Money Management vs Social Trading
Author: Baiana Kashaeva
Markets today offer different account types for online investing, including PAMM, MAM, RAMM, or LAMM. In this article, we want to focus on PAMM and Social Trading, their similarities, and their differences.
Both models are designed to provide additional investment opportunities to those clients who do not feel comfortable trading on their own. It’s a great way for brokers to tap into the client base that might otherwise be unavailable to them.
Although there is no single definition or list of features for PAMM and Social Trading, as various brokers have their own understanding of these tools, it is safe to say that they are asset management systems where investors rely on traders’ knowledge and experience to gain profit.
PAMM and its benefits
PAMM (Percentage Allocation Management Module) is a system where investors trust their money to professional managers. The distribution of funds is automated and is based on personal balance or equity.
Inexperienced clients, along with professional investors, prefer PAMM model for many reasons. Yet, transparency is probably the number one: you decide yourself who to work with from the pool of ‘portfolios’ and which assets to invest in.
Professional money managers choose PAMM for the ability to apply electronic algorithms, benefit from high execution speed, and, obviously, to a earn commission from profitable trading.
What makes this model secure for brokers is regulation that very often stands behind Money Management and requires not only broker but also money managers to be compliant.
Social trading and its benefits
Social Trading is built on copy trading architecture, which is similar to signals: groups of people receive signals to open/close orders, but they’re granted the ability to trade on these accounts too.
Similar to PAMM, there is a pool of managers with trading statistics, and Investors can choose who to follow. However, here Investors can define the way they copy trades, and this is the principal difference from Money Management.
Some of the criteria available are:
- particular volume, with coefficient, precisely or by balance/equity
- ability to copy trading from several managers
- trades copying in the reverse direction
What makes this system ‘social’ is that it is often public and is managed on a separate platform, where other brokers and their clients can connect.
What investors choose and why
What investors end up going with depends on the level of independence they’d like to maintain while at the same time using the experience and knowledge of other traders.
While Social Trading might seem appealing to those who’d like to keep their funds separate, it still requires some work on Investors’ end. They must monitor what traders are doing, choose whether to copy their actions or not, and what amount of risk they are comfortable with.
PAMM model, in turn, relieves investors from extra work, but then they must trust the trader and get used to the idea of a third party managing their savings.
It’s worth saying that both systems are beneficial for the brokers and the clients because they provide investment opportunities to traders and make it possible to solve several strategic goals for brokers:
- reach out to new type segment of clients: professional investors and managers, who can be unavailable to them currently
- improve retention results, as both systems provide certain growth for your clients inside your company
On top of that, both systems help inexperienced individuals start trading with a lower risk.
Thus, when choosing which system is worth investing in, the broker should keep in mind the following aspects: the clients they want to target, regulatory rules, technology partners to work with.
Regardless of the chosen business model, brokers should look closely at the technology partner they will implement this model with. Investors and professional managers will appreciate intuitive interface, a smooth path from the moment of registration to withdrawals, flexibility, and customization.
If you are a broker looking for a solution right now, we encourage you to have a look at TFB PAMM — our comprehensive product that includes all functionality that brokers, money managers, and investors are looking for. Please feel free to contact us if you have any questions or would like to request a demo email@example.com
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