Social Trading at a Glance - A Performance Analysis of Signal Providers

Abstract

This study provides an overview of the characteristics of signal providers on social trading platforms, which are increasing in relevance supported by the fact that retail investors do not like to make investment decisions by themselves. Signal providers and receivers exist on the platform. We use a proprietary data set of one of the largest German social trading platforms. Signal providers are grouped to certain career levels, which represent a track record calculated with the help of certain performance and risk variables. Career level five represents the highest possible ranking. We show that signal providers in general neither outperform mutual funds nor the market. However, the motivation for signal receivers to go on social trading platforms should be the high transparency and simplicity to invest amongst others. Furthermore, the study's robustness check indicates that signal providers' investment strategies are not likely to be effected in times of high market volatility due to not investing in assets that are highly prone to market movements. This behaviour is shown by a factor analysis.