International Finance

Follow the leader

eToro enables people to copy successful traders who post their trades, but not the amounts Tom Groenfeldt August 4, 2016: The stock portfolio of a stroke nurse at Brighton and Sussex University Hospitals in the UK is up 6.72 percent on eToro over the last three months, with a risk level of just 2. “Consistency discipline and a reliable trading system are the elements I...

eToro enables people to copy successful traders who post their trades, but not the amounts

Tom Groenfeldt

August 4, 2016: The stock portfolio of a stroke nurse at Brighton and Sussex University Hospitals in the UK is up 6.72 percent on eToro over the last three months, with a risk level of just 2.

“Consistency discipline and a reliable trading system are the elements I trust when I trade,” explained the nurse, who had been an analyst at Amex for several years. “Behind every trade, there is a trend identified, a target and a stop.” Risk scores can range from as low as 1 to a high of 10.

The eToro site is a pioneer in social trading. People from around the world — with the notable exceptions of the US and Canada — can enroll, deposit money with the firm, which is a broker, and then invest directly or by copying successful traders who post their trades, but not the amounts.

Once an investor chooses someone to follow, he registers the decision and the amount to dedicate to that leading trade, and eToro’s computers keep the trades in line.

The most successful traders with many copiers can earn substantial sums, up to 2 percent of assets under management for traders whose copiers are investing $300,000 (in aggregate) or more with them.

The company, which was founded in Israel and has dual headquarters in London and Cyprus, has 4.5 million registered users in more than 170 countries around the world trading currencies, commodities, indices, ETFs and CFD stocks online and says thousands of new accounts are created every day.

More than 6,000 eToro traders based around the world are being copied, said Nadav Avidan,

head of communications at the firm. “They are becoming a new generation of money managers. They definitely have real potential to create a very profitable work from home arrangement, but as in any online business, you need to be professional in what you do and give the right attention to those who copy you.”

Cooperation, community and interaction are the key components of the eToro trading experience, the company says on its web site. It has a staff of community managers and  market analysts to help traders.

One of them, Mati Greenspan, explains “My expertise is in providing topnotch analysis of the financial markets.” He has published articles on the eToro web site on simple market strategy, trading news and simple portfolio strategy.

Avidan said that one Norwegian investor started on the site at 19 and by the time he turned 20, he was on the front page of his country’s leading newspaper and was managing a few million dollars.

“If you are an amazing trader and can get people to copy you, with $50 million in assets following you, you can get $1 to $2 million a year, and you can do it in your pajamas from your sofa at home.”

The best investors with growing numbers of copiers are using low risk strategies and have a real sense of social responsibility, he said. “They care about what is happening to their community, care about explaining.”

When the company recently launched in Russia, he went to Moscow to show eToro’s public relations agencies how the site works. Avidan pulled up a trader he is following, but not copying. The trader had experienced poor returns in January.

“On his post, he said that January was a weak month and then explained what he was planning for February. Almost no one left him because he is communicating everything to his audience and they understand what is happening. Most people when they first start with financial markets think it is win win-win all the way. But after a few weeks, they see that the market can always surprise you, no matter how experienced you are. Once you get the idea the market can go both ways, all that is left is the trust you have in the person you trust with your money.”

Investors at eToro can trust the investors they are copying because they know the leader is making the same investments they are.

“In traditional money management, you are trusting someone in a suit and tie, and you have nothing in common with in term of aligned goals.”

Both want to make money, but the money manager doesn’t necessarily make more by helping an investor make more.

“The investment manager wants to get a raise, a promotion, move up the hierarchy and if that means he has to sell the products the bank is telling him to sell, then he will. He and the investor are not in it together.”

By contrast, at eToro the lead investor and the traders are in it together.

“With COPY, if you copy me, say with $1,000, from the first second of establishing this relationship, we have the exact same goal. Every time I (the lead investor) do something with my money, I am doing it because I think I will make more money from my money. That means if you, the copier, saw a loss of 10 percent you know the leader lost 10 percent of real money. It really helps people to understand we are all in this together and doing our best to make the most profit from the market.”

The eToro selection of assets includes most major US equities, plus equities from the UK, Germany, France, Spain and Italy. The platform also includes ETFs, currencies, commodities and indices and operates in eight languages.

“We are a brokerage. We execute your orders and take a small fee on each transaction. When you are a social trading network, one of the basic things you learn very fast is that people share more when they are happy. People who make profits will want to engage in the social aspects of the platform; if you are making profit you want to share it with the world.”

Helping people to profit keeps the social network engaged, alive and interesting, he added.

“That means the social network is a business objective for us, not just nice to have.”

Other social networks that offer trading may post one new story a day, providing little incentive for members to come back and participate.

“If you go to our platform, in less than a minute you get new updates — so many people from all over the world are discussing the markets. If you enjoy talking about the markets, then it makes sense. You would feel the need to go back and see what others are saying.”

The platform appeals strongly to people in their twenties and thirties who are comfortable with social networks and sharing useful information with others — tapping the wisdom of the crowd rather than simply posting pictures of what they had for breakfast.

“People understand that sharing is a way to achieve thinking.”

That concept is not widespread in finance where investment banks don’t want to share secrets, except perhaps with their biggest customers.

By contrast, eToro wants to become the most successful investment house in the world, with its clients.

“If you did your analysis of Twitter and have an understanding of why it is tumbling, and what elements are going to drive the stock back up, it makes no sense not to share it. We are not in competition, you don’t need to gain points over me. We share because we want everyone to be successful and have more people join our agenda and invest in the future we want to see.”

So the boards at eToro continue to offer a range of advices, like one trader’s views to play it safe on the possibility of Brexit.

“Trade what you see, keep it small and low leverage, take profits more often and set your stop loss in the green.”

Meanwhile, OilyTycoon admits he, or she, can’t follow self-advice on oil.

“Another way to reduce trading stress is to stay away from oil. Wish I could practice what I preach, though.”

‘Real chance for ordinary people’

“The rise of social trading worldwide has led to rapid growth in the number of people engaging with global markets,” said Yoni Assia, co-founder and CEO, eToro. “What was once the preserve of the few, with access often limited by geographic location, is now open to anyone who wishes to take control of their money – regardless of where they live. From a fire marshal who lives outside of Barcelona, to a horse trainer from the Netherlands, eToro gives a real chance to what the industry refers to as ‘ordinary’ people. And when tapped into the wisdom of the crowd, and joined by millions of other traders, we see that those so called ‘ordinary’ traders have as good a shot at beating the market as any investment firm in the world.”

Yoni Assia,
co-founder and CEO, eToro

This story first appeared in the July 2016 issue of International Finance Magazine

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