Harnessing the Wisdom of Crowds to Help Play the Financial Markets

By November 07, 2012

Social trading platform eToro brings online community mechanisms to the world of investment. It provides a global network that enables its members to trade foreign exchange, buy and sell commodities and bet on stock indices by copying top performers.

Having created one of the very first ‘social trading’ networks,eToro now boasts over two and a half million users in 140 countries and recently set up a local operation in Spain to guide investors there.  Meanwhile the eToro OpenBook platform has just received an award for Best Forex Social Media Trading Product from financial publisher MSM, following a poll of the trading and private investor community, so this seems a good moment to look more closely at the concept. The basic idea is to demystify financial trading and make it accessible to all. “What we wanted to do was to take the best from social networking and link it to the world of finance,” Alon Levitan, eToro Director of Strategy and Marketing, told L'Atelier. The platform is based on a financial community connected to an online trading site which enables users to buy and sell currencies, trade commodities and bet on various indices. However, the ‘open’ approach means that users can view and share the moves made by other investors and choose to automatically mimic the trades being carried out by a chosen trader – or investment ‘guru’– in real time. Thus less experienced investors are now able to set up what amounts to a ‘people-based portfolio’ comprised of their selected top-performing traders in the network.

Copying the top traders                                                         

“What’s really interesting about eToro is that the platform uses attractive gaming and social mechanisms to encourage people to invest,”commented Philippe Torres, Head of Consulting and Digital Strategyat L'Atelier. When an investor creates an account on eToro, s/he has to invest a minimum of $100. S/he can then view the profiles of all network members and look at their trading statistics, recent trades - in real-time - and also assess their risk appetite. In this way, every member can obtain advice and learn about trading. The site also compiles statistics showing the top traders on the network according to their real gains, i.e. how much they have earned as a percentage of their initial stake, plus the number of followers and ‘copiers’ they have, thus enabling the user to take the best traders as models. Using the CopyTrader facility you can then choose to duplicate some or all of a top money-maker’s deals automatically, having indicated in advance a maximum amount you are prepared to stake on copying a given trader’s moves.  

Automatic trading producing results

The community system is becoming a model approach to trading. “This initiative is based on Web 2.0, which nowadays has become a standard applicable to all fields,” underlined Philippe Torres.  Meanwhile, Alon Levitan says that the system is working well and that they have been able to calculate that “while forex dealers trading manually might expect to make gains on 50 to 60% of all deals, those trading in automatic mode have been able to show profits on 94 to 98% of all their trades.” So it would appear that eToro really enables people to learn about financial trading. Nevertheless, Philippe Torres sounds a word of warning: “Although eToro might enable users to draw inspiration from the best traders, simply copying ‘best trader’ actions might prevent users from drawing full benefit from what they have learned.” To aid the learning process, the platform enables newcomers to undertake simulated trades – using virtual money with a demo account – free of charge, before joining the professionals and going in for real-money deals.

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