Faculty Research
Abstract vector image of person inserting a credit card into a phone and receiving money

Jiaying Deng, Ph.D.,

Assistant Professor of Information, Technology, and Operations
Popular social trading platforms like eToro and Zulutrade borrow many of the same features found on traditional social media networks–investors of all levels can like, comment, and reply to the public posts of investment leaders.

These platforms, however, have become an important emerging market within the sharing economy because of the way they go further, offering investors transparent access to leaders’ trading activities and financial performance, and the ability to automatically allocate their funds to mirror the strategies of the leaders they choose to follow.

The networks rely on leaders exchanging their expertise for payment that is based on size of their following, but unlike regular social media platforms where accounts can remain connected for years, relationships on social trading platforms are volatile and often short lived.

“Followers on these platforms have total flexibility,” said Jiaying Deng, Ph.D., assistant professor of information, technology, and operations. “They can choose to dissolve their network links at any time without a penalty, so from the leaders’ perspective, they face income uncertainty.”

Understanding when and why an investor follows or unfollows a leader in this environment is one of the fundamental questions surrounding social trading.

In a study that examines leader-follower network evolution on these platforms, Deng and her coresearchers used two years of social trading data pulled from eToro and found that many leaders were missing out on an important opportunity to build and maintain their network, and thus reduce income uncertainty.

“Many leaders may rely too heavily on their financial performance. They stop there and do not actually communicate with their followers,” Deng explained, referencing their study that is forthcoming in Information Systems Research. “While financial performance is critical to network formation, social communication in the form of posts, likes, comments, and replies is an often-overlooked driver.”

Investment leaders who engage with followers, discuss their trading strategies, and like and comment on other activities resulting in positive sentiment were more likely to attract new followers and maintain existing ones. Fully utilizing the platform capabilities enables them to harness the same power of peer reviews seen on other online platforms such as Yelp.

But this could be a double-edged sword, with an observed downside.

“People are more sensitive to negative comments,” Deng said. Engagement that is inaccurate, poorly presented, or not well-received can lead to negative comments, which, the study showed, were even more influential than positive sentiment when it comes to link creation and dissolution.

“It’s unclear why some users don’t use these platforms in their entirety,” Deng said. “It could be limited attention and time, or they might think, ‘As long as I have good financial performance I don’t need to communicate,’ because it’s not a frontline measure.”

Aside from a potential pathway to profit for investment leaders, the research also suggests that networks should create regulation measures in order to sustain a healthy, ethical ecosystem and avoid events like the 2021 GameStop trading frenzy, which caused significant losses to retail investors who followed the trading strategies proposed by some Reddit users.

“As demand continues to increase, I expect more financial firms will launch social trading offerings, which would provide more diversified choices for retail investors,” Deng said. “Our research can help platform leaders better engage their audiences while also protecting the interest of investors.”

—Michael Benigno