‘eToro’ and the emergence of social trading

I recently visited the world headquarters of financial-tech start-up eToro, located in Tel Aviv, Israel.  eToro is the world’s largest online financial trading community designed to financially empower individual investors through a simple, innovative trading platform and an active social trading community.  Although it is still not legal in the United States, it has 3.5 million registered users that benefit from the collective wisdom of eToro’s community.  With $31.5 million in funding and $18 million of assets under management, eToro is successfully bringing social trading to the masses and disrupting the finance industry in the process.

“Finance has been enabled, but not disrupted yet by the internet.  It is ready for disruption,” eToro founder Yoni Assia told me during my visit.  “Consumer finance is a utility, but today most people don’t consume it as such.  Why? It is anti-social. The industry was built to serve the top 1%.  They use complex instruments that are lucrative, yet dangerous.”

The site offers CFD’s or “Contract for Difference,” that are agreements between a user and a broker to pay each other the difference between the price of an asset (such as Gold, US dollar, Apple stock, etc.) at the moment the contract is made and its later price when you decide to close the trade. This encourages more activity by the average small investor since they can buy as little as $10 of Apple, even if a share is selling for $500.  To generate revenue, eToro has transaction fees of .1% on stocks, .3% on ETFs, and 1% on bitcoin transactions.

Social Trading

eToro strives to be a community with “social trading.” When a user spots an interesting trader that they would like to keep track of, they can follow their activity. The most direct way to benefit is the ability to copy.  If a user spots a particularly promising trade in their live trading feed or by browsing through a trader’s personal profile, they can quickly open the same trade by clicking on “Copy”. However, if that same user spots a trader who is consistently profitable, then can also click on “CopyTrader” to start copying their trades automatically. Many users dedicate their entire account to recruiting traders to trade for them, building what is called a “people-based” portfolio.  A 2012 MIT study found that eToro members whose networks allowed them to cull from a wide range of strategies earned a 30 percent better return on their investments than members who never copied anyone else’s trades.

Wisdom of the Crowds

One of eToro’s biggest innovations is that at its core, the site reduces the information asymmetry that has helped consolidate power for a select few who work in the industry.  All financial data is now available and not just for people at Goldman Sachs. Exposure to what your fellow traders are doing in the financial market at any given time and why, gives users insights into market trends, innovative strategies, and trading ideas. On the eToro OpenBook, a users’ feed will update them immediately the moment someone opens a position, which, assuming they bought the stock at a low price point, will enable you to catch the opportunity at the “point of maximum opportunity,” as opposed to the “point of maximum risk” which is what happens when you try that persons success after the fact.

 Regulation 2.0

Regulation remains the biggest challenge for eToro and other finance 2.0 companies. Nick Grossman from Union Square Ventures wrote a blog about regulation 2.0 where he argues for a switch from making up-front decisions about an activity (i.e., peer-peer apartment renting or ride-sharing), like we do with regulation 1.0 and instead being more tolerant in the beginning.  This permissive approach can be accompanied by increased “accountability through transparency,” that the availability of huge volumes of data in real-time make possible.  Grossman also believes regulation 2.0 would theoretically be simple and cheaper to operate while allowing businesses like eToro to be explored without the fear of regulatory shut-down.

 Social Network Effects

While it took eToro 6 years to reach 50 million trades, they reached 100 million trades less than one year later. One way that eToro helps build their community is by focusing on “social stocks.”  These are the stocks for brands that people like to talk about including Facebook, Google, and Manchester United.  People are more likely to share their trades and comments about popular stocks on other social networks. eToro also uses gamification and recognition management tools to spur involvement. Top investors are highlighted and ranked based on their performance and how many people copy their investment strategy. One fireman with 6500 copiers and 133,000 followers has achieved almost hero status.

Financial Web Future

The future looks bright for eToro.  They have had no problem raising money, their CEO fits the mold of the visionary leader, and the awards and recognition keep coming.  Wired magazine recently said they were 1 of 5 companies in Israel to watch out for and that the next big thing is the “financial Web.” Fast Company, one of the leading business-technology magazines, featured them among the top 10 most innovative companies in the financial sector for 2014. A growing number of people are joining the eToro community and starting to blend social with finance.  Hopefully, more sensible regulation will emerge in the United States that allows us to start social trading.

Dan Steinberg

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TEVA Pharmaceuticals Decides Against a Two-Sided Market Strategy

Last week I visited ‘TEVA Israel,’ the Israeli affiliate of TEVA Pharmaceuticals.  Teva is the largest generic drug manufacturer in the world and one of the world’s largest pharmaceutical companies.  They are responsible for 17% of medical scripts written in the US, and its drug Copaxone is the #1 MS drug in the world at $4b in sales/year.  TEVA Israel wants to be the innovation hub for TEVA Global.  As Dr. Roni Sholih put it, “TEVA Israel is an incubator for all of TEVA for finding ways to grow beyond just selling drugs.  If one of our companies grows big enough, then maybe corporate will want to take it to TEVA Global.”

Dr. Shiloh is the head of DDI+ at Teva, which stands for Drug-Drug Interactions Plus. It is a web based solution system for advising physicians how to treat patients consuming multiple medications. Drug-Drug interactions are one of the leading causes of death in the United States, and Teva’s current strategy for DDI+ is for it to be a valuable module within an electric medical record (EMR) system.

As currently positioned, DDI+ will be a one-sided market with TEVA providing doctors with information and doctors sending nothing back to them.  As I listened to Dr. Shiloh speak about the product, I wondered why they weren’t pursuing it as a two-sided market.  As more doctors adopt DDI+, Teva can receive valuable data about when and why doctors still prescribe a medication even when they are advised against mixing it with another drug their patient is taking.  Teva could sell that data to other pharma companies that want to better understand how doctors treat patients. Pharma companies could also use it to improve their ability to recommend drugs based on analyzing the data from DDI+.   With the likelihood of new blockbuster drugs becoming rare, these insights could be more valuable than ever to Pharma companies.  As currently positioned, DDI+ will not capture any of this data.

I assumed that a barrier to positioning DDI+ as a two-sided market was HIPAA regulations.  However, the problem here is not necessary with HIPAA since it would be possible to aggregate the data by removing a patients name, address, patient #, etc.  The concern is that this platform is built to integrate seamlessly into existing EMR systems and EMR systems by their nature are meant to track individual patients.  But wouldn’t existing EMR’s still want to know when and why a doctor who was alerted to a contra-indicated mix of drugs decided to prescribe them anyway?  DDI+ could make this type of reporting a default setting, thereby incentivizing doctors to record and share this data.

Doctors typically have only have 8 minutes to see each patient, leaving little time to research potential undesired consequences related to drug-drug interactions. With its improved user interface and more relevant and personalized data, DDI+ has the potential to both prevent doctors from prescribing contra-indicated drugs and to capture insights about when and why it happens any way.  However, TEVA seems content using it simply as a tool to help them promote their generic drugs.  At least as a one-sided market, DDI+ still has the potential to be an important tool to help doctors keep their patients safe.

Dan Steinberg

How Architecture Can Lead to Innovation

With everyone from tech start-ups to financial institutions trying to foster a more innovative workplace, it is important to consider how office design can shape culture.  During my recent visit to the Stanford Design School, I saw how an open floor plan can foster a more creative workplace environment.  One prominent example of this growing trend is the new Bill & Melinda Gates Foundation Headquarters in Seattle. In describing the impetus to build it, the New York Times notes that “private offices and expressions of hierarchy are of debatable value.  Less space per worker may be inevitable for cost-effectiveness, but it can enhance the working environment, not degrade it.  Daylight, lots of it, is indispensable.  Chance encounters yield creative energy. And mobility is essential.”

To better understand how office design can promote or inhibit innovation, I asked Tom Sieniewicz, a partner at NBBJ, the architectural firm that designed the Gates Foundation building for his opinion.  Tom is currently designing the much anticipated translational research and clinical facility in Boston that will collocate researchers and clinicians in order to break down the barriers between medical disciplines and help find the cure for diseases like Alzheimer’s.

“There is a movement to rush towards open space and tear down the walls, but I am already looking beyond that to ceiling heights as being another important factor that you can’t change once a building is designed.  Computational work is done better with lower ceilings. If you want a more humor-filled building with creativity, you want higher ceilings.”

Unless you can afford to build your office from scratch, you can’t change the height of your ceilings.  But is making your office floor plan more open worth the risk?  Yes and No, according to Tom.

“If you have a closed office you need 120 square feet for that employee to have what they need.  However, if you open it up, that same employee only needs 70 square feet of space. That frees up a lot of valuable shared space.  However, some buildings like the NBBJ Boston office are all open and many people feel that it is actually a very hard place to get work done.  For that reason, many of the partners of the firm find it important to have a personal study at home.”

One early example of creating an open floor plan involves Alfred P. West Jr., the CEO of SEI Investments, a financial services company with a market capitalization close to $6 billion.  In 1996, West built a brand new office that he admits was a deliberate attempt to make people uncomfortable to shake up the culture.  He noticed how his departments had turned to fighting each other for resources instead of collaborating as they had in the beginning.  According to West, the quirky environment of his new building “came from us wanting to encourage creativity and innovation….Today, you need more than Edison in the lab. If you go onto a trading floor, it’s open so people can communicate; they can share ideas. It was obvious this was a way to improve collaboration.”

Some of the more creative offices that I visited in Silicon Valley have white boards in every room, utilize moveable furniture, and place couches in the same room as desks, almost like a café.  One benefits of a thoughtful floor plan is the ability for serendipity.  In describing the Gates Building, the New York Times notes that “stairwells are positioned to land at hubs with coffee stations, copy machines and informal furniture groupings, so that employees from disparate departments can enjoy random meetings.”  86 percent called the Gates Building an “inspiring” environment, and 89 percent confirmed that it supports informal collaboration.

Office design is still a developing science, and some approaches might not work for everyone.  Siobhan O’Mahony, Professor of Strategy and Innovation at Boston University advocates for a balanced approach. “Offices need neighborhoods for heads-down work, and neighborhoods for heads-up work, and everybody needs assigned heads down space.”

Is the traditional ‘cubicles, corner offices, and meeting rooms’ framework no longer a viable option to inspire your workers to find the next great idea?  For many companies, coming up with their next big idea is critical, and the right office environment can be just what is needed for a breakthrough.

Dan Steinberg