Social trading targets savvy retail investors

June 22, 2013 12:15 am

Social trading targets savvy retail investors

By Vanessa Kortekaas

Imagine if Twitter was used only by the world’s most successful stock market and currency traders – and they posted all of their trading ideas for online followers to see.

That, in a few more than 140 characters, is what “social trading” is attempting to achieve: adapting the social media phenomenon to create a connected community of savvier private investors.And, in recent weeks, one of the fastest growing social investment networks has moved two steps closer to its aim of generating a Twitter-style buzz among tradersin the UK.

In May, eToro – the Cyprus-based trading platform and trader network that already has 3m members in about 200 countries – was licensed by the Financial Conduct Authority to offer financial services to UK users.

Now, the company is planning to relocate its headquarters from Cyprus to Canary Wharf, as part of a plan to increase its user base. EToro will announce next week that it is moving into Level 39 of One Canada Square – the newly opened business incubator in the Docklands skyscraper.

It says that its intention is to invest “millions of dollars” into this UK operation in the coming years, to attract users. UK traders account for only 7 per cent of the platform’s 150,000 active users every month.

“Being headquartered in the UK means being able to have better access to the biggest market in the world in contract for difference trading,” says Yoni Assia, chief executive of eToro – referring to the retail derivative contracts that can be traded on his platform. His aim, he says, is to turn eToro into a “household brand” in the UK.

Originally launched as a foreign exchange trading platform in 2007, eToro has already become one of the pioneers of social trading – by allowing users to chat to and “follow” each other, as on Twitter and Facebook.

According to the Investment Trends research consultancy, other platforms to have entered the social trading space include ZuluTrade, myFxBook, Currensee and Tradency.

Among currency traders, they have grown in popularity – particularly in Australia.

In March, Investment Trends’ forex trading report found that four out of 10 forex traders in the country “embrace social media in the context of trading”.

Asked what they hoped to gain from reading posts on the networks, nearly half of those traders said insights into analyst commentary; 44 per cent cited the ability to detect market trends; while 42 per cent mentioned keeping up with news and market events.

Social trading has even inspired research from the Massachusetts Institute of Technology (MIT).

It found that investors connected to diverse social groups achieved better returns than lone traders, or those who were part of just one smaller group or chatroom.

Some UK spread betting companies, including IG Index and City Index, have sought to provide clients with similar ways to interact with and learn from each other.

IG has more than 7,000 followers on Twitter, while City Index has run an Apprentice-style web TV show in which traders are pitted against each other and customers are encouraged to follow the candidates on Twitter, as they compete to win a £100,000 prize.

However, eToro has gone further. It is one of the first social networks to enable “followers” to duplicate the trading positions of successful traders.

Its CopyTrader function allows users to choose which traders they wish to follow and have a percentage of their deposited funds automatically placed into the same trades as these “gurus”.

EToro says that almost two-thirds of its users now copy other traders’ investments – allowing them to “tap into the wisdom of the crowds”.

“There’s no doubt we’re disrupting the investment space,” says Mr Assia, who describes the “following” concept as being similar to investing in a collective fund.

“It gives more people access to fund management,” he argues.

About a quarter of eToro’s users are female, and Mr Assia says that eToro does not suffer the high “churn”, or turnover, of clients experienced by other UK spread betting operators.

However, not all traders – or trading platform providers – are convinced of the wisdom of crowds or of following certain traders.

In Australia, only 6 per cent of forex traders say that they follow others on social trading sites.

In the UK, some warn of the dangers of encouraging inexperienced investors to copy others.

Joshua Raymond, chief market strategist at City Index, points out: “Clients can potentially blindly follow other traders’ strategies in real-time with their accounts.”

He urges clients to make their own decisions. “It’s important that the dangers of social trading are made transparent to anyone who engages in following other people’s trades, and we would always recommend to our own clients that they create their own trading plans and undertake research before entering any trade, Mr Raymond said.”

Or, as one senior manager of a City firm puts it: “The temptation to the uninformed [trader] will be that copying is a form of holy grail.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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