Investors can now exchange ideas online, Katie Hope assesses the pros and cons
Social networking sites are nothing new. Millions of people every day log on to Facebook to update their profile, “poke” their mates and throw sheep at each other, but the trend has now hit Contracts for Difference (CFD) trading.
While adding chatrooms, open to anyone who is interested, are common, CFD provider CMC Markets has taken things one step further. It is offering a networking site for the exclusive benefit of its CFD and foreign exchange clients.
Launched last week in the UK, the Trading Social Network, which started in Australia six months ago, allows users to chat to members in both the UK and Australia, see what other members are trading and to exchange investment ideas.
Other members award them a star rating, similar to shopping website Amazon’s book review ratings, based on how useful or informative they have found their information to be.
Patrick Latchford, managing director of CMC, says: “It’s very different to a chatroom as everyone is a client and they are trading similar instruments. Up until now the industry has tended to be silo-based around countries, and this is our first attempt to take it truly global.”
In Australia, a third of CMC’s clients have signed up while in the UK the company is aiming for 10,000 members by the end of this year.
Of course, part of the intention behind the site is to ensure that clients, attracted by membership of the private online club, maintain their custom for longer. However, there are some obvious dangers.
The UK launch comes just as the Financial Services Authority begins a review of controls at firms for dealing with rumours, including what policies are in place to ensure firms do not initiate or spread false rumours.
The operation of such chatrooms will form part of the City watchdog’s investigation. Latchford insists CMC will be monitoring the chatroom carefully, and says that the Australian experience has thrown up “limited” numbers of cases of misuse.
The FSA is displaying little concern at the moment, however, a spokesman saying: “We would expect everyone in a chatroom to abide by our processes, including not sharing insider trading information. In nine out of 10 cases there is no cause for concern.”
Insider information is perhaps unlikely to be shared in such an open forum, but another danger for traders is being unduly influenced by investors who are simply talking up their own books. However this would only have any impact on smaller, more illiquid stocks such as Alternative Investment Market (AIM) listed shares.
Latchford believes the transparency of the chatroom, which displays both user feedback and return on investment ratings, should prevent this. These are only displayed if the participant agrees, but users are likely to be suspicious of a trader who does not choose to disclose such information.
Regardless, the key for traders is to be discerning, says David Norman, an ex-trader and author of several books on CFDs.
“When they see a message from another participant like, “BP is strong! Look at the oil price go!”, it can just be the trader trying to justify his long position in BP to himself,” he says.
“I know some traders who follow comments like this blindly and lose money.”
It’s also difficult to believe that experienced traders, who often charge to sell their strategies, would ever divulge anything of use on a forum such as this.
“If I were a good trader, I would only tell someone about my success after I had done the trade,” points out Peter Klein, managing director at CFD provider Saxo Bank. The timing can also be tricky, according to Dave Evans, market analyst at fixed odds better BetOnMarkets.com.
“By the time someone has got in and posted what they’ve done the move may have already happened,” he explains. “I’ve followed people before and by the time I’ve got into a trade, they’ve got out.”
Away from the worries, there are plenty of positive elements to chatrooms that are likely to outweigh the possible disadvantages, especially for someone relatively new to investing in CFDs.
Alastair McCaig, senior trader at CFD and spread bet provider WorldSpreads, says: “If you’re trying to put the bigger picture together when an instrument is not behaving as it should then you want as much information as possible.
“If 10 people are digging around on a stock then someone will find information you don’t have.”
There is also the social element. Trading on your own can be a lonely experience when there’s there’s no one to commiserate with you if you lose or to admire you when you do well.
One of CMC’s Australian users commenting on the site said: “It is a great way to combine trading (a lonely existence) with a social outlet.”
David Evans agrees: “Being stuck at home in your boxer shorts watching Trisha on daytime TV can be difficult. It’s nice to have feedback and to see if other people are doing well or struggling.”
While a CFD chatroom is unlikely to reach the heady popularity of something like Facebook, for the stay-at-home or part-time trader, it is one way of making what can be an extremely solitary activity more sociable, not to mention potentially more financially rewarding. But the key is to remain discerning.