When Mark Zuckerberg first introduced Facebook at his
university, the market—when it caught wind of the
creation—was very sceptical about who would need such a thing
as a "social network." Ten years later, social networks
are a phenomenon and the basis of many other businesses across
nearly every sector, from hospitality to dating to transportation.
And, of course, to finance: the emergence of many social trading
platforms like eToro and ZuluTrade makes it possible for anyone to
manage an online investment portfolio exactly like an experienced
investor would, without any extra toil or trouble.
Internet technologies have had a sound track record in lowering
barriers to entry: think about how easy and cheap it is to use
social media to spread ideas, sell something, or launch a business.
Finance, especially trading, is an industry perceived to be
complex, non-transparent, and overrun with high management fees.
But up-and-coming social trading firms are now disrupting the
finance industry with easy-to-use platforms, high transparency, and
nearly zero management fees, lowering barriers to entry and opening
doors to new clients.
With our eye on the current development of many tech firms, we
see social trading disrupting two areas: 1) trading itself, by
attracting users to social digital platforms, and 2) market
generating predictions from data taken off of various social
The idea of using social platforms for trading was introduced to
the market shortly after the 2008 crisis, offering the possibility
for everyone (nearly) to join and to trade in exactly the same way
as the trader(s) you were following. The easy registration and low
(nearly free) service fees have positioned these offerings as
strong alternatives to traditional fund managers who are fighting
against decreasing industry returns themselves.
But we believe that social trading goes beyond trading
platforms: there is huge potential behind the data generated from
social networks for market analysis. According to Domo, there are
four million likes on Facebook and 350,000 tweets sent on Twitter
from 3.2 billion internet users... perminute. By
analysing this huge pool of data, some firms like SESAMm and
Talkwalker claim to be able to give market predictions ahead of the
market. Almax Analytics is even pushing this game further by
analysing global news. And imagine: we've seen only the tip of
the potential behind social-media-generated data.
Can social go beyond retail customers?
Part of the current FinTech boom, social trading carries the
very nature of the democratisation of technology, offering access
to better financial services and financial education to the masses.
This is along the lines of what we've seen from robo advisors,
blockchain, and mobile payments.
Fund managers are facing a lot of pressure from the market to
attract the millennial generation and to lower operational costs.
By using social trading platforms, established fund managers would
have easy access to a new huge pool of customers with a smaller
investment per account, leveraging their expertise in asset
management at the same time. These new tech-savvy customers will be
able to copy fund management firms' portfolios and emulate
their strategies while paying lower management fees thanks to the
new technologies. One thing we might see in a couple of years is
that the fund managers better understand the needs of their clients
on account of the data generated from the digital
platform—exactly the way Amazon knows when you need a new
Is social ready for finance? Or is finance ready for
One last point, pointed out by Shane Leonard in 2015, is that
the Facebook click rate for financial-service-related ads is among
the lowest (at 0.23%, compared to entertainment's 0.44% and
publishing's 0.92%). We shall have to wait for the market
before we can tell whether this is an indication that people are
simply not that "social" about finance products, or if
it's the case that FinTech disruptors haven't quite cracked
it yet. As with other FinTech outputs, social trading can allow
traditional players to define new relationships with clients who
belong to the coming generation. It won't promise you a better
return, but it will offer you a new way to engage your
customers—and if social and digital are already in their
genes, then your products and services should be too.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Technology has the potential to transform business at its fastest rate ever. I have previously published articles about big data ("Big Data: He Who Owns The Past Controls The Future", Mondaq, 6 October 2014) and digital technology ("Insurance - A Quiet Revolution in Digital Technology", Mondaq, 16 March 2015).
Overstock.com, Inc. (NASDAQ:OSTK) announced a strategic investment in Bitt.com, a Barbados-based financial technology firm working to move island nations in that region to adopt digital national currencies.
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