Effects of Transparency: Analyzing Social Biases on Trader Performance in Social Trading

Abstract

Social Trading platforms combine the trading functionalities of classical online broker services with the communication and interaction features of social networks. Next to following other users’ profiles, a main characteristic of social trading platforms is the possibility to follow other users by automatically copying their trades. By being a technologically based financial intermediary that enables individual profit maximization, social trading platforms constitute a contemporary example of financialization. Our empirical analysis of the behavior of traders on a social trading platform provides new insights on financialization related questions regarding the influence of transparency and interaction in delegated investment environments. The disposition effect is a well-studied behavioral bias of investors and traders. Human investors tend to realize returns of their winning positions too early and let unfavorable positions accumulate losses for too long. We find that on social trading platforms the traders’ sensitivity to the disposition effect is influenced by the amount of attention they receive from their followers who invested capital into the traders’ strategy. These novel insights propose a link between principal-agent theory and the disposition effect induced by transparency mechanisms. We extend the literature on trader-investor interaction channels in social trading networks. The results obtained in a social network environment are of high relevance for regulators who have a strong focus on customer protection and financial services regulation. They also provide guidelines for platform designers, traders, investors and social trading platform operators.

Determinants of leadership in online social trading: A signaling theory perspective

“…This study expands the ideas of signaling theory in network leadership by evidencing its relationship to the herd behavior (Banerjee, 1992) and the disposition effect (Glaser & Risius, 2016;Heimer, 2016;Lukas et al, 2017). Our results suggest that for followers, placing trust in someone with a strong career and professional background in investment trading is the most pertinent factor.…”

“…The disposition effect, i.e., the tendency of traders to forgo loss realization in favor of gain realization, seems to be lower in an online social trading environment due to higher transparency and the sense of being observed (Lukas, Eshraghi, & Danbolt, 2017). Traders' disposition effect seems to be affected by the attention they receive from their followers who believe in the traders' strategy (Glaser & Risius, 2016). This shows that traders influence each other's perception of risk in the network, something that could help us understand followers' perception of top traders and the associated risk in an online social trading platform.…”

Herding or wisdom of the crowd? Controlling efficiency in a partially rational financial market

“…However, when all the agents tend to conform their expectations to those of a group of influential leaders, efficiency is lost and market bubbles may emerge. In social trading, the market platform (as, for instance, eToro and Zulutrade [15]) provides the infrastructure to display profiles of the traders to other users. Therefore, the platform can manipulate the topology of interconnection and the kind of information shared among the investors.…”

“…Indeed, the financial agents, not being aware of the of the intrinsic value of a resource, may leverage the opinion of her peers to form their expectation. In the last decade, the presence of imitative behaviors in trading has been magnified by social trading platforms like eToro and Zulutrade [15], which allow investors to observe the trading patterns of their peers and copy their investment strategies.…”

Dialectic Tensions in the Financial Markets: A Longitudinal Study of pre- and Post-Crisis Regulatory Technology

“…Postcrisis studies on innovations which facilitate heightened regulatory supervision have focused on surveillance and disclosure technologies used by regulators to identify market manipulation by data mining for suspicious or risky transactions (Williams, 2013;Siereing et al, 2017). Other contemporary studies have explored the use of blogs, social media and the crowd to facilitate trading and increase transparency of financial markets (Glaser and Risius, 2017;van Li et al, 2017;Tiejun and McGroaty, 2017). Yet, there is an absence of work which takes a longitudinal perspective and addresses, both pre-and post-crisis, the relationship between regulatory technologies, embedded in trading environments, and transparency.…”