Neil Martin has a long chat with eToro co-founder Yoni Assia, the ‘social trading’ online platform which has over 4.5 million members across 140 countries and which sees China and Russia as the next big growth opportunities. They also discuss how social trading might just be the future saviour of the traditional investment management industry.
Part One: Football and China
I’d been talking to Assia for about 30 minutes when I thought this question might take him aback. I figured that Yoni Assia, founder and CEO of the world’s largest social trading platform, who had just flown into London from Tel Aviv to check out his UK office and press the flesh, wouldn’t be quite ready for my searching question about football.
“So why do you support West Ham then?” I had spied the banner on his website: ‘Official Partner: West Ham United Football Club.’
But, I’d figured wrong. When it came to football, he was as sure-footed as when talking about finance.
His answer was precise: “We’re super excited about their shift to the Olympic Stadium which we can see out of our offices. We love the team, the new management. I think we can connect very highly to their aspiration, you know coming from below; they are having a great season; they are a very aggressive young talent. Manager Sam Brain set up an account on eToro and is giving his profits in the account to charity. I’m very happy to see them have a great season so far.”
I couldn’t argue with that. I know of West Ham, but being a supporter of the more civilised sport rugby, I usually steer away from discussing football!
Facebook for Social Trading
Created in 2007, eToro is best described as a Facebook for what’s known as ‘social traders.’ It currently boasts over 4.5 million users who are spread across over 140 countries and each one is encouraged to be as open about their trading as possible. And this reflects eToro’s mission in life: ‘…to revolutionise the way people access the financial markets and make their trading experience more social, simple, enjoyable and transparent.’
Anyone can trade stocks, currencies, commodities, or ETFs. They can invest anything from a few hundred dollars to hundreds of thousands.
The UK is an important strategic market for eToro and apart from their aptly positioned Canary Wharf offices, they have just launched a major brand advertising campaign across the country. This includes ‘stockbroker’ station Waterloo, their huge electronic advertisement positioned above the departure boards catching the mass of would-be traders who travel back and forth to the suburbs.
They have also made a couple of big hires in the UK and see it as a growing market for the platform, although you get the feeling when talking to Assia, that China and Russia, where eToro has been scaling up their operations, will dwarf activities here. On China, Assia was sure about its future role: “I think China is absolutely amazing, I believe that the future is there.”
And given the figures that Assia is talking about, who wouldn’t be looking East?
“What to me is amazing about China is there every app there has 50 million users…”, explained Assia, “… I meant the scale and opportunity there enables companies to focus on automation and user experience to the mass audience which has not been able to emerge anywhere else around the world, especially by the way in financial services and where the regulatory environment is quite keen on financial innovation.”
Assia highlighted a recent example with WeChat, the Chinese equivalent of WhatsApp, which is used by the Chinese to send Red Envelopes at New Year; it’s a popular custom and a way to gift money. This year, WeChat was used by 420 million people to send over eight billion envelopes.
Penetrating the Chinese market is not without its challenges though and eToro has formed a partnership with Ping An to ease the way, it’s the largest financial institution in China and alongside two other institutions, has raised $27 million for eToro. These funds will be used by eToro to create a beachhead and learn how to operate a social trading platform in what is a very different culture.
Size matters for Fintech companies, a point stressed by Assia: “The biggest shift in Fintech is coming from technology, which is making everything based on big data, analysing how things happen when people interact directly through mobile, or through the web through your platform.”
He said that eToro releases a virtual new version of the trading platform each week. The updates are based on how users interact with the platform, creating new features, and that feedback is made possible by the website’s growing mass audience.
In the Beginning
Assia has been involved with computer programming and financial trading since he was about 13, and started the eToro platform with his big brother who has an industrial design background. The ambition behind what they hoped to build was clear.
“The initial core concept…” explained Assia “…was to open the global markets for everyone to trade and invest in a simple and transparent way. If you think about the markets, they are still very much for the suited and reputed, a niche of customers who feel confident enough to trade the markets, to analyse the data, to look at what’s out there.
“What we realised is that the interest of the mass affluent population has grown dramatically over the past ten years, or 15 years, more and more people are reading and learning about what’s happening in news, whether its China, or oil, or Russia, or the DAX Germany.”
However, no matter the interest, Assia discovered that there was still a big barrier to entry. Therefore, the ambition was to create the largest social trading network in the world and one which had a very different and new user experience.
The key is transparency said Assia: “We focus on internet user experience, a Facebook like experience for people and second, that you have to connect people to one other. Trading and investing is complicated, you can simplify it through user experience, but making the actual decisions is not simple. You need to understand the risks, and you need to take responsibility over your decisions, and we realised that the best way to do that is just to connect people.
“The power of places like Goldman Sachs and JP Morgan is that you have a thousand traders sitting on the same room, with the ability to access and talk to one another, with investment committees, and information flowing to one another, and we’re building something like that, but globally, for millions of people.”
The concept of a collective group of traders is reinforced by the concept of copy trading, which eToro originally invented back in 2010. This transforms any person on the platform into a passive money manager. Everyone on the platform can see the top traders and their track record for a number of years, including what they traded in their own personal account.
The platform is based on Contract for Differences (CFDs) which actually facilitates trade copying. Assia took me through an example of one of the platform’s most successful traders to show how this works in practice.
“I always show a portfolio where I’m copying one of our popular investors who’s actually an analyst at Deloitte Digital…” explained Assia “…and I’m copying him with a thousand dollars and if you check the history of me copying him, he’s done more than a 150 transactions in his account, which means with these 1000 dollars I generated more than a 150 transactions in my account, each transaction with an average of about 20, 30 dollars.
“So the beautiful thing about building the platform based on CFDs, is that you can create those small fractional transactions in the markets. You can actually open a 1000 dollar portfolio that has a 100 different stocks and the actual cost for that portfolio would be 0.1% of a 1000 dollars, so you’ll pay one dollar to open a hundred different transactions in your account. If you do that same transactions at a traditional stockbroker, you’ll probably pay 1500 dollars just to open those 100 transactions which would completely eliminate the possibility of creating those micro portfolios.”
Obviously, no matter how sophisticated the platform, the element of risk cannot be removed, although eToro tries hard to mitigate its effects said Assia. One of the main safety valves is the platform’s risk score algorithm that measures the risk of different users’ strategies. But, as Assia agreed: “There is risk copying people, by definition copying a person is very similar to investing in the markets; similar to investing in hedge funds.”
The upside for successful traders, is not only do they make money on their own positions, but if they get copied, they get also get paid.
Typical users of the platform range from people interested in the markets, yet who find other platforms too cumbersome and complex, to experienced traders who actually come in to open a dialogue, to show what they’re doing and discuss it with others.