Social trading platforms: an innovation?

To those who are hearing about the likes of eToro and other social trading platforms for the first time, it seems like something new-fangled and fancy. And there’s an extent to which it is highly modern: sites like eToro can only exist due to the benefits the Internet provides, and the principles of social trading would fail if it weren’t for digital connection. 

But as this blog post will show, the principles and ideas behind social trading pre-date the existence of the platforms which facilitate it. In some senses, social trading dates back all the way to the private members’ clubs of centuries gone by. This article will share some more information about the history of the platforms, and deep-dive into what similarities they have with social-focused offline trading processes. 

Are they new?

The short answer, of course, is yes: social trading platforms, as they exist in their current form, are by definition relatively new. As this review of a social trading platform from respected site The Bull reveals, the market leader in this regard (eToro) was founded in 2007 – meaning that the social trading platform’s position in history is far from deep-rooted, and dates back only by a couple of decades at most. 

Social trading platforms work by allowing the user to essentially outsource their trading to an expert trader, who is also a member of the site. The new trader signs up to the site and selects from a list of experienced traders, and then the site automates the process of “copying” the trades placed by the more experienced traders. Any profits are then shared between the expert trader who planned the trades, and the new trader who also invested their capital – and trusted the expert to make the right choices. 

The term “social” gives the game away: in a technology context, this word means Internet-mediated, and social trading platforms would simply not exist without the Internet. It may theoretically be possible to send your instructions via post for your social trading partner to place on your behalf. But the Internet offers easy scalability and replicability, and social trading sites can only exist because they allow new users to join and get involved quickly – meaning the operating costs are lower. 

Is the idea new?

But what’s perhaps less new is the idea of sharing information about trading commodities and assets – and, indeed, trading on someone else’s behalf. Social trading platforms work on the basis that distributions of information and time are not even, and that some traders have more knowledge and even just space in their day to work on social trading. 

In this way, social trading platforms can be understood as the natural consequence of the wealth manager role. Prior to the arrival of social trading, and even since it has arrived, paying someone to build a portfolio on your behalf is a common practice. Both social trading and wealth management services allow you to outsource your trading needs, and to rely on the knowledge of someone else for building a hopefully profitable portfolio. 

But the traditional, non-technological definition of the word “social” can apply here. In previous decades, discussion of the latest stocks was – among a certain class of people at least – considered to be a topic of conversation, with many (predominantly male) traders gathering in locations like private members’ clubs to discuss their portfolios and share tips. Legacies from when this was popular continue to exist today in the form of broadsheet newspaper columns, like Questor in the UK’s Daily Telegraph, which give advice on the stocks that might be good to go for next. 

Finally, it’s worth pointing out that social trading – just like wealth management services and older forms of socializing around trading – is not a silver bullet. There’s absolutely no guarantee that a social trader will profit from their social trades, even if they choose a so-called expert – and there’s still a chance they’ll make a big loss. 

Overall, it’s always been possible to trade stocks in a way that could be described as “social” in nature. As with so many technological innovations, the underlying principles of social trading have always existed. What has changed is that the “platform revolution” has now taken place, and social trading is now formalized and Internet-mediated – allowing more people to participate in the social trading framework.

TIME BUSINESS NEWS

TBN Editor

Time Business News Editor Team