When the last of the pits closed at the London International Financial Futures and options Exchange (Liffe), it left legions of former floor traders to hang up their chequered jackets and build new careers elsewhere. Some would make the transition to trading on screens at the trading arcades and dealing rooms scattered across the City. But a sad lament often heard spoken by former Liffe traders was that they missed the camaraderie – and insight – of being on the floor and found sitting behind a screen a sad, lonely and introspective alternative.
Now with the advent of social investment networks, Retail Forex traders can log on to virtual worlds which have all the noise of speculation that ruled the trading pits of old. Users obtain instant access to the insight and knowledge of thousands of other traders speculating on the same currencies as themselves. Social investment networks apply a Facebook-style approach to investing, in which users can share and discuss trading strategies, while the websites have different methods for ranking the best-performing traders, offering users the chance to follow and duplicate the – thus far – winning trades made by the ‘gurus’ of each network.
According to the latest research by Aite Group, the financial research and consulting firm, leading social investment networks include eToro which has 70,000 live account holders, putting it ahead of the competition. ZuluTrade is the nearest rival in terms of live account holders, having 25,000 live account holders. Tradency, Currensee and myfxbook share the lion share of the rest of the market with 15,000, 9,000 and 8,000 live account holders respectively.
The social investment market is somewhat nascent, with each provider seeking to use its brand to differentiate itself from the competition. The leading social investment networks offer customer services in a variety of different languages, matching the global footprint of the customer base. For example, the Currensee service is available in Chinese, German, French, Italian and Spanish and they recently launched their offering in Japanese. Currensee also has customer service staff available to support many of these languages. Meanwhile, eToro offers users the choice of 15 languages, including Arabic, Chinese, French, German, Japanese, Russian and Spanish. However, other networks such as C2 offer services exclusively in English. The Aite Group research found that most networks could improve the breadth of language services available to customers.
eToro, is an online Forex and commodities and investment network, which has registered members in countries across the globe including France, Germany, the UK and US. Traders who sign up with the eToro service can start with a practice ‘dummy’ account in which users get to speculate with $10,000 of virtual money to practice trading and learn how the platform works. When a user is confident enough to trade for real, the minimum deposit for a live account is $50, with a typical account holder having a balance of about $10,000 – users can speculate millions on the platform.
A popular tool offered by eToro – and other leading social investment networks – is a ‘copy trader’ function, which enables users to follow its leading traders. “With CopyTrader you can put $5,000 or $50 on a specific trader and you are actually able to copy that trader with your money which means your money will be following each and every trade that person does,” explains Yoni Assia, the chief executive officer and founder of eToro. “We are able to develop very sophisticated ranking algorithms to show you who the best traders are. So you can follow them and get updated every time a trader does many of his trades.”
The leading traders using the eToro service are displayed on its OpenBook trading platform, which displays the trade experts a user is following while also enabling an account holder to make trades manually. If an investor with $10,000 in an eToro’s copy trade model allocates $1,000 to copy an expert trader, the level of risk for the investor’s $1,000 will be the same as the level of risk for the expert trader account – which means the investor copying a guru does not have to calculate himself how much to trade. Furthermore, as a risk management control, eToro does not allow account holders to put more than 20 per cent of their balance at risk, following one of its ‘guru’ traders. “You can’t lose all your money on one trader,” says Assia.
Assia uses a real-life example – Fatima, a top-performing euro/dollar trader based in the Middle East – to illustrate how the copy trader function works. Fatima’s profile reveals her full trading statistics during the past year (which is as far back as the trading history of a trader goes), along with comments that other traders have made on her performance.
Why would a top-performing trader such as Fatima want to reveal her strategy to the worldwide web? “Traders such as Fatima are getting a lot of feedback and appreciation about what they are doing. Being a Retail trader is a lonely task. This way you are able to have people comment and appreciate the way you trade,” says Assia. “Recognition is very entrenched in human behaviour. This is a chance to step into the light. People have strong personal recognition when they are followed by 1,000 or 2,000 followers. Some people enjoy this almost as much as the monetary incentive.”
Tradency, a Forex auto-trading platform launched at the end of 2005, has helped pioneer another popular form of social investment network trading, known as mirror trading. In the ‘mirror-trading’ model, the trade signal of an expert trader is copied, but investors are allowed to set risk levels that may be higher or lower than those of an expert trader.
Tradency’s Mirror Trader platform, which features a database of different trading strategies, offers users the options of trading in an automatic, manual or ‘semi-mirroring’ fashion. Users opting for the automatic function passively follow a trading strategy which has a good track record. Users can combine such a strategy by executing trades manually. Those choosing a semi-mirroring strategy, can monitor the buy and sell trading signals of strategy developers in real-time and decide whether to mirror the trades or not.
“You don’t need to set a predefined system to your portfolio. You are getting real-time signals from all the strategies that are displayed on the Mirror Trader platform,” says Lior Nabat, president and CEO of Tradency. “You can pick and choose which strategies you would like to execute, signal by signal. Meaning by each trade your strategy is doing, you see the user feed and you automatically join or mirror this trade.”
Collective2 (C2) is another US-based social investment network which follows the mirror trader model. C2 offers its users a library of more than 15,000 trading systems for asset classes which include Forex, along with equities, futures and options. “You can come to C2 and propose yourself as a vendor and charge a fee of whatever you think your signals are worth. But it is a flat time-based fee, not based on account size or trading volume,” says Matthew Klein, chief executive officer at C2.
In what looks like a race for critical scale in the social investing field, the Aite Group survey identified ZuluTrade as one of the fastest growing firms. It reported a quarterly account increase of 15,000 new accounts – eclipsing the 15,000 accounts it acquired in all of 2010. ZuluTrade’s mirror-trading approach lets users manually set their own risk parameters or use a default mode that automatically assigns a trade size to a signal, which does not have to match the level of risk taken by the expert trader.
Trade leader selection process
“A major distinguishing factor between the networks is the selection process used for choosing a trade leader,” says Javier Paz, a senior analyst at Aite Group. He explains that Currensee has a unique approach to social investing, highlighting its trade leader selection process which requires a minimum of three straight months profitable trading on a live account. When Paz’s recent research was published, Currensee had 16 Trade Leaders generating 20 different strategies, which averaged as a group a return of 33.8 per cent in the period from January 2011 to June 2011.
“Our Trade Leaders are hand-selected for the program based on their approach to money management and risk management. The discipline to set a strategy, stick to it and refine it over time is what makes them successful and our commitment to providing our investors with experienced traders is what makes the Currensee offering unique,” says Dave Lemont, chief executive officer of Currensee.
C2 publishes all the trades made on the platform, and documents which are made from live brokerage accounts. This transparency is combined with user reviews with each service – which are not always complimentary. One disgruntled user of a trade user account accused him of leaving his computer unattended and failing to exit trades. But Klein believes the transparency of the service will enable its trading stars to rise to the top and build up substantial followings that are based on a successful track record. “As an introducing broker, we have done all the expensive regulatory, legal and compliance work and built a platform for people that do not have the wherewithal to do this themselves. We enable people to prove that they are good traders and join the financial world,” says Klein. “In the past, if you were a smart guy in a basement in Moscow who came up with a really great trading algorithm and you did not have capital or go to Harvard, Yale or MIT, you were not going to get acclaim as a trader and end up getting hired by Goldman Sachs. You were not even going to be able to start a little hedge fund.”
Models for engaging users
Leon Yohai, founder and chief executive officer of ZuluTrade says unlike other social networks, ZuluTrade is an “ecosystem in the Forex community” connecting about 100 broker-dealers and more than 58,000 thousand signal provider strategies to its auto-trade trade service. “Socially, people talk about it. Friends will join as a result,” says Yohai. Meanwhile, Zecco, one of the leading value-players in the online US-based stockbroker space, with over 400,000 investing community members, believes the Facebook model may provide the next avenue of growth for social investing. Zecco has launched a Facebook app, titled Wall Street, which enables its customers to trade directly from their Facebook accounts.
“Social investing is here to stay. We think that it is an extension of behaviour that is already happening offline and we are going to facilitate it as best as we can online,” says Nicholas Britz, president of Zecco’s Forex business.
As the different social investment network models refine their offerings and compete for market share, Paz of Aite Group believes there is sizeable pent up demand among Retail Forex investors for this type of service. While the size of the social investing market has about 130,000 users at the moment, Paz projects exponential growth over the next five years, with the market mushrooming in size to more than ten million investors. Furthermore, Aite Group believes that the social investing market has a potential audience of hundreds of millions of investors, made up of both traditional and first-time investors. Half of the firms surveyed in the Aite Group research reported triple-digit percentage increases in live account holders.
Impact of social investing
Lemont of Currensee believes social investing will significantly boost the size – and transparency – of the Retail Forex market. “Automated trading systems could dramatically increase the volumes in the Forex markets with the Forex brokers. Services like Currensee clearly reveal who the good brokers are – the honest brokers – and who are the ones who aren’t playing fair or in the best interest of their customers. We only work with the top brokers who give the best spreads,” says Lemont.
Nabat of Tradency says the growth of the social investment market will be bolstered by the positive impact the trader leader or mirror model can have on the returns of ordinary investors. He believes that the social investing model will become common place on Retail trading platform offering trading in a variety of asset classes – not just Forex – within the next three to five years. Though he feels that Forex is particularly suited to this type of investing. “Forex is the only asset that is active 24 hours a day, six days a week. There are infinitive opportunities to trade. There is no other asset so liquid,” he says. Nabat believes that until the advent of social investing, Retail Forex traders were in a sense “flying alone”. “Now users can take the knowledge of other traders that are more experienced and trade with them, either in an automated or semi automated fashion,” he says. His view is given some added weight by the Aite Group research, which found evidence to suggest that Forex social investing firms were producing a level of investor profitability of at least 50 per cent, compared with 30 per cent among US ‘self-directed traders’.
“What this whole industry is about is a way of lowering regulatory barriers that have made it very hard for good investing strategies and brains to get discovered,” says Klein of C2.
While research from Aite Group suggests that the social investing Forex market is being driven by a younger less experienced demographic of traders, the market is not homogenous. Klein suggests that C2 – which according to Aite Group research is experiencing a 500 per cent annual growth in live accounts – is attracting more sophisticated Retail Forex investors. “We appeal to a certain demographic. People who know what a Sharpe Ratio is. We are built for programmers and people that want to do black box trading. We have APIs for them. We have interfaces to popular back-testing solutions such as TradeStation or NinjaTrader,” says Klein.
Meanwhile, Aite Group research has found that eToro is attracting a younger audience than those courted by traditional banks and brokerage firms. eToro’s customer base is typically male, aged between 25 and 44.
Investors in social investment networks are clearly attracted to the concept of ‘crowd sourcing – which is driven in part by a belief that the collective opinions of a ‘crowd’ of investors – made up experts and novices alike – generates a superior knowledge pool to that of a single person or small group of individuals. Paz of Aite group believes crowd sourcing could transform the way “very large masses of individuals pursue an attractive return during volatile economic conditions”. This notion is clearly an implicit attraction for many investors in social networks.
However, Klein of C2 feels the industry should act with caution in promoting any ideas that emulate the collective wisdom of crowds and large groups of investors, as a more reliable or informed guide to making investing decisions. “The problem with the idea of ‘social’ is that it assumes everyone is good at having an opinion, which is really not true in the world of investing. The opposite is true in the world of investing. Everyone has an opinion and generally everyone is wrong,” cautions Klein.
Nevertheless, Britz of Zecco says the transparency and wide pools of investor knowledge in networks – has clear benefits – which is something all networks can use to attract new users. “What is driving the investment communities is that you now have a new source of aggregated information that you previously didn’t have before. For example, Currensee is attempting to make its community knowledge useful by picking some of the best traders and letting people follow them,” he says.
Currensee, which began operations in 2009 as a social network that encouraged traders to share their account performance and obtain insight from community metrics and other members, appears to now be attracting more wealthy users than some other networks. The average account size of $25,000 to $30,000 is two to four times greater than the size of many of its peers, according to Aite Group research.
Currensee’s success in attracting higher net-worth users could in part be a result of its Trade Leader Investment Program. “Currensee applies unusual rigor to the trade leader selection process. It receives hundreds of applications each month, but so far has accepted only 16 people,” writes Paz.
According to Aite Group’s analysis of the social investing market, eToro is the only other network which has developed rigorous rules for qualifying trade experts or requiring them to issue signals from a live account. All eToro trade experts have to use live eToro accounts to generate trade signals, but its trade expert certification process has not yet been introduced.
One moot point in the social investment network model is the reliability of so-called ‘dummy accounts’ as a guide for investing, when the user is not risking any real money when pursuing an investment strategy.
Edwin Lefevre’s classic tome Reminiscences of a Stock Operator, first published in 1923, sums up the difficulties such ‘fake’ investors have when actually putting their own money on the line. “It is like the old story of the man who was going to fight a duel the next day,” wrote Lefèvre. His second asked him, “Are you a good shot?” “Well,” said the Duelist, “I can snap the stem of a wineglass at twenty paces,” and he looked modest. “That’s all very well,” said the second unimpressed. “But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?”
Lemont of Currensee is highly critical of automated trading systems that allow performance to be shown in demo accounts, as he argues this does not provide a reliable guide. “There is a very big difference between pretend money and real money. Why would I close a losing position if it’s not my money. Why wouldn’t I just wait out the draw-down until the market comes back. Whereas with my own money, if I open up a position and it is down 50 pips, I am going to say to myself, I’m done – I can’t lose any more money. But if it’s not my money – just play money. Who cares,” says Lemont.
Nevertheless, networks such as eToro which offer ‘dummy’ accounts are providing new users with a valuable self-educating tool. While users experimenting with such accounts are not prone to the base emotions of fear and greed which can drive financial markets, they will be able to see if a hunch for where currency prices are heading is true or not.Social investing networks also provide customers with tools to educate themselves and inform trading strategies. For example, Tradency offers its users a suite of informative and well-made short videos which introduce the concept of social investing and the advantages of its Mirror Trader offering.
Klein of C2 concedes that the social investing industry could be attacked by critics as akin to the online gaming industry. “It does concern me a little bit that people are opening Forex accounts at very high leverage without really understanding what that means. You can make money for a long time picking up pennies in front of a steamroller,” he says.
However, social investment networks are developing risk management tools to help facilitate responsible investing. ZuluTrade provides its users with a ‘margincallometer’ which informs a trader of the odds of having a margin call with their current selection of signal providers. The platform also provides an ‘auto button’, which can be adjusted according to an investor’s risk appetite, enabling an auto-selection of a trading size via handheld mobile devices such as an iPad, iPhone or smartphone Android App.
Currensee does not allow its customers to over leverage themselves, in relation to the positions taken by a trade leader. “We recently introduced tools which enable a trader to manage their own risk – even beyond what the trade leader does. So we allow customers to set maximum drawdowns that they are willing to tolerate by each trade leader such that when that particular drawdown level is hit, all open positions will close so the customer can not sustain any further loss,” says Lemont of Currensee.
Investment networks also provide users with default profit and stop losses, which enable a user to terminate a trade once losses or gains breach predetermined amounts. “One of the things that we are going to do in the future is offer a service which will inform users – if say the EURUSD is in range – of which systems are most suitable to these types of markets,” explains Nabat of Tradency. “This means when market conditions change, we can change the set of systems in order to minimise the levels of risk investors take.”
A willingness to innovate and develop new offerings makes social investing a dynamic market, which could fuel its growth further. “Our definitions are fluid. People who are proposing themselves as great traders often evolve to be people who are good at picking other traders and vice versa,” says Klein of C2. However, the pioneering nature of social investing may put the sector under closer regulatory scrutiny. The interaction between users in social networks can blur official boundaries and rules on the giving of investment advice and promotion of financial products.
“Social Networking is an extension of communication to the public. Regulators have recently created direction in regards to the interpretation of the existing rules. As the market innovates how it communicates and as the medium changes, the interpretation will continue to involve, but the principals will remain the same,” says Britz.
Nevertheless, the prospects for the social network investing market appear bright and its success could even make the model one day become a part of the Retail Forex mainstream. “Social Investing offers better clarity and better flexibility than standard mutual funds, paving the way for social investing to become a real alternative Retail asset class. We see the market developing from trading to a true alternative global asset class,” says Assia of eToro.
Any data or statistics presented in this article are for illustrative purposes only and may not be accurate due to changes that may have occured since the original figures were compiled and the article written.