MySpace For Traders
For equity investors, the wild market volatility of the past few weeks has been cause for palpitating hearts. But those active in online trading communities, where members can see others' recent investing moves, are taking solace in observing how their peers are reacting. "Just the fact that I'm seeing people in there buying calls [an equity option that bets on rising prices] and common stock has given me confidence that others are also buying on the dip," says Jim Collins of Brooklyn, N.Y., who opened an account with TradeKing in January.
Like other areas of the Internet, online trading sites are turning into shared experiences. Only one big discount broker, E*Trade Financial, has made a foray into collaborative Web 2.0 capabilities with its 1999 acquisition of investment community site ClearStation. But a handful of newer brokers, with fewer than 200,000 accounts among them, have made social networking a cornerstone of their platforms.
While their concepts and tools may differ slightly, TradeKing, Zecco Holdings, and thinkorswim all operate on the premise that the networking features they offer encourage more trading. On TradeKing and ZeccoShare, the social networking portal of Zecco Holdings, members create profiles that show their investing strategies, key stocks they follow, and if they wish, their recent trades. TradeKing users can even publish blogs to share their investment ideas and thoughts about market conditions.
Thinkorswim, a unit of investor education company Investools, emphasizes learning. Although the site, which launched in late 2000, has a Web-based trading platform, its free Java-based software lets customers view presentations, listen to live audio broadcasts, and meet in chat rooms. Later in September, users will be able to see news and instructional feeds via live streaming video.
The advent of trading sites centered on social media is a reaction in part to the Wild West world of online investing. Because the sites do background checks before approving account holders, customers can feel more confident they're getting credible information from trustworthy sources.
By incorporating message boards, blogs, chat rooms, and podcasts, the new sites also reflect growing demand for two-way flows of information. Investors no longer want to be just on the receiving end of content, says TradeKing Chief Executive Donato Montanaro, who helped launch the site in December, 2005, from Boca Raton, Fla. Montanaro, previously head of online trading at former discount brokerage Quick & Reilly and founder of deep-discount firm SureTrade, is convinced social networking features encourage trading. Roughly 2,000 to 2,500, or slightly less than 5%, of TradeKing account holders are active either blogging or publishing their trades. "That 5% makes up just over 10% of the site's revenue, so clearly investors who network more trade more," he says. He estimates the number of active users has doubled over the past six months.
Zecco Trading, which began in October, 2006, says it has 42,000 accounts and has been adding 1,600 to 2,000 a week, while the number of active customers at thinkorswim has tripled, to about 45,000, over the past 18 months, says Investools President Tom Sosnoff.
Except for Zecco—the name stands for zero commission costs—where customers don't pay for their first 10 stock trades a day, or 40 trades a month, commissions at these brokers can be as low as $5 per stock transaction, 25% to 60% lower than fees at traditional online brokers. Options trades can cost as little as $1.50 plus a per-contract fee, at least 75% below the more established brokers.
The growing popularity of these sites raises questions about security. TradeKing is governed by the new Financial Industry Regulatory Authority (FINRA). TradeKing keeps FINRA informed of new features, such as the year-old certified trades function, which shows the quantity and price of actual shares traded by customers. "Being a regulated entity, this would be a stupid place to perpetrate a scheme because you're creating a trail attached to your name," Montanaro says.
TradeKing officials also review every blog entry and remove unethical or potentially harmful comments. The company has no 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 requires applicants to fill out a suitability form listing income, investment history, and experience using various financial instruments and options strategies. It then permits each user to trade options only up to a certain level of complexity, says Timothy Krause, director of risk management.
At thinkorswim, where 80% of the transactions are in options, the very complexity of the trading encourages participation in an investor community, says Sosnoff. TradeKing will be adding several new features in mid-September. One, the ability for users to share their certified trades without revealing the number of shares bought or sold, grew out of feedback on the blogs. Farther down the road, TradeKing plans to roll out a tool that will allow searches for members who have had the best returns on investment over time.
Collins, who worked for 10 years on the sell side for brokerages such as Lehman Brothers, says he has been getting investment ideas from other TradeKing members commenting on his blog posts. When he reported an interest in engineering and construction companies and the success he'd had in buying options ahead of Foster Wheeler Ltd.'s (FWLT ) first-quarter earnings, somebody recommended Perini Corp (PCR ). In the second quarter, "the earnings went through the moon. I sold it with a 100% gain" on Aug. 8, he says.
Whether these sites can unleash the wisdom of the crowd for market players remains to be seen. But you can bet that in investing, as in other corners of the Web, the urge for community will grow stronger—and the bigger players may have to respond to the upstarts.
Join a debate about the value of social networking.
By David Bogoslaw