A controversial article in TechCrunch argues that startups have failed to successfully combine social interaction with trading or investing. The article generated a firestorm of negative responses, primarily from social finance startups. However, the question of whether finance can be socialized is unanswered.
Attack on Social Investing
Shane Leonard, the CEO of UK startup Stockflare, which provides free stock information, slammed companies whose business models center around the creation of communities of traders and investors. He noted that Robinhood and Wealthfront had found success only after pivoting away from using social-based models. Wealthfront started life as kaChing, allowing users to copy portfolios of successful traders. The firm became successful only after it ditched that model to become a robo-advisory, investing client funds in ETFs using modern portfolio theory.
Leonard also belittled the success of StockTwits and eToro. eToro, a Cypress-based website that allows users to copy successful FX trades, hasn’t been able to open in the US because it uses contracts for differences (CFDs), derivatives which can’t be offered to retail investors in the US. Leonard claimed StockTwits has been stagnant since 2012, and remains a fraction of CNBC’s viewership.
Responses
Leonard’s article prompted a feisty response from StockTwit’s founder Howard Lindzon who claimed his firm has 1.2 million monthly users (compared to CNBC’s 8.4 million) and has gotten to that point more quickly and cheaply than CNBC. Lindzon also pointed to regulatory barriers to growth in social finance.
A thoughtful article in Finance Magnates Fintech, a FinTech news service, questions whether social investing is a good idea at all. Retail investors are just no good at emulating successful traders:
“…inside sources that have developed social trading platforms or worked at brokers offering copy trading, have commented in the past to Finance Magnates that although brokers benefit from such offerings, customer performance doesn’t. As one developer explained to Finance Magnates during last month’s iFX Expo, ‘Retail traders are poor at picking trades and are bad at copying traders’.”
What about Crowd-Sourcing?
One problem with Leonard’s article is that it skips over social finance firms like Lending Club, Kickstarter and Indiegogo which are successfully crowd-sourcing loans and investments. Closer to home, there are firms like Slingshot Insights, which crowd-funds custom research projects, and Estimize, which crowd-sources earnings estimates and economic indicators. (See a related article authored by Estimize’s founder Leigh Drogen.)
Whether disintermediating banks or consensus earnings, crowd-sourcing is gaining traction and promises to be a major disruptor to existing financial institutions, regulatory barriers or no.
A Lack of Retail Research
One of the challenges of the investment research landscape is that the vast majority of research is targeted to institutional investors rather than retail investors. Retail investors who are clients of large brokerage firms may get access to their broker’s institutional research, but written research is increasingly getting hollowed out by deteriorating industry economics, and will probably shrink further as regulators press to unbundle research payments.
For a time, the Global Research Analyst Settlement provided subsidies for retail-oriented research in the US, but after the subsidies expired in 2009 many retail-oriented research firms have exited, downsized and/or switched their focus to the institutional market.
It is no wonder, then, that social finance has tried to fill the void, and with some success. SeekingAlpha has 4 million registered users, 7 million monthly users, and over 10,000 contributors. An academic study published in 2014 found that stock market ideas published on Seeking Alpha outperformed the research written by Wall Street analysts.
Institutional Investors Go Social
Irrespective of what its correct user numbers are, StockTwits created the cashtag, an integral new form of communication about stocks. As companies such as Dataminr, Social Media Analytics, and Eagle Alpha are demonstrating (primarily to institutional investors) there can be valuable signals in the broader social media noise. However, although institutional investors are mining social media, they are not necessarily participating in it.
SumZero and Value Investors Club are examples of crowd-sourced investment research from buy side analysts and PMs who are looking to both talk their book and get access to ideas from their peers. Value Investors Club was founded in 1999 and has about 500 active members. SumZero, founded in 2008, has a network of over 10,000 buy-side investment professionals but it is not clear it is profitable.
Our Take
Shane Leonard’s skepticism about social finance reflects formidable barriers of regulatory and behavioral inertia. Nevertheless we are already seeing early success from companies leveraging crowd-sourcing techniques to fund loans and investments.
Social finance is filling a major void in retail-oriented investment research, whether through platforms like Seeking Alpha or in the increasing volume of financial-related tweets, thanks in large part to StockTwits’ invention of the cashtag. According a study by Gnip, cashtagged conversations on Twitter involving Russell 1000 securities increased more than 550% from 2011 to 2014, reaching several million messages per quarter.
Social media is increasingly an outlet for corporate announcements after the US Securities and Exchange Commission ruled that it is compatible with Regulation Fair Disclosure. Although investment banks have not embraced social media for research distribution, independents are increasingly doing so.
Like some hyperactive child, finance isn’t easily socialized despite multiple play dates with various social media platforms. However, it is just a matter of time. As Millennials increasingly permeate finance, barriers will weaken. By the time the generation weaned on social media, Generation Z, comes of age, finance will be very well socialized indeed.