Determinants of leadership in online social trading: a signaling theory perspective

Online social trading offers an opportunity for less-experienced individuals or firms to follow top traders by mimicking their behavior, but little is known about the determinants of leadership that shape such relationships. To study this, we build on signaling theory using fixed-effect panel least squares estimations to analyze 250 top traders in a network of around 1100 traders; we examine their trader credentials, volume of trades, performance, and risk signals. Contrary to our initial expectations, findings show that trader credentials are more important than performance, volume, or risk signals, but there are significant differences between virtual and real money traders. This study proposes a network signaling theory approach by linking it to herd behavior and the disposition effect. Our findings can have practical implications not only for top traders, followers, and social trading platform managers but also for policy-makers and regulators of such investment instruments.