New players, strategies and opportunities. An exciting future awaits for social forex trading

Social trading in forex is becoming ever more established in the retail world, and is even becoming a useful tool for more experienced traders looking to exploit the knowledge of the masses to improve their strategies. Heather McLean explores how this innovative area is seeing the development of new functionalities and toolsets to improve the trading experience for all, leading to an exciting future of opportunity.

First Published: e-Forex Magazine 56 / Retail FX trading / April, 2014

When talking about what innovative new social trading platforms and communities have recently been launched, Jeff Grossman, managing director at independent full service broker, Squared Financial, says many are quite similar. He explains: “The [social trading platform] technology hasn’t gained traction in the professional or institutional markets, so the space is still very open to innovation.”

On platforms that stand out, Grossman comments: “Recently FX Pro has launched its own version known as Super Trader, which leverages its own client base whilst Myfxbook [an online automated analytical tool for forex trading accounts and a social forex community] is definitely a leader. The portfolio analytics are very strong even by Institutional standards and its criteria for vetting systems is also impressive.”

Rapid development of platforms

Social trading platforms have been significantly developed since their introduction, comments Mariusz Potaczała, CEO at TMS Brokers, provider of premium brokerage and institutional risk management advisory services in FX, CFDs, Futures and Options. He says that with growing communities of traders and with thousands of signal providers to choose from, the emphasis has been put on delivering the most precise and reliable real time data and statistics to verify traders’ track records. 

Yet Potaczała adds: “Being able to calculate return on investment is no longer enough for clients when choosing a signal provider; they expect to be able to examine the distribution of position returns, position allocation, account equity, unrealised P&L or estimate value at risk.”

As for trends in the development of new functionality and trading applications for social forex, including automated copy trading, Grossman says that it is important to prioritise those that provide more complex functions as well as the basics. 

Grossman also notes that: “The most impressive functionalities are focused on providing better risk management. These technologies offer more than just systems to follow and performance metrics; they provide the means for clients to manage exposures according to their risk appetite.” 

“This is a real advance in the technology and method of investing that lets clients really understand how to benefit from systematic trading,” Grossman enthuses. “However, one thing that hasn’t been given importance is the quality of execution around the copy trading platforms and publishing stats for the public, and this seems to be the case for both third party and broker-specific platforms.”

Mariusz Potaczala “Being able to calculate return on investment is no longer enough for clients when choosing a signal provider; they expect to be able to examine the distribution of position returns, position allocation, account equity, unrealised P&L or estimate value at risk.”

Mariusz Potaczala

“Being able to calculate return on investment is no longer enough for clients when choosing a signal provider; they expect to be able to examine the distribution of position returns, position allocation, account equity, unrealised P&L or estimate value at risk.”

Novice and experienced trader appeal

As for what ways the integration of social networking applications with web, desktop and mobile trading platforms is helping novice traders to capture the benefits of social investing, Grossman says: “It just makes the whole process very user friendly and accessible. This lets the end client focus on performance and risk management rather than technology itself. That’s a huge step forward compared to the traditional route,” he adds.

Social trading platforms are also beginning to attract the attention of experienced traders. There is a growing interest in multi-asset class trading on social networks including FX, CFDs and Options thanks to the evolution of social trading platforms, notes Potaczała. 

Potaczała states: “These developments have attracted more experienced traders to social trading and resulted in the increased need for even more portfolio management tools. Not only are the signal providers being the subject of thorough analysis, but so are the instruments they trade. With less volatility in the currency market, there has been growing interest in trading other asset classes.”

Grossman states that the multi-asset focus is driven by self-directed investors looking for diversification and better returns. “Above all, this segment recognises the advantages of better control and transparency,” he notes. “It can be used to optimise their portfolios directly, or simply as a benchmark for their traditional investments.”

Bringing home Institutional grade services

Institutional FX grade services are finding a home in the retail social trading environment. Potaczała states: “More professional traders moving into the social trading platform arena also means that there is increasing awareness of the need to diversify investment portfolios and properly manage the risk. We find it to be especially true for traders with capital markets background, who are used to managing their portfolio and expecting their broker to provide them with the required tools.”

“With leverage available, traders need to be able to knowingly build their portfolio to suit their risk profile, with the right asset allocation and risk allocation per instrument, but also per signal provider,” adds Potaczała.

However, Grossman comments that while he sees very little in terms of institutional FX grade services, both research and analysis, working their way into the retail social trading environment at this moment, he states: “The institutional mode for servicing clients in terms of research and analysis is done via a combination of sales trader and analyst interaction using chat room functionality on social trading right now. Yet the potential that we see is in the opposite direction; we see a space in the market to bring bespoke research and analysis, of institutional grade, to the retail market space for social trading.”

Jeff Grossman “We see a space in the market to bring bespoke research and analysis, of institutional grade, to the retail market space for social trading.”

Jeff Grossman

“We see a space in the market to bring bespoke research and analysis, of institutional grade, to the retail market space for social trading.”

Tools for more successful strategies

Many new toolsets are being provided by social investment network providers to help traders undertake new and more successful strategies. Rune Bech, chief digital and communications officer at Saxo Bank, oversaw the development of Saxo’s social trading community, TradingFloor, comments that TradingFloor features a range of valuable content for traders, such as market news and views, data, insights and trade ideas from Saxo Bank’s research teams and VIP authors, while a real time trade stream reveals the current market sentiment. 

Bech notes: “As with other social media platforms, traders can ‘like’, comment on and engage in debate about particular trades, ideas and blog posts they view on the site. This ability to interact with other traders around the world and learn from them lies at the heart of social trading. And of course social traders can learn as much from the investors who perform poorly as from those who are successful. TradingFloor puts everything into the open, so there is no doubt about whose strategies are successful, and whose are less so.”

Bech adds: “Particularly valuable is TradingFloor’s on-demand TV channel which features video content filmed from Saxo Bank’s own trading floor at its headquarters in Copenhagen. In-house anchor Owen Thomas, a former Bloomberg and BBC World journalist, was recently joined by award-winning ITV News correspondent Angus Walker.” 

While new tools are being produced by social investment network providers to aid traders in more successful strategies, Grossman comments that while there are a significant number of tools, what is needed is a way to help investors match up their requirements with the right tools. He explains: “Well all the tools are there. What’s missing is an equally user friendly way to help investors find what’s really appropriate for their needs. This is a major part of investment strategy in its own right.”

Potaczała comments: “It has been made possible to build an investment portfolio and manage the risk by diversifying the asset classes, instruments and signal providers. Nowadays everyone can become a quasi-professional portfolio manager with access to real time data and statistics and high quality tools to analyze it, and also access to backtesting functionality to determine the range of outcomes to be expected from planned trades over planned horizon.”

Rune Bech “And of course social traders can learn as much from the investors who perform poorly as from those who are successful.”

Rune Bech

“And of course social traders can learn as much from the investors who perform poorly as from those who are successful.”

Future growth

This then is just the beginning for the social trading revolution as platforms continue to evolve and attract a wider audience of users who become more adopt at the social trading model.  

Grossman states that at this point in the game, it is impossible to predict how these exciting platforms will grow in themselves, and to attract new audiences. He says: “No one really knows at this stage how these platforms will develop. Regulation and organic development will certainly play a greater part. I expect [social trading platforms] will have to become more credible and sophisticated to really gain traction.”

An example of a growing platform is TradingFloor; Bech claims that there is a multitude of developmental opportunities in the pipeline for this social trading platform. He explains: “As it stands, TradingFloor is around 60% complete, with additional features being added over the course of this year.  

“One of the main features in the pipeline is the ‘autotrade’ feature that enables traders to replicate automatically the trades placed by other users whose strategies they want to copy, something which has the potential to digitalise the fund of funds industry,” Bech states. 

He continues: “It was always part of Saxo Bank’s strategy to beta launch the site initially, and build in additional features and other tweaks over time in an organic way to reflect the feedback we receive from traders. In this way, we can ensure that we create a platform of the highest quality that provides exactly the features and capabilities that our clients want. 

“Many of our institutional clients have also expressed interest in the platform, and from August we will have a social trading platform that can be white labelled by institutional audiences,” adds Bech. 

On the likely leaders in the global social trading marketplace, Grossman states: “Certainly the retail brokers who can integrate this type of offering into their on-boarding systems stand to gain most. On the other side, traditional fund and money managers may well find it can enhance their client experience and satisfaction in a very positive way.”