The Real Importance of Social Trading
One of the purposes of this blog is to try and distill some of the important big picture themes for brokers and other market participants. We believe that the aggregated experience of all of our key people, many of whom are industry veterans, is highly relevent to the industry as a whole but also specifically to newcomers to the space. This experience numbers in the many decades and has guided Cooma as a company through all manner of market environments.
So, when we as a company talk about social trading we’re not just interested in the boxes it ticks for, say, marketing managers or business development teams. Yes, it aids in retention. Yes, it eases the learning curve and encourages new traders to stick around long enough to start figuring things out for themselves. Agreed. It also keeps traders engaged because we’re all social creatures and feeling part of a community can help keep clients motivated who would have otherwise dropped off. Finally, it’s also a useful selling point, an extra service to add to a broker’s offering.
All of the above are perfectly valid and correct reasons to be interested in social trading, but we’d argue that there’s a deeper trend at work that should inspire all brokers to start taking the social trading phenomenon more seriously, similar to how they have done with the industry’s transition to mobile trading.
A Super Brief History
Trading is by its very nature a social phenomenon. As long as there have been markets there has been conversation around them as well as people issuing “tips” to whoever would be willing to listen. In the 1923 classic, Reminiscences of a Stock Operator, Edwin Lefèvre describes the psychology of trading tips.
“Tips! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tip-seeker is not really after good tips, but after any tip. If it makes good, fine! If it doesn’t, better luck with the next.”
This tip-sharing practice evolved into certain traders and money managers with proven track records publishing newsletters detailing the positions they were taking and why. Technology helped move this practice from the printed word, through email, internet forums, and finally to the real time social media technologies we enjoy today.
An interesting offshoot worth mentioning here are the chat rooms that existed in the earliest crypto exchanges. These “troll boxes” permitted anyone logged into their account to talk to everyone else, and were used to share news, information, tips, to brag about profits, to tell tales of lost fortunes, and so on.
Over the years chatter around markets has become an industry in its own right that’s just as, if not more, important than the actual trading activity itself. It’s what generates the buzz, it’s what gets other people interested. Creating these kinds of environments for your traders is a way to encourage community, which has the effect of bringing new people in independently of your other marketing efforts. These are all strong arguments for brokerages and exchanges to introduce some kind of social trading element. However, we would argue that the demographic reasons are far more significant than even any of the above.
The Demographic Argument for the Importance of Social Trading
So many resources have been devoted to understanding the needs, preferences and requirements of younger generations of consumers. Millennials initially, now Gen-Z as well. Their preference for mobile devices, for example, for doing business with socially conscious companies, for preferring assets like crypto and story stocks.
However, it’s often overlooked that these generations invest in a completely different manner to their parents’ generation because they think in a completely different way. Their attitudes to risk are altogether different, as is the way they assemble their ideas. This has huge implications because we’ve taken for granted that their approach to trading will be identical, using the same tools and services as their parents, just from a mobile device. But maybe this isn’t the whole story.
2021’s meme stock phenomenon would not have been possible without a social media platform like Reddit. We’ve been hearing about the power of the retail trader for years but no one expected it to be this generation and for them to move markets in a swarm-like formation as they did during a global pandemic. It was a new type of trader announcing themselves on the global stage.
Millennials and Gen Z, Similar But Different
Now, while there is a significant overlap between the attitudes of Millennials and Gen Z, there are some notable differences which serve to reinforce the underlying trend. Gen Z are true digital natives, most of them not being able to remember a world before smartphones, let alone the Internet. By contrast, elder Millennials grew up in a world with no World Wide Web. For these reasons, Gen Z is far more likely than the Millennial generation to get its information exclusively from online sources and specifically social media.
A survey conducted in February 2022 by Statista revealed that Gen Z news consumers most frequently get their news from social media, with 50 percent of respondents reporting they used social networks as their news source on a daily basis. By comparison, their Millennial counterparts are much more likely to also consume offline information from other sources such as television, radio and newspapers.
This has interesting implications for trading behaviour in general, going forward. Earlier this year, Fidelity conducted a survey that found that between Gen X (those born between 1965 and 1980), Millennials (those born between 1981 and 1996) and Gen Z (those born between 1997 and 2012), Gen Z respondents were the “most likely to say that they turn to social media influencers to educate themselves on investing.”
Younger Generations Are More Likely to Take Someone Else’s Lead
According to the Pew Research Centre, Gen Z differs from the Millennial generation (or rather carries its trends further) in another notable way. Gen Zers are much more likely than previous generations to turn to the government for solving problems rather than to businesses and individuals. Pew research suggests that 70% of Gen Zers say the government should do more to solve problems. The trend is also there for Millennials (64%), and the further back you go in generational terms, the less popular this idea becomes, with only 53% of Gen Xers, 49% of Boomers (born between 1946 and 1964) and 39% of Silents (born 1928 to 1945) holding this view.
Demographer Neil Howe explains this dynamic with reference specifically to the Millennial generation.
“They’re a very community oriented generation. We know the risk averseness, by the way, because they’re not drinking, not smoking, the crime rate is way down for this generation […] the CDC has 150 Youth Risk Surveillance Indicators. They’re all down. […] They want to create a world in which you can live in a more supervised way and live a good life and not have so much uncertainty and risk […] Boomers and Gen Xers, we wanted a more risky world.’
He also goes on to explain how the younger generation prefers less choices and more guidance than previous generations.
“…cognitive psychologists talk about the Paradox of Choice […] I think Millennials are more bothered by that than older generations. It’s fascinating. I’ve done a lot of work in employer benefits. I know that when the employer offers 30 different kinds of pension plans. All of this variety of plans, Xers love it […] You offer 35 different plans to Millennials, and they […] feel betrayed, they’re disappointed. Why? If you ask them they’ll say: because you know which one’s best, you just won’t tell me. Meaning they want to be told, they want to be given advice.”
Bringing it Together
This is the crux of the demographic argument for social trading. There’s an underlying trend at work that’s difficult to overlook because it’s telling you that sooner or later most of your potential clients will be of a different mindset than the one you have been trying to appeal to for the past decade or so.
It’s obvious when stated like this, but the way most businesses have responded to these trends is to just try and be as mobile friendly, inclusive, green, and socially conscious as possible. In our industry, the implications are greater because as we’ve seen with crypto, followed by the Robinhood phenomenon and then the WallStreetBets story:
The younger generation will flock where the onramps are smooth, the learning curve is gentle, and most importantly there is social activity so they can take their lead from others around them and follow the crowd until they have things figured out. If you can’t generate that, or find some other way to encourage and incentivise it among your traders, then eventually the potential volumes that this new generation brings with it will be generated elsewhere.