Social trading allows 13 million people to become fund managers! Is it possible to copy experts with zero fees?

Social Trading is a form of investment that allows investors to observe the trading behaviors of peers and expert traders, following their investment strategies through copy trading or mirror trading. The earliest platform, Collective2, started in 2003, and currently, the number of users on mainstream social trading platforms worldwide has reached 13 million, with many traders achieving an annualized return rate of over 20%.

What is social trading? From closed finance to open communities

In recent years, Fintech has become very popular, and Social Finance integrates community mechanisms into the financial industry. Currently, the more developed areas include crowdfunding, peer-to-peer lending, and community investing. Social trading is one of the most mature applications among them. In today's Fintech terminology, this can be referred to as a form of social trading. In the past, we only trusted services provided by large institutions, but now it has expanded to ordinary people within the community, with the foundation of mutual trust built on the transparency of information.

Social trading is often considered a social network because this feature allows traders to interact with others, observe each other's trades, and understand the decision-making process. One of the earliest social trading platforms was Collective2, which began offering social trading features to retail traders as early as 2003. In 2010, social trading started to gain greater mainstream appeal, followed by the launch of multiple platforms in 2012. Headquartered in Europe, NAGA has been listed on the Frankfurt Stock Exchange since 2017 and claims that trading volume on its platform exceeded 27 billion euros in the second half of 2019.

Social trading mainly has two types: copy trading, where Trader A's trades are exactly the same as Trader B's single trade; and mirror trading, where Trader A automatically executes every trade of Trader B, meaning Trader A fully follows Trader B's trading activities. Other variants offered on certain platforms allow users to copy other traders' portfolios (copy portfolio) and follow traders' dividends (copy dividends), where a certain proportion of funds will be withdrawn in real-time from the followers' balances whenever the trader they are following withdraws funds from his or her account.

The core features of social trading include unobstructed information flow, collaborative trading opportunities, platform monetization strategies, and complete transparency. Social trading platforms reveal traders' performance statistics, open positions, past positions, and market sentiment, providing members with comprehensive information to assess the credibility of the contributors they follow on the platform.

Copy Trading Mechanism: A Win-Win Model for Traders and Followers

In social trading, copy trading is divided into “traders” and “followers”, which is similar to the concept of fund managers and subscribing investors. For traders who excel, they must publicly disclose their trading positions, allowing everyone to see each profit and loss…similar to the concept of account statements. If the investment performance is good and stable over the long term, and someone wishes to follow you, they can directly copy your investments. At this point, you become a fund manager (similar to a fund manager) and can earn a proportionate additional management fee income from the funds you manage.

This mechanism provides unprecedented opportunities for individuals skilled in trading but lacking formal financial backgrounds. Traditionally, becoming a fund manager requires a finance-related degree, certifications (such as CFA), and years of institutional work experience. However, on social trading platforms, as long as you can consistently demonstrate excellent investment performance, you have the chance to manage the funds of thousands of people and profit from it. This “performance speaks” model breaks the entry barriers of traditional finance.

For followers, observing performance data, selecting investors you approve of, and then investing funds (with a limit) allows you to track. When they enter or exit, your positions will also buy and sell in real-time. Interestingly, the design of mainstream social trading platforms allows you to follow star investors at no cost, while the income for star investors comes from additional payments made by the platform.

The Dual Role Mechanism of Social Trading:

Trader (Capital Manager): Publicly disclose all trading positions, those with excellent performance can be followed and earn management fees, and the number of followers can reach thousands.

Follower (Investor): Select traders to copy their investment strategies with zero fees, instant synchronization of buy and sell, no need to analyze the market yourself.

The motivation for experienced traders to share their strategies is that they often receive monetary and status rewards—social trading networks typically have a leaderboard based on popularity and success rate. There are quite a few with annualized returns exceeding 20% on the platform, and many of those being followed can have thousands, even seven to eight thousand followers. This means that the amount of capital managed by top traders may reach millions or even tens of millions of dollars, and the management fee income they earn is quite substantial.

Recognition by MIT research and the World Economic Forum

MIT computer scientist and researcher Yaniv Altshuler described social trading networks as complex adaptive systems, and wrote in a 2014 study: “Users of social trading platforms have an inherent ability to share ideas and information with one another, thereby gaining new sources of information that can be used to improve their trading performance. Since users are not competing against one another but rather against the market, this situation becomes a non-zero-sum game, encouraging users to share as much information as possible.”

His paper concludes that “social trading offers better profit opportunities compared to individual trading,” but users “make excellent but sometimes not optimal decisions when choosing experts, as they can see the choices of others.” This research conclusion reveals the dual nature of social trading: it can indeed enhance profit opportunities, but choosing the right trader is key.

A report from the World Economic Forum in 2015 described social trading networks as disruptors, stating that “their emergence is designed to provide low-cost, complex alternatives for traditional wealth management firms. These solutions cater to a broader customer base, enabling clients to have better control over their wealth management,” and that they “pose a tangible threat to traditional practices in the wealth management industry.” Economist Nouriel Roubini's think tank predicted in 2016 that “new forms of investment such as social responsibility investing and copy trading will bring some of the largest industry growth in the coming years.”

However, a study conducted by St. John's University in 2017 found that “leader” traders or traders who have followers are more susceptible to the disposition effect than investors who are not being followed by any other traders. The authors believe this observation may stem from leaders feeling responsible for their followers and fearing the loss of followers when acknowledging erroneous investment decisions. This reveals a psychological issue in social trading: public operations may affect the quality of traders' decision-making.

The Business Logic and Risk Warning Behind Zero Fees

In reality, on a trading platform, the users who actually use the copy trading feature may account for only 1%, at most. Among mainstream platforms, the best-performing ones may have no more than 5% of users utilizing this type of feature. Due to the high customer turnover in these trading platforms, customers will largely leave as soon as the market conditions are unfavorable, so retaining customers is a task they must undertake.

In marketing, there is a concept that the cost of acquiring a new customer is 5 to 10 times that of retaining an old customer. Therefore, the viewpoint is that this service may seem like a loss for traders, but in reality, it is better at retaining users and saving on marketing costs. The platform does not charge followers; instead, it pays fees to star traders as a customer retention cost, which is a classic example of platform economics.

Investment operations carry risks, and one must assess their own abilities and act within their means! Those who are not familiar with foreign exchange or leveraged trading should be very cautious, especially not to use excessive leverage. One of the biggest mistakes social traders may make is believing that this method completely eliminates risk. All trading involves risk, and traders may incur losses at some point. Therefore, trusting third-party judgments while retaining all loss risks is considered a significant drawback of social trading.

From 2018 to the end of 2022, the market experienced both a major bull run and a significant bear market. Many traders who were once popular on various platforms later disappeared during the major drop in 2022. The reason is that platforms have risk control mechanisms for traders; if the overall risk of a portfolio is too high, they will be delisted. Are the investment strategies of these traders in the community worth referencing or trusting? Time will reveal many things.

In fact, the financial industry's information is indeed too closed off now. Many young friends aspire to become independent fund managers in the future, but unless they already have years of experience managing large sums of money, this industry still heavily relies on academic background and work experience. In reality, entrusting one's money to another person for management inherently involves a significant trust issue, but current technology is gradually reducing the cost of trust.

Frequently Asked Questions

Is social trading profitable?

Don't forget that there is a direct correlation between risk and potential profit. You will never make big money without risk. Social trading can be profitable, but you should properly assess your own risks and never invest money that you cannot afford to lose.

Is social trading gambling?

Social trading resembles gambling more than investing, and numerous studies show that participants in social trading ultimately underperform the stock market. Therefore, investors should remain rational and not blindly engage in copy trading; they need to understand the strategic logic of the traders being copied.

What is the difference between social trading and copy trading?

Social trading is a broader term, and copy trading is a part of social trading. This means that copy trading can be viewed as a type of social trading. Social trading also includes features such as observational learning, community discussions, market sentiment analysis, etc., while copy trading specifically refers to the act of replicating others' trades.

Is social trading suitable for beginners?

For beginners, social trading is a strategy worth trying. It can accelerate the learning curve and enhance trading strategies, but it cannot completely eliminate risks. It is recommended that beginners start with small amounts of capital, choose traders with stable long-term performance, and gradually learn their decision-making logic rather than relying blindly.