How far has social trading come?
Social trading is very much part of the FinTech innovation scene of the modern electronic trading world, a far cry from its origins
The infancy of social trading is well and truly over, and its widespread adoption by FX brokerages in the latter years of the previous decade as a retention tool which was capitalized by an extra pip added to the (fixed!) spread is a distant memory.
Today, social trading has become an established, network-based methodology which continues to empower novice traders and assist them to either make informed decisions as to when to execute trades via their retail platforms, or indeed to conduct the trades automatically by following a particular trade leader.
Traditional notions of social trading consisted of people following successful traders via newsletters. As the internet has gathered momentum and electronic trading became de rigeur among retail traders, retail brokerages using closed system MetaTrader 4 systems, executing warehoused trades via an internal dealing desk, began to engage traders via platforms such as ZuluTrade, which aimed to extend the lifetime value of a novice trader in exchange for capitalization by way of increased spread on fixed spread accounts and increased external commission on variable spread accounts.
The widespread adoption of social media websites, like Facebook and Twitter, was followed in the FX trading industry with financial traders making use of the knowledge-sharing capacities provided. Financial traders and investors use these services as additional sources of information.
Since then, retail trading has emulated the institutional sector, with aggregated live market liquidity from Prime Brokerages which have relationships with Tier 1 banks meant that the retail trader could, with the right assistance from experienced masters of the currency market, access the same potential, under the same conditions as professional traders, and with this, social trading platforms have come a long way.
Tradency, one of the pioneers of social trading, recently conducted a full insight into how it could use the vast amount of data that it has collected over the 11 years that the company has been established. The company then took this data to build RoboX, which automatically selects different trading strategies according to the suitability to traders.
If, for example, a trader is highly active and is successful using one particular strategy for a while, then begins to tail off, this could potentially lead to the trader losing confidence and ceasing to trade, so RoboX identifies this and moves the trader to a more suitable strategy, using big data to do so.
At Tradency’s head office, Lior Nabat, the company’s CEO explained to FinanceFeeds “In order to take a good look at the evolution and development of the entire solution, we need to go all the way back to 2004 when Tradency was founded.”
“Mirror Trader was invented in 2005, and at that time when I had completed the development of the Mirror Trader, I had a vision of what to do going forward” he continued.
Mr. Nabat said “The successful use of the wisdom of the crowds for other businesses cannot be translated into the online trading industry. In this business, timing is critical. It is quite impossible, for example, that a very high quality restaurant would offer the excellent food that it has built its reputation on on Mondays, but then have awful food on Thursdays.”
“Such businesses are consistent, however in this industry, the difference of a few milliseconds can make the difference between a satisfied customer or a loss maker who then leaves and does not trade again.”
“If a taxi driver says now is the time to enter stock market! that’s the time to exit!” – Lior Nabat, CEO, Tradency.
“Timing is a major problem” concurred Mr. Nabat. “My reference to the restaurant industry is valid indeed, because if a restaurant has a good formula, then it is always good, and there are no timing issues, there is no variation in timing. With trading, timing is the key.”
“Getting out early, or out late, for example, you profit more, however with social trading it is not possible to do that” concluded Mr. Nabat.
James Glyde, Business Development Manager at Spotware Systems, the developer of the cTrader platform, explained to FinanceFeeds “Social trading is a great resource for brokers; it shares and amplifies many of the values of algo trading, most notably, generating round the clock volumes.”
“There are many social platforms available and each aimed at very specific and slightly different categories of users, which is great. Without commenting on others products, I will elaborate on cMirror, which very loosely fits the definition of social trading. cMirror was built to be a more professional atmosphere for investors, simply put, it’s a catalog of strategies where investors can find and follow successful strategies and pay a fee to the provider” concluded Mr. Glyde.
Certainly, the social trading sector has gravitated very much toward the FinTech industry rather than being an integral part of the brokerage business as it was in its early years.
Tradency and Spotware Systems are both companies which operate as FinTech innovators and do not involve themselves in brokerage business at all, whereas ZuluTrade an eToro, two of the earliest participants in the social trading business, are very much involved in the brokerage business.
Regulatory probing came along, and this is where the dichotomy between the FinTech developers and the brokerage sector companies is at its widest.
Whilst technological innovators continue to provide up to the minute solutions that operate in conjunction with a retail platform but do not involve themselves in brokerage business continue to develop and flourish, those in the brokerage sector have felt the squeeze.
In May this year, the National Futures Association (NFA) in North America filed a complaint against ZuluTrade which cited both Zulutrade and its owner and CEO Leon Yohai, both entities based in Greece, covering various aspects including failure to cooperate with the NFA’s ruling on anti-money laundering procedures, as well as falling below the required capital adequacy levels, and makes reference to the firm having conducted business with approximately 400 clients in geographical regions in which Zulutrade is prohibited from doing business, including Iran, Syria and Sudan.
According to the NFA’s complaint, Zulutrade, which is located in Greece, has a “history of regulatory problems“, and the NFA’s recent findings have led to this potential action.
The NFA states that Zulutrade misclassified receivables from U.S. and foreign brokers and failed to record certain liability balances.
Specifically, Zulutrade incorrectly included commissions earned more than 30 days prior as current which led to Zulutrade overstating current assets by $1,870, which also resulted in a decrease of a haircut charge of $820.
Further, in May 2015, Zulutrade made payments totaling $6,529 for liabilities incurred in April 2015, to signal providers and individuals who referred customers to Zulutrade, however, Zulutrade failed to record a corresponding liability on its April 30, 2015 net capital computation.
Adjustments made to the foregoing reporting errors reduced Zulu’s excess net capitalfrom $17,828 to $250 as of April 30, 2015. Zulutrade entered into an intercompany agreement with its affiliate, Zulutrade LTD (Zulu LTD), whereby Zulu paid Zulu LTD rebates for certain trades executed in Zulutrade LTD’s customer accounts.
At the beginning of each month, Zulu made prepayments to Zulutrade LTD based upon an estimate for the month. As a result, Zulutrade recorded a decrease in cash and an increase in current pre-paid assets, which Zulutrade incorrectly classified as a current asset.
Circumstances such as this would not occur within firms that purely provide technology and can dedicate their R&D resources to innovation rather than meeting the requirements of regulators.
This is further exemplified by the recent investment made by Ping An Ventures in social investment firm eToro.
Joining existing investors which include Russian financial institution Sperbank, Ping An Ventures provided a round of funding earlier last year, sparking speculation that eToro had its eyes on China.
FinanceFeeds met with Lance Liu of Ping An Ventures in Shanghai China, and asked him what the rationale was for such an investment on eToro, to which he replied “Our core business is investment in financial services firms, and there are many good business models overseas with good technology which China does not yet have. We have a large market to serve so we have a remit to invest in new technology and foreign business model and bring it into China.”
“eToro’s collaboration with us is on two fronts” said Mr. Liu. “One is a cooperation on the social investment side, whilst we also invested in the fintech side of their business.”
How will this be structured?
As part of the structure of the new venture that is currently being created, Mr. Liu explained “At this stage, we did not establish a joint venture model with eToro because we wanted to do a trial first. Sometimes we do joint venture and sometimes not, it depends on the business itself. This time we just cooperate on a commercial level.”
“eToro created a wholly owned foreign enterprise (WOFE) which is in the process of registration and is a fully owned subsidiary under eToro. The market here in China is less strict than it was before, and it is less hard to open in China as it had been previously, as long as there is government oversight and input.” – Lance Liu, Head of Investment, Ping An Ventures.
Alluding to the FinTech aspirations that Ping An has, Mr. Liu said “We are very much a fintech company so nowadays, the technology aspect of finance is our priority. There is a very large fintech incubator within Ping An Group. LUFAX (Lujia Zui Financial Asset Exhange) is a large enterprise that was started with investment from Ping An, and that company rose to become the largest B2B platform that now concentrates on asset securitization. I was also involved in the acquisition of the two payment companies in 2011. We injected our own management structure, and merged them into one company.”
This gave rise to the notion that the investment in eToro was centered around the technology side of the business.