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Beat the market with wisdom of the crowd

Annabel Palmer talks with founder of online trading community eToro about how social media is changing the way people trade, and what to expect from City A.M.’s 2013 Active Trader Conference

Q How is social media changing the way people trade?

A Recent research we carried out with the Massachusetts Institute of Technology has shown that copy trading, where traders watch the trading activity of other people and make their decisions accordingly, performs significantly better than manual trading. Manual trading is incredibly difficult for those with little time on their hands, who may just want to trade as a hobby.

Many people new to trading believe it is impossible to beat the markets, or even to make money. According to the New York Times, regulators have found that more than nine out of ten traders lose money. But I believe social trading will revolutionise that scenario: the wisdom of the crowd will allow traders to beat the market.

Q What position does eToro have specifically in the social trading market?

A My colleague likens eToro to Who Wants to be a Millionaire’s “Ask the Audience” lifeline. An outsider can watch the financial trading activity of other users and base their decisions according to that activity. We allow our 2.8m users to automatically copy those experts and their trades at the same time and at the same rate.

The benefits of this platform are threefold: first you can capitalise on the knowledge and performance of other traders and replicate it with little prior knowledge yourself. Secondly, it opens up a dialogue between novice traders and experts. Thirdly, it is bringing simplicity and transparency to what has historically been a very niche industry.

A significant difference to traditional trading is that the instrument being traded is secondary. Our investors are thinking, “I have to chose the right people to follow,” not “I have to choose the right instruments”. And we are mass market – the essence of a social network. Whereas previously people would feed money into a big bank for professionals to invest it, now everyone in our network is trading their own money. Interests are aligned.

Q Who is your target audience? How does it differ to the broader trading industry?

A More than 70 per cent of people who connect to eToro through Facebook are between 18-34, so you could say we’re the platform for Generation Y. Ours is an internet, not a financial trading, experience. The minimum investment is $50, and the average is around $1,000.

Q What are the negative implications of social trading?

A Just as there were those who thought people would never share photographs on the internet, we do hear feedback from more traditional investors who fear a breach of privacy. The more traditional financial trader thought people would never share information about how they trade with strangers.

And a lot of people are used to asymmetric information – only telling people about the trades that make money – when the reality is that trading is not always a win-win activity. But that is intimidating for people with a finance background, who are only used to talking about profitable trades. In general, transparency and openness should be in the toolbox of every trader.

Q Are there risk concerns with a sheep mentality?

A Our research suggests not. It found that individual traders who trade using our platform earn on average 4 per cent more than on their own. The biggest misconception surrounding platforms like ours is that we’re not providing a professional tool. We don’t agree. What we offer is an extension of what is already there.

And we help those unfamiliar with risk diversification to avoid any irresponsible investments. For example, on our platform, you cannot invest over 20 per cent of your money in one investment or one option.

But our platform has also significantly changed how responsibly people trade. What we are seeing is that the more people who follow an individual investor, the more responsible that investor becomes. They feel they have to be conscious, and sensible with the trading decisions they make.

Q What does the future hold? And what will you be talking about at this year’s City A.M. Active Trader conference?

A We are already seeing growth in double digits every month and that will continue. One day, social trading will become the mass market form of trading. Few people trade the active markets today because they find platforms intimidating, and social trading will break down those boundaries.

I will be discussing social investing 101. It will be very helpful for anybody interested in participating in the markets, but who don’t consider themselves professionals. It will also benefit those who are open-minded, and keen to open themselves to new technologies.

Yoni Assia is board member and chief executive of eToro. He will be speaking at this year’s City A.M. Active Trader conference on 21 June 2013 at The Grange Hotel, Tower Bridge, London E1 8GP. Early Bird Tickets are now available for just £45 from www.CityAMactivetrader.com

CV YONI ASSIA

Company: eToro

Year founded: 2007

Age: 32

Trading focus: Stocks, currencies, commodities, indices

Born: Israel

Studied: BSc in Computer Science and MSc in Computer Sciences

Work experience: Over 10 years’ experience in investments and Forex trading

Favourite business book: Liar’s Poker, by Michael Lewis

Motto: “Something will always be better than nothing”

First ambition: To create, to make a difference

Awards: MoneyAM Online Finance Awards Best Active Trading Platform 2010; World Finance Best Social Trading Network 2011

Heroes: Steve Jobs, Bill Gates, Mark Zuckerberg – people who have changed the world through technology