By Pierce Gibson Crosby Ι Updated January 14, 2013
There are common tactics for Wall Street traders to pass the latest headlines to their cohorts – whether it is an underreported quarterly earnings statement or the Federal Reserve’s latest round of liquidity puts in the mortgage markets.
The problem for the average Main Street consumer is that this information loop stops in the hands of those few powerful traders, CFO’s or hedge fund managers.
But could the information game be changing? Imagine you, a small time day-trader had real-time access to over 140 thousand people who – chances are – know more than you do about the particular options market for the Euro to US Dollar.
As far as ‘going pro’ is concerned, platforms are now opening new avenues for the small time trader to maximize his or her returns, by following the moves of the professionals who they trade alongside. These portals lower barriers to entry exponentially compared to ten years ago when a professional third-party broker was responsible for executing each trade.
Cyprus-based eToro is one such an online trading brokerage that boasts this precise volume of users, with 305K active users in 2012, and 2.5M registered total on the platform.
“Our goal is to reach 1 million active investors within in the next 18 months.” Said Alon Lavitan, Head of Strategic Marketing for eToro.
So what? Well, imagine Facebook, but instead of the everyday dog picture postings, news feeds are replaced with real-time positions being placed by 305K traders.
Now that, is a community.
The eToro platform is just one of the notable standouts in a handful of new “social investment network” communities. Others exist in similar size, such as Ayondo, ZuluTrade, Tradeo, Convestor, Currensee, and FX Junction which all boast over 2M in registered users.
Not all platforms provide responsive technology and user-friendly interfaces, but generally speaking, they are as easy to navigate as a Facebook newsfeed.
Like Twitter, eToro users follow individuals they see as successful – eToro calls these highlighted traders “Gurus.” Much like LinkedIn, users judge traders based on their portfolio and their history with the markets – which documents each position made by the trader going back to the opening of his or her account. Once the user feels confident in the “guru,” the user copies positions that the trader executes, thus leaving a portion or the entire portfolio in the traders hands. Any trade the successful trader makes, the user account is programed to make the same.
Said Alon Lavitan, “The big advantage of copy trading is the ability to quickly identify and add the best performing traders to [users] portfolio.”
Such popular traders or “gurus” like Malsolo (or Julio) from Spain has over 65,000 followers on the platform and 7,500 copiers. This means that 7,500 users entrust part of all of their assets with his technical skills. While the company refused to disclose the net value of total assets held by some of these top traders like Julio, he suggested most of large market share of copy trading is by Premium Members, who hold a $20,000 USD minimum balance in their accounts.
At a low estimate then, even if only half of Julio’s copiers are Premium Traders, Julio would be commanding $75M in his asset profile. The average size of trades made by the top 20 portfolio managers, is $100K+ per trade.
In December of 2012, the profitability of the ‘CopyTrader’ function on eToro was plotted by Operations Manager Dara Sandow showing the significant payouts and increased volatility of the tool for Premium Members.
For non-Premium Members (anyone with less than $20,000 USD in their accounts).
“This [copy function] automatically diversifies users investment portfolio,” said Lavitain. “As they instantly include all the [copied] trader’s attributes (risk appetite, investment strategy, portfolio breakdown, etc.) into their own portfolio. It is a great tool to start trading instruments that they may be less familiar with and allows to expose their portfolio to more opportunities without the needed knowledge.”
The DIY approach to risk-based investing could very well become more feasible than a traditional trading desks for beginning investors. With the widespread speed of economic data delivered through community blogs and aggregators, traders will likely have a closer compedtive edge to floor traders at the NYSE.
Conversely, these new cloud-based brokerage platforms and networks will play a direct role in disrupting traditional third-party brokerages like ETRADE, TD Ameritrade, Scottrade, OptionsHouse, or Charles Schwab.
The low cost online brokerages compounded with the business-savvy outlets like StockTwits, SeekingAlpha and Twitter, may leave both media and technology in the dust.
“Blogging, Tweeting and aggregators like StockTwits are becoming the new Bloomberg Terminal,” said Roger Nachman, a retired analyst and contrubtor. “The volume of data out there lets many tech-savvy investors cut right though the middle-man [broker].”
“The reason the financial markets were chosen is because finance is an industry where banks and large institutions shrouded pertinent knowledge with secrecy and closed doors to the average investor.” Said Lavitain. “It was eToro’s vision to disrupt that line of practice and make as much financial information as possible available to the average person, thus giving everyone an equal opportunity to profit from financial investments.”
While common US investment audiences still refer to traditional publications like Bloomberg, WSJ, Reuters or CNBC for their daily digest, open source trading communities like eToro and StockTwits may chip further into the profitability and viewership of the business cornerstones.
ZeroHedge – an anonymous-tip-driven finance blog – logged a complaint last fall about traditional business media, putting forward, “…perhaps CNBC’s viewers have gotten tired of getting just one side of the news flow: the always rosy, and over the past 5 years, always wrong one.”
CNBC’s eight year veiwer ratings. (Courtesy of ZeroHedge)
In 2012, CNBC’s viewership declined by 14%, bringing Total Day Average down from 198,800 to 171,000. Though they still represent the strongest business news network in the US, the company suffered consistent declines in viewership. (see below)
Against this trend, eToro Operations Manager Sandow reported a 20% increase in new accounts in 2012, expecting upward of that number in 2013 with the popular launch of their CopyTrader platform.
eToro also debuted their “Social Index” at the Finovate tech conference last fall. The new index allows users to gauge the market sentiment based on fellow traders positions in aggregate. As an example, for the EUR/CAD pair, 92% of the traders in this currency pair are buying, whereas for the USD/JPY pair, only 54% are buying. Such physical data has indeed helped novice and experienced traders beat the markets for 2012.
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