Social Trading, Communication, and Networks

Abstract

Social trading is an emerging market in the sharing economy, allowing investors (followers) to duplicate the trades of other investors (leaders) in real time. We analyze the formation and dissolution of links in a large social trading network. Such networks are characterized by the rapid dissolution of links, increasing the importance of studying network dissolution. We investigate how social communication, along with financial performance and demographics, affects dynamic network evolution. We show that different types of social communication, such as posts and comments, have different implications for link formation and dissolution. Moreover, we find financial performance to be highly important for link formation and dissolution, whereas demographic characteristics are only relevant for link formation. In social trading, the extreme flexibility of followers in dissolving links and thereby, terminating their relationship instantaneously brings about large income uncertainty for leaders. Thus, a thorough understanding of network evolution and its determinants is crucial for leaders. Our results can provide guidance on when and how to communicate with followers. As vocal leaders on social media may exert a significant influence on financial markets—as demonstrated by recent the GameStop frenzy—a better understanding of the evolution of investment networks is also important for regulators.