WTF are social trading networks?


In the summer of 2015, Pinterest and Instagram introduced click-to-buy features to augment mobile sales. The move towards click-to-buy on these platforms seemed promising: brands and celebrities have hundreds of millions of followers on Pinterest and Instagram, and buy buttons would enable passive followers to become active shoppers in nanoseconds.

Nevertheless, these buy buttons haven’t really taken off, for a number of reasons: in the plethora of content on the web, individual pieces of clothing get lost, and, frankly, consumers aren’t really interested in using Pinterest and Instagram as purchasing channels.

The fashion industry might have known that getting people to actually make purchases with buy buttons was going to be tricky if they had looked to the world of finance. Fintech entrepreneurs have been trying to harness social technology for sales for years with social trading networks.

What are social trading networks?

Social trading networks are online platforms that enable members to follow the trading activities of other investors, including well-known professionals. Most of these platforms have autotrading capabilities, which means that investors can choose to automatically copy other traders’ moves from the platform itself in their brokerage accounts.

While the average person can figure out which brands to follow online based on his or her particular taste in clothing, the beginner or even veteran investor may have trouble identifying the traders worth following. Social trading networks help members tell the wheat from the chaff by providing completely transparent user statistics and history. These networks have taken the social aspect of their name seriously by taking their cue from Google+ (not a great sign, guys) and enabling members to trade in groups.

Sounds groovy. So what’s the problem?

Any concerns that brands had when launching buy buttons on Pinterest or Instagram could be soothed by the knowledge that all Pinterest and Instagram users wear clothing – there was always a certain chance that these users would be interested in buying their wares.

However, the audience that social trading networks is appealing to is much more niche – not simply investors or potential investors, but active investors. This pool is slowly evaporating, with increasing numbers of investors turning to roboadvisors, the new gods of statistics and analysis, to do their investing for them. With studies showing that passive investments are cheaper and perform better, it’s hard to blame them.

Moreover, social trading networks have a much bigger marketing challenge than brands on Pinterest and Instagram — people use these platforms for personal consumption, whereas social trading platforms need to convince investors to sign up in the first place.

Another problem is the assumption underlying social trading networks; i.e., that a trader that has invested well so far will know how to invest in the future. That’s a little bit like saying that a scholar of the first World War could have accurately predicted the second. Possible, but not probable.

That does sound problematic. Why would I join one of these networks?

If you do want to be an active investor, social trading networks have their perks: they make it simple to interact with like-minded traders, to gain access to trading statistics and analysis, and to adjust your portfolio to mirror that of your trading mentors.

If you happen to be a brilliant trader, you can also get paid to share your investment activities on these platforms.

Ok, I’m intrigued. Who are the major players?

Social Trading Guru lists 29 leading social trading networks. Most of the assets classes traded on these networks are forex, though some are stocks, indices, and commodities. In case the problems cited above gave you the indication that social trading networks are a digital disaster, the situation is not so dour: Israel-based etoro has raised $79M, while German-based ayondo has raised $10M.

Still, like their fashion compatriots, a lot of social trading networks seem to be struggling to monetize social technology.

Put it this way: social trading networks are the buy buttons of the finance industry. They might see higher usage rates in the future, but for now, they’re mostly a sideshow, not a main investing act.