More investors are meeting and sharing ideas in online trading communities. Should you base your portfolio moves on the wisdom of crowds?
For most equity investors, the wild market volatility of the past few weeks has been cause for gritted teeth and palpitating hearts. But a few who have become active in online trading communities took some solace in the fact that they at least had found a place where they can see how other investors are riding out the storm.
"Just the fact that I'm seeing people in there buying calls (an equity option that bets on rising prices) and common stock has definitely given me confidence that the individual is buying on the dip, which is basically what I do, and it's always good to get some reassurance that other people are doing the same thing," says Jim Collins, who opened an account at TradeKing.com in January.
Like many other parts of the Internet, online trading sites are more and more turning into collaborative experiences. Only one of the better-established discount online brokers, E*Trade Financial, has made a foray into collaborative Web 2.0 capabilities with its acquisition of investment community Web site ClearStation in 1999, but a handful of newer brokers have made social networking a cornerstone of their platforms.
Getting personalIncorporating social media, or social networking, features such as message boards, blogs, live chat rooms, and podcasts works to the mutual advantage of both brokerages and their customers, said Brian O'Malley, a senior associate in the Menlo Park (Calif.) office of "Battery Ventures Partners", a Boston venture capital firm that invests in emerging technology companies. Customers want guarantees that they are getting credible information from trustworthy sources, and brokerages realize their business will suffer if they cannot ensure the legitimacy of the information and users on their Web sites.
The rise of trading sites centered on social media is seen by some as part of a backlash against the mass e-mails people used to get from unknown people promoting penny stocks and more often than not looking for a quick pop. But it also reflects growing demand for two-way flows of information.
"We see today's consumers aren't content to sit back and have their entertainment sent to them, or their news or, increasingly, to have financial advice sent to them," said Donato Montanaro Jr., co-founder and chief executive of TradeKing, which launched in December, 2005. "They demand to be part of the conversation that impacts their lives, and we are empowering that conversation." Investors in TradeKing include Battery Ventures Partners, and O'Malley sits on TradeKing's board of directors.
Investors who network trade moreTradeKing allows all of its members to have their own blogs through which they can share investment strategies, or even thoughts about the political landscape that may affect future market conditions. The site's key innovation is its Certified Trades capability, which allows users to reveal what they have bought and sold and at what price.
Montanaro, who cut his teeth on trades as a licensed broker before being put in charge of all online trading at Quick & Reillyn the mid-1990s and founding SureTrade, is convinced the site's social networking features encourage actual trading. Roughly 2,000 to 2,500, or just under 5 percent, of TradeKing account-holders are really active, either blogging or publishing their trades. "That 5 percent makes up just over 10 percent of the site's revenue, so clearly investors who network more trade more," he said.
Customers pay a US$4.95 commission for stock and ETF trades, and US$4.95, plus US 65 cents per contract, for options. For the first 13 months after the launch, there were just over 1,000 people who became really active and stayed active on TradeKing, and that has more than doubled over the past six months. Zecco Trading, a division of Equinox Securities and part of investment community zecco.com, which launched last October, says it has been adding 1,500 new trading accounts a week for the past few months.
How safe are the sites?The number of funded and active customers at thinkorswim.com, which launched to its first customers in late 2000, has tripled from about 15,000 to 45,000 over the past 18 months. Granted, compared to the number of people with accounts at established discount online brokers, it is still very early days for the newer trading sites that are betting on the market potential of social networking.
The growing popularity of these sites raises questions, however, about the kinds of protection they offer investors from scams such as "pump and dump" schemes, and what they provide in lieu of suitability rules that registered investment advisers are required to follow. Those rules are meant to ensure that investors stick to appropriate trading strategies that match their financial circumstances.
Montanaro and Mike Massey, the company's director of community development, stress that TradeKing, as a brokerage regulated by the Financial Industry Regulatory Authority (FINRA), cooperates with regulators and updates them about new features it is thinking about adding to the Web site. Last August, it launched the certified trades function, which allows customers to see what other account-holders who choose to participate are trading, how many shares they are buying or selling, and at what prices. Perhaps more important, the certified trades feature assures customers that TradeKing knows that those participating are real people and has validated their identity.
The electronic paper trail"We know if someone blogging is the CEO of Whole Foods and is blogging about Wild Oats and we know that he's got a greater than 5 percent interest in Whole Foods," Montanaro said, referring to the recent controversy involving the chief of the Number one organic supermarket chain. "Being a regulated entity, this would be a really stupid place to perpetrate a scheme because you're creating a trail attached to your name with a regulated entity," he adds.
Massey said his team reviews every blog entry and takes steps to remove comments that can be construed as unethical or potentially harmful to investors. "We try to be as light-handed as possible. In one or two instances, we have removed the user and taken down the content (he posted)," he explained. TradeKing said it has no specific suitability rules beyond the warnings listed under the disclosures and terms and conditions tabs on its site, which customers are supposed to read before opening an account.
Zecco Trading takes it a step further by requiring prospective customers, as part of the application process when opening an account, to fill out a suitability form that lists their investment history, income, experience using various types of financial instruments, and the options strategies they have used in the past. Based on those responses, Zecco Trading assigns each account-holder a specific level of options permission, which he needs to stay within when choosing strategies, says Tim Krause, director of risk management at Zecco Trading.
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I have been an active stock blogger for almost five years at Stock Picks Bob's Advice. One of the utilities of a social investing website, and I use Covestor at www.covestor.com, is to create the credibility that a third party verification provides for my readers. When I comment about stocks I own, readers now know that this can be verified. When a blogger writes about strategy, they can ask the tough question, "Well how are YOU doing in the market?"
Posted by Robert Freedland on Tuesday, September 11 2007 06:24 PM