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