A Primer on Social Trading Networks – Institutional Aspects and Empirical Evidence
Presented at EFMA Annual Meetings 2015, Breukelen/Amsterdam
26 Pages Posted: 10 Jul 2013 Last revised: 15 Jul 2018
Date Written: May 5, 2015
Social trading networks provide access to an innovative type of delegated portfolio management. This paper provides a rationale for how these platforms are organized and gives some very first empirical insights to make social trading more tangible for both academics and practitioners alike. First, we discuss the basic mechanics and institutional aspects in light of the arising agency relationships between signal providers (users sharing their in-vestment ideas, i.e. portfolio managers) and signal followers (users subscribing to the sig-nals of other users, i.e. investors). We argue that as an intermediary, the platforms may generally reduce information asymmetries between both groups. However, due to the de facto non-existent entry barriers, it is reasonable to expect a high number of uninformed charlatans among signal providers. Second, using a unique dataset comprising transactions from the four major platforms, we analyze the returns generated during the year 2012. We find that signal providers typically engage in active trading rather than buy-and-hold strategies, which ultimately results in non-normal return distributions, implying that mean-variance analysis is an insufficient framework for performance analysis and portfolio selection in the context of social trading. More precisely, we argue that signal providers typically follow directional approaches and thus may exhibit substantial market risk at any point in time. Hence, far more than the documented 25 percent of the signal providers in our sample can be assumed to bear systematic risk.
Keywords: social trading, social networks, delegated portfolio management, CFD trading
JEL Classification: G11, G23
Suggested Citation: Suggested Citation