Loner or Socialite?

Social Media morphs into social trading.

Social media sites like Linkedin or Facebook are full of traders telling us how wonderful they are and they have discovered Alchemy or the Holy Grail. If, like me, you are intrigued by what other traders are thinking and build that into the fabric of your trading style, then, the occasionally perceptive, sometimes interesting and often barking mad theories of fellow traders will be useful.

The other day my eye was caught by a guy spouting about how the whole market was “run”, not driven, but actually run by Central Banks. He painted a very vivid picture of Yellen, Carney, Draghi and Kuroda, or their nominees, sitting around a table playing an ancient game where FX rates are negotiated and bargained over. Occasionally the Governors of the PBoC, BoC, RBA & RBNZ would be invited but this “gang of four” run the market.

He claimed to have an inside track to this event and even gave levels that had been agreed for the various currency pairs.

The FX market has always been two things to me; first a place where actions speak louder than words and second, that discretion is the better part of valour.

To watch an experienced bank trader when the market is flying is a sight to behold. Remember that he is a price maker seeing price taking as a negative. He wants to control the price not rely on brokers or his competitors. He won’t say much neither will he reveal his position to anyone, often not even colleagues.

Contrast that with a retail trader. Happy to talk about and dissect both the market and his own strategy. Also, content to tell anyone who will listen what his current positions are. 

Social trading; gaining acceptance 

When social trading first started coming to prominence, I, for one, didn’t see it as suitable medium for traders. That was of course my pro-traders attitude reacting to the question; “why would I reveal my positions to others?”

Of course, as I said before, bank traders are price makers avoiding wherever possible being price takers. In the retail market price taking is the only option. Therefore, discussing your position is not such an issue, unless modesty (or vanity) prohibits or inhibits you.

I have changed my attitude to social trading and I congratulate those firms who have given it both a place in the retail traders toolbox and a reason for being.

As retail FX trading gains popularity, it is attracting investors as well as traders. What does an investor need? A platform on which to invest. Equity traders use performance matrix’s and social trading is simply a less sophisticated, less generally accepted performance index.

It comes without the need for licensing since all the trader is doing is putting his trades out there for subscribers to see. He/she would be trading in any event so it’s no biggie for him/her.

Verification is and always will be the major issue. The backing of a regulated broker who provides a social trading platform which, by default, must verify its client’s activities is a major plus and social only platforms will struggle to survive.    

The future? 

There is one further fracture between the retail and “pro” markets. The whole credit issue where leverage is the guarantee of performance in the retail market. Leverage is a blessing and a curse to the retail FX trader. He is obviously able to magnify his profits but he will also see his losses magnified.

Interbank traders deal under strictly defined credit limits where there is movement of principal and that is the major difference.

The retail market is crying out for a platform that allows price making as well as price taking. That is a huge ask and would take a lot of consideration just to decide if it were to even be possible. Centralization could be an avenue worth investigation with a central repository but that would require commitment and cooperation, two things that can be in short supply within the broker community.

Giant steps have been taken via regulation but there is a great deal more to be done to create a seamless, respected, forward looking, well-regulated yet unfettered, market that provides innovation and security to all its participants.