LONDON (Reuters) - Ask most market traders to share the details of their order book and you’ll be lucky if they ever speak to you again.
The last thing professional traders want is for the rest of the market to know the detailed history of their trades, and the positions they currently hold.
But information sharing is becoming a valuable asset in the online retail trading world, and social network-driven trading sites are helping mainly non-professional investors get a foothold in these ultra-competitive markets.
Online and mobile trading have driven growth in retail currency trading, which accounted for up to 10 percent of the $4 trillion-a-day FX market as of 2010, Bank for International Settlements (BIS) estimates show.
Online trading websites Etoro and Currensee have applied a “Facebook meets Twitter” - like approach in which users build communities to share and discuss trades, while sites rank top players and offer the chance to duplicate the trades of the most successful peers.
Etoro says this transparency helps amateur traders learn more about the market, while its trade-copying feature allows users to combine trades to maximize their impact on the market.
“Once people share their trading activity and their trading profit, they can help to create significant wealth for the entire trading community,” said Etoro CEO Jonathan Assia.
Etoro’s OpenBook platform is exactly that: The profiles of its more than 1.5 million users around the world include their trading history and detailed performance breakdowns, along with “follower/following” lists.
Traders can use this information to inform their own trades, or they can copy positions opened by other traders, leaving it up to them to decide when to close the position. The copier stands to make a profit or loss accordingly.
Launched in late 2010, OpenBook also categorizes users by their trading style. Santosh Tiwari is a medium-risk trader who is one of Etoro’s top performers, and boasts 900 followers.
“To be honest, it’s a bit of an ego kick,” Tiwari says of his following, but he adds that knowing users are scrutinizing his every trade keeps him from making reckless trades.
“It does make you cautious, because when I put a trade on, in the back of my mind there’s the thought that 900 people are following me, so I really have to be sure of what I’m doing.”
U.S. alternative investment service Currensee also encourages amateur traders to duplicate successful trades, in this case, those of high-performing professional traders whom users can follow in real time.
CEO Dave Lemont said the Trade Leaders Investment Program, which has seen a total turnover of $6 billion since launching in October, has enabled users to become active investors, if not active traders.
“It’s a little passive, but it’s self-directed because you pick the trade leaders, you pick the amount of money you use, you can change the amount of money you invest,” he said.
“When you invest in a hedge fund or a mutual fund, you often don’t know what trades are being made in your account, whereas we show every single trade,” he said, adding that many clients use the program to diversify their portfolios.
Industry observers say an open and transparent trading environment can be useful to new traders, but caution that knowing the motivation behind each trade is much more useful than passively following trades which make money.
“The thing non-professional traders need to learn is not when other traders trade and what they trade, they need to understand why they’re trading,” said David Poole, principal at research advisory Client Knowledge.
“You can be fooled by short-term success and not really understanding what the strategy is behind the trade.”
Tiwari agrees that an over-reliance on other people’s trades may lead to uninformed trading which can be dangerous, and says social networking functions should be used alongside other analysis to determine a personal trading strategy.
He adds that overall, retail FX trading has benefited from the openness of social networking as it highlights the importance of accountability. It’s not so easy for traders to “talk their book” and offer a difference of opinion in public when it’s open for everyone to see.
“On Facebook if you start a confrontation with someone, what do you have to lose? Nothing, because you’re just stating an opinion and everyone has an opinion,” he says.
“But here, when you’re trading you’re really putting your money where you mouth is.”
Reporting by Naomi Tajitsu, editing by Paul Casciato