of change; a hi-tech tool to bridge the gap between the individual investors and the fat cats of the market economy: the central banks, institutional investors, insurance companies, fund managers, large investment banks, and the ultra-wealthy families who seemed to control Wall Street. While Internet technologies and online trading managed to attract the attention of day traders and introduce many individuals to the world of financial exchanges, the aforementioned gap was not exactly narrowed. Premium pricing, high-frequency trading, dark pools of liquidity, and hedge funds are just some of the 21st century developments on Wall Street that individual investors can only dream of having access to.
The concept of social trading is the closest that average online investors have to an equalizer when faced against the forces of Wall Street. Here’s a look at how the salient features of social trading platforms empower individual investors against the many advantages of Wall Street on a daily basis:
Sharing Information and Financial Analysis
The premise of Wall Street being out of touch with Main Street has a lot to do with the way institutional investors conduct business, and the unfettered access to financial privileges they enjoy. The first advantage Wall Street has over individual investors is information. To the average investor, the Internet is a treasure trove of information that can be used to make informed decisions prior to taking a market position. To a trader or market analyst at Goldman Sachs, much of the information on the Internet is stale and cannot be used. The information on Reuters and Bloomberg terminal workstations arrives at dazzling speeds and is immediately examined and dissected by sophisticated computer modeling software and by an army of highly-paid analysts. Such information rarely makes its way to the Internet. Fund managers have an added advantage of being able to tap insiders for information across different industries.
At the highest level of the decentralized forex trading environment rests the interbank market, where the central banks enact monetary policy, and where global financial behemoths such as Deutsche Bank and UBS trade billions of dollars on a daily basis. The dealings of such entities result in information that is disseminated through the Bloomberg and Reuters terminals. The highlights of this information are passed on to the rest of the forex trading community.
Social trading introduces the efficiency of information sharing that is common in social media circles and turns it into a powerful advantage for online investors. The information is far from static; it is delivered in real-time, and it is analyzed and curated by the community. This information sharing concept could yield more value than the information from the Bloomberg and Reuters terminals that is reviewed by a few analysts for the benefit of institutional traders. Information sharing within a social trading platform enjoys the wisdom of crowds, a construct that is very effective in high liquidity markets such as forex.
Sharing information in a social trading platform such as the forex OpenBook platform from eToro presents a distinct advantage over Wall Street: it enjoys a greater diversity of expertise and a wider variety of financial goals. While the top level market makers in forex are busy trying to squeeze every profit possible from their trading desks, individual traders united in a common social trading circle will have different reasons for being a part of the community. The information shared is analyzed by individuals with different motives and points of view; the social trading circles can choose a consensus or look for a trading style that matches their interests.
The way that information is analyzed and shared within OpenBook is very organic. Some individuals will emerge as experts thanks to their handling of information, but only after the rest of the trader community has evaluated their performance. These elected experts remain in their position as long as the community keeps them there, and all along everyone observes precisely how the experts handle the information and perform winning trades.
Sharing Trades With Social Trading
In the cutthroat world of investment banking, there is a strong “follow the leader” mentality at play. Prominent market makers and major brokers are always analyzing the competition and trying to copy each other’s trades, a practice that inevitably leads to such “herd instinct” results such as massive selloffs that lead to market corrections. To keep their competitive edges reasonably sharp, the major investment banks and large brokerage houses of Wall Street resort to the use of proprietary trading systems that are jealously guarded and kept secret.
In the real of social trading, there is no sense in keeping trading systems secret. If anything, sharing trades increases participation in the market and adds to liquidity; something that is essential in forex. The eToro CopyTrader is another feature within its award-winning social trading platforms that allows participants to start taking profits early on their trading careers by copying, rather than attempting to emulate, the best positions and trades that successful traders have adopted in the past. Unlike Wall Street, eToro’s platform thrives on transparency to foster an environment where everyone gets equal access to the markets.
Financial exchange markets are only as efficient as the individuals who choose to trade in them. Social trading ensures that this efficiency is maintained by empowering individual traders.
