Social trading isn’t dying – it hasn’t even been born yet. Guest editorial

By Tony Cross, Director, Monk Communications Ltd, an expert on the retail derivatives industry.

Look around the retail derivatives market and it’s awash with the idea that getting investors to interact with one another will be some kind of silver bullet for the sector.

The theory goes that not only can it regenerate dormant accounts that have cost literally thousands of pounds to recruit in the first place, but that the next generation of traders will be demanding this kind of interaction – they all live in a sharing, connected world that’s powered by the latest technical innovations from Silicon Valley.

With this kind of prize on offer, perhaps it’s no surprise that we’ve seen wave after wave of brokers come to market, claiming they’ve cracked it. They’ve managed to plant the seeds of a new business model that will prove to have the reach of Facebook and the profitability of a derivatives firm, but without most of the hefty marketing cost that acts as a brake on many legacy players.

Yes, the venture capitalists may have the appetite to build models like this, but they all seem to be missing one fundamental point.

History doesn’t repeat itself, but it often rhymes…

Jump back two decades to the mid 1990’s. It’s the early days of widespread consumer access to the internet and who were the big players back then? Names like CompuServe, AOL, Prodigy and maybe even Yahoo sat at the forefront, each pursuing their own, largely silo-based strategies – also known as walled-gardens – for developing content and communities.

Where are these pioneering companies today? Three have vanished whilst the fourth is now being sold off – all have been comprehensively eclipsed by the likes of Amazon, Facebook and Google. There’s a saying that the first person to make a million dollars in the US gold rush was the man selling shovels – it seems worth remembering that the same analogy rings true today.

That situation we saw unfold less than a generation ago is already repeating itself in the world of social trading – some of the most basic lessons of Web 1.0 appear to have been comprehensively overlooked by these well-funded pioneers in this nascent industry.

Ask any of the players to define what they do and you will get a different definition of social trading. Start pushing them on the regulatory aspects – questions over money management and the potential for market abuse abound – and the picture becomes even more complicated.

The common aspect seems to be however that it’s stretching the truth to call it ‘social’ if you can only talk to – and get trade visibility – from a select number of clients at your own broker. These brokers are blindly following a path that has already been shown as leading to failure by the internet names of the 1990’s, so what’s the solution?

When Tim Berners-Lee came up with the idea of placing marked up documents on servers that could then be accessed over the internet, the key aspect here was the fact that a common standard was adopted and the information was accessible to all.

Look at what Google does – it indexes the internet, making a tidy profit from the accompanying ad sales.

Or Amazon – it’s an open marketplace and any retailer can display their wares for sale to a global audience. There’s no need to back one horse in the internet race of 2016, so it almost defies belief that brokers are setting themselves up as providers of social trading, yet failing to learn from such recent and blatant mistakes.

Is the holy grail achievable?

However, one firm is closing in on this broker Nirvana – a world where dormant accounts can be reactivated easily and clients have an impetus to trade. The most successful investors will be rewarded for their following, and the next generation will have a truly collaborative environment where they can share trade ideas in much the same way as they can discuss the next great indie band, or the must-visit, pop-up Sino/Peruvian fusion restaurant.

The concept is known as SwipeStox and it’s being snapped up by brokerages keen to deliver a layer of genuine interactivity for their clients, without getting chased into the silo of attempting to become their own community and at the same time hoping to conquer the entire global market.

Ben Bilski, SwipeStox CEO, commented, “The market is awash with new brokers all fighting for the same clients. We’re deliberately ignoring that game and instead what we’re doing is providing an added layer of functionality that will make those clients easier to recruit, more loyal and more active.

The successful ones who can generate a solid following will be remunerated quickly and at a highly competitive rate. It costs the trader nothing and all the costs are shared by the brokers.”

What about the proof?

One Financial Markets was the first broker to adopt the technology in early 2016 and the initial feedback has been positive. They have noted that initial deployment has led to a rise in account reactivations and they hope to see the number increase when they roll this out fully.  They also believe that those using the technology will increase their trading activity.

Asked about the longer-term prospects for the deployment, Andrew Henderson of One Financial Markets said “this has the potential to be a powerful, low cost solution that allows traders to interact across the globe.”

“We will continue to attract our own clients, but they now have a world of trading ideas at their fingertips – this is another excellent plug-in approach that has global potential, certainly one of the best I have seen. We feel this is a strong addition to our offering and one we are genuinely excited to roll out” – Andrew Henderson, One Financial Markets.

As for regulation, well perhaps that’s the elephant in the room when it comes to social trading.

Iterations we’ve seen so far have evidently given the regulator cause for concern, ranging from the need for brokers to hold asset management licenses through to concerns for the potential for market abuse – ‘popular’ traders suddenly get an undue weight of money from automated followers behind their trades, paving the way for front-running.

Legal opinion of SwipeStox allays these concerns – it’s merely offering a sentiment indicator and an illustration of how successful that trader has been in the past.

Some brokers may be claiming that they’ve already nailed the concept of social trading. Closer inspection however suggests the journey has only just begun.