Committed traders spend thousands of hours absorbing, processing and acting on market information. “Social” empowers them to post, receive, and thus exchange information, 24*7 with others around the globe.
P2P is THE new paradigm. Unsurprisingly, traders have embraced P2P with gusto.
Social and traders: isn’t this exciting? How about Social trading / Copy-trading / Auto-trading / Mirror trading??
Here’s our take! (Hint: knowing that trading is Intellectual Property, you won’t be surprised!)
Social trading & collaboration
Trades are a time sensitive IP produced by hard to acquire trading skills: knowing a good trader’s current market outlook, or the trade that he just placed is VERY valuable information.
On this account, “social” holds promise. Trading rooms & clusters of “Twitter traders” have formed on a validated psychology principle: group beats individual decision-making. Your information helps me; my information helps you, it’s a win-win, “social trading” here we go!
Almost, but not quite!
Social trading = free for all?
There’s this tiny little thing: for this to work, my contribution has to be as valuable to you as your contribution is valuable to me.
Otherwise, imagine this conversation between Trader Johnnie and George “Quantum” Soros in 1992. Johnnie, who just placed his first ever trade, reaches out: “Hey George, I’m a trader, you’re a trader, let’s social trade: I’m long the GBP, any thoughts?”.
Absurd, and therefore unlikely! Animal Farm’s unforgettable Napoleon summed it up:
“All traders are equal, but some trades are more equal than others”
Free “Social trading” as described above = barter. Barter works… AS LONG AS all parties to it exchange equally valuable contributions.
Luckily for George, trading is an IP industry: no amount of Johnnie trades are of interest to George (this is not to say that knowing ALL trades by ALL Johnnies at any point in time wouldn’t!). Barter and IP are difficult soul-mates: a sustained IP exchange where a trader consistently contributes above average only works if he really likes philanthropy: the communist trader – a very strange creature, indeed!
Social trading – our take
“Social trading” would work IF all traders had similarly valuable IP to contribute. But they don’t. The moment a trader contributes more than he gets, his incentive is to walk. Once he does, the second best trader, who also contributed above average and now also lost access to the best trader’s IP, follows suit. This triggers a race to the bottom that soon becomes noise. At its worst, this is Twitter for traders. Everyone has trades to tweet, alas not all trades are equally valuable.
Social trading – what’s next?
Barter is not the way to exchange valuable information: this ignores the dynamics of intellectual property. Existing “social trading” propositions fall short on this account and thus have flaws that greatly outweigh their benefits to good traders. What’s worse, they’re a self-selection magnet for all sorts of bad stuff that smart traders should best stay away from. Groucho Marx knew when he said: “I wouldn’t join a club that admitted me as a member!”
At Darwinex, we know that, given the right set-up, good traders have valuable IP to contribute, and can benefit from collaboration. Our investor platform is already in private beta, so stay tuned!