Social trading’s death throes: China’s interest is not in revival as Zulutrade’s fate is to play second fiddle to eToro

Why did Formax buy Zulutrade? Not to take the defunct social trading model to China, that’s for sure. Quite the contrary. Here is our analysis

Dead leads

There is so much that is insidious about the now desolate social trading sector.

At a time during which the latest buzzword among young, self-styled internet trend observers was ‘social’, the marketeers at the lower end of the at that time unregulated retail brokerage sector littered the forums with social trading dialog, and a number of third party firms arose, with the intention of generating a network of novice traders, who in turn would trade more b-book volume as a result of the placebo effect provided by such networks, as the novices followed novices.

During the past few months, FinanceFeeds provided an insight into the increasing lack of viability that took place during the period at which a number of retail FX brokerages were sold the ideology of social trading, when the word ‘social’ prefixed every passing fad in the same way that ‘crypto’ does now, and the letter ‘i’ did in the early part of this Millennium.

Social trading may well have been written off as a fad, a triumph of marketing over substance which generated volume-based commissions for its developers, and which led many retail FX brokers to consider it a tool to increase the confidence of novice traders, whilst paying the social trading provider a pip per transaction in order to generate greater return on investment by extending client lifetime value.

The exit rally that has taken place recently with regard to third party social trading firms, as well as the in-house developed platforms provided by some retail brokers, is not likely to be a dynamic that any industry executive will lament.

Quite simply, social trading presents trader, broker and marketer with a conflict of interest that rendered it the fad that it was, and last week, another company fell into the hands of a new owner, this time one of the longest established social trading providers, Zulutrade.

ZuluTrade, one of the original entrants into the social trading arena, was fined by the National Futures Association (NFA) in the United States, just at the time that the future was looking bleak for such services, leading to a very important matter which other regulators that preside over good quality jurisdictions took note of – that this constitutes financial advice, and indeed financial advice provided by private individuals with no license and no responsibility to ensure the customer’s best interests.

In fact, quite the opposite was the case in most social trading business models, in that many b-book brokers incentivized lead traders, experienced or not, to connect as many ‘followers’ as possible to their accounts and reward them for it on a P&L basis.

Indeed, Zulutrade’s acquisition by Chinese conglomerate Formax may appear as though it was part of a thoughtful methodology by the avantgarde Chinese to empower IBs in second tier development towns across China by providing a platform by which they could have self-directed traders interact with one another and generate more brokerage volume.

This, however, is very unlikely to be the case, and is even less likely to be the rationale behind the acquisition.

In China, there are very few self-directed traders at all, and almost all of the large traded volume is conducted by portfolio-managing IBs across the country, many of whom are known entities to FinanceFeeds, and are responsible for trading in many cases over 90,000 lots per month of customer volume, via MAM accounts connected to automated trading robots that have been designed in house.

China is not a social trading environment, it is a portfolio management environment.

Whilst the conflict of interest drove social trading out of Western electronic trading business, there will never be such a dynamic in China, due to its completely different structure and the hands-off approach of Chinese retail investors.

Formax, which is based in Hong Kong and operated by CEO and Founder Bill Wang, is an all-encompassing online financial services platform.

It can be considered the APAC equivalent of Britain’s Hargreaves Lansdown, which provides its proprietary Vantage system to a retail client base that is 100% domestic, serving all manner of retail financial products to its investors across Britain who manage them all via the Vantage system, whether it be life assurance, savings plans or their CFD account.

The same applies to the structure by which Formax operates.

Formax operates a subsidiary, Formax Capital Markets, which is its Forex trading technologies arm that serves both retail and institutional traders, just like HL Markets is Hargreaves Lansdown’s CFD and FX division, which is a white label of IG Group.

eToro’s APAC CEO Jasper Lee explains how PingAn leverages the social technology to provide a centralized financial services platform to retail banking customers across China

Aside from Formax Capital Markets, Formax Group provides every aspect of retail financial service.

Hence, why would the firm buy an outmoded social trading platform?

The answer really is that, rather in the same vein as eToro’s partial acquisition by Chinese bank Ping An’s venture capital division, they wanted the system itself, to adapt it for other purposes.

The fading into the background of some of the stalwarts of the social trading business as retail traders in Westerm markets have become increasingly self-empowered has made its presence felt, backed by the regulatory disdain (quite rightly) for social trading, however eToro continues to go from strength to strength as a fully integrated social investment platform, with a very different ethos to the ubiquitous ZuluTrade or Mirror Trader model.

Joining existing investors which include Russian financial institution Sperbank and Germany’s Commerzbank, Ping An Ventures provided a round of funding in early 2015, sparking speculation that eToro had its eyes on China.

Almost two years ago, FinanceFeeds met Lance Liu, Investments Director at Chinese venture capital firm PingAn Ventures here in Shanghai, to discuss the recent investment that Ping An Ventures had made in prominent social investment platform eToro.

FinanceFeeds asked Mr. Liu during that particular meeting 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.”

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.

We asked Mr. Liu whether Ping An had become more of a technology company than a financial services company these days, to which Mr. Liu replied “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.”

Speaking in Guangzhou, China recently to eToro’s APAC CEO Jasper Lee, this became more clear. Apart from the substantial effort required to market eToro to a Chinese audience, gaining investment from what is not only a bank and VC firm but also a vital Chinese partner was a strategic masterstroke for eToro.

One year ago: Andrew Saks-McLeod discusses initial stages of eToro’s Chinese venture with PingAn senior executive Lance Liu in Shanghai

“There are several different subsidiaries under the PingAn group, which include PingAn Security and LUFAX. Our synergy with these divisions was sealed in December 2016 with a memorandum of understanding having been signed” said Mr. Lee.

“With different subsidiaries we did different things. With PingAn Securities, we conducted some seminars. The purpose of these were to educate people in China who invest in Chinese stock, to invest in global stock, whilst abroad, we offer Chinese listed companies to Chinese traders in the US, such as Alibaba, JD, which Chinese people are familiar with so they can trade with confidence” he explained.

eToro gains access to single plaform for multi-product financial services via PingAn TOA

Mr. Lee then showcased to FinanceFeeds how eToro was able to launch an education website where the firm can provide educational resources to clients about oversees investments. PingAn’s TOA system, which provides a single log in for users, meaning users can log in to eToro platform so they can access all of the services provided by PingAn Group with just one log in.

“We have also signed a memorandum of understanding with LUFAX, and we aim in 2017 to operate together to provide services to Chinese customers who live oversees.” – Jasper Lee, CEO APAC, eToro

LUFAX has been one of the largest global FinTech firms over recent years, and the company hase a huge base of Chinese users who live outside China, and it is widely accepted that among the diaspora community there are numerous people seeking oversees investment very eagerly.

An example of that is Toronto, a city in which ove 600,000 Chinese nationals arrived between 2001 and 2009, many of which invested heavily in large scale commercial real estate and luxury high rise condos, as well as poured massive capital into Canada’s banks, saving it from the financial crisis. Far from Canada’s conservative fiscal policy, it was the Chinese investment that bolstered the economy, and now several years on, those investors have massive monthly income from rental and lease revenue, that they would trade in securities.

The future in China for eToro – more opportunities, more cooperation

“In China we have the cooperation with PingAn, but are also seeking opportunity to work with other financial institutions and are highly open to any cooperation here in China. Here we see partnership potential with IB as well as retail clients. Referral broker relationships are very important to penetrate the Chinese market” concluded Mr. Lee.

Hence, rather than charge novices by marking up their spread, to follow other novices, and ultimately create a false ‘financial advice’ network led by those with little more acumen than those imparting their confidence into a social network, the social trading systems in this instance are being used to harness corporate services and distribute them to retail customers via a centralized point, hence that is what the network aspect is now used for.

Thus, it would be churlish at the very least to consider that Formax is intending to give Zulutrade, an outmoded and frowned upon model, to its clients, instead using it to centralize its customer database and provide multiple services, via similar methodology to that used by eToro and PingAn.

Social trading, therefore, is not coming to China, and this acquisition can be considered the end of Zulutrade as it was known, and an affirmation of our analysis that social trading has been consigned to the history books.

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