The first two things that come to mind when we talk about the eToro brand (one of the many participants in the Russian trading market) are ‘social trading’ and Sberbank, one of the largest banks in Russia, that entered into a partnership with the broker earlier this year. A former start-up which has defined a new way of over-the-counter trading, eToro has turned into a sophisticated fintech brand. This has drawn the attention and the investment of the largest banking conglomerates and allowed the company to take part in and influence essential processes in the financial sector.
What has allowed this start-up company to enter the largest emerging markets? What will it make of its strategic partnership with Sberbank? How well was the ability to copy traders from other countries received by Russian investors? These are among the issues that Finance Magnates Russia was able to find out in an interview with eToro’s CEO Yoni Assia and Head of the Business Development Department Nadav Yur.
In November 2014, Chinese insurance and banking conglomerate Ping An together with Sberbank invested in Israel-based start-up eToro. Later, it was reported that Commerzbank, one of the most prominent German banks, had joined the ranks of its investors. eToro describes itself as a Global Social Investment Network with millions of users around the globe. In Russia the project attracts a lot of attention due to its partnership with Sberbank.
Nadav Yur joined eToro’s team a year ago after the latest fund raising from the large banking entities, mainly from Chinese Ping An and Sberbank Venture Capital.
“Commerzbank joined the fund raising a bit later and we’re still discussing project development details with them. This process takes a somewhat slower pace for now”, Nadav says.
“We should talk about the distinguishing features of these regions. China is a special case in its own. We’re talking about region with a completely different technological landscape, there are no Western social networks like Facebook, there is no popular Google search engine, affiliate network is completely different and so on. Russia also has its peculiarities but it still looks a lot like developed western markets, unlike China,” Nadav adds.
What were you able to offer to the Russian market?
Nadav: “We offered a unique technological solution that does not have analogy. An intuitive and easy platform for wealth management and investing. We based our focus on a new consumer, used a friendly and common interface, similar to Facebook or VK (Russia’s local social network), with each user having his own feed page where all the actions, ideas and analyses of the person are recorded or shared.
We also added an online translator that allows customers to break the barrier between languages, so that everybody would be comfortable in engaging in a conversation regarding the markets without the dependence of the country or language. Do not think that by simplifying the user experience we did not put our focus on the professional traders too. We did and you can find a full spectrum of the technical indicators and instruments for the technical analysis, as well as news feeds from Bloomberg and other financial resources for the fundamental one.”
Explicit preference for non-FX markets in Russia
The beauty of this synergy of complex made simple is what Sberbank CEO Herman Gref pointed to in February at the official eToro presentation held at Sberbank.
Yoni adds: “Both Chinese and Russian consumers have special preferences in choosing financial instruments. For example, in Russia a lot of people focus on stocks and indices, they are interested in trading on foreign stock and commodity markets. So there is an explicit preference for non-FX markets in Russia. Both in China and Russia, hundreds of millions of Ping An’s and Sberbank’s clients were previously not able to invest in Facebook’s stocks simply because there was no such service offered to them. But with us they can. For example, by buying a CFD contract with x1 leverage which is to all intents and purposes a stock (for 99.9%). We ourselves are buying the underlying asset. Main advantages of trading with us are: no minimal fee amount – you can invest $100 into a Google stock which costs $800 on the market; you can copy traders who trade directly on the American market. Russian or Chinese users can’t just go to the portfolio manager who trades on the American market and invest several thousand dollars. And we act as kind of a bridge between markets.”
What is the eToro-Sberbank partnership currently working on?
Nadav: “We are working closely with Sberbank to establish a JV in the Russian Federation under the legal framework, even though our product is different from the other market participants. We are not just a trading platform, on which you can turn in or out some instruments depending on the geo position or customer, we integrate a lot of different products under one global investment network. Where the social aspect and the option of copy trading is our leading angle, so we cannot offer just FX or stocks or indices separately, as the essence of social trading and copy would be lost.”
How independent is your business in Russia? Can eToro have several strategic partners?
Nadav: “Sberbank has exclusive rights in Russia, in China it’s different on top of that, right now we’re only Sberbank’s partners but we’re discussing the creation of a joint venture. Why? So that this joint venture would be registered as a Russian legal entity which will greatly simplify regulatory aspect of our operations in Russia and would have a much more simple and self-intuitive management model.”
“Relying on Sberbank as our main partner”
What does it mean to be a “strategic partner”?
Yoni: “As we could understand Sberbank is always looking to satisfy and anticipate the needs of their customers. So the idea of giving them the opportunity to trade on global financial markets with the social trading feature as an additional service among others offered is a step in this direction. etoro’s strategic goal is to expand our trading platform into Russia by using resources of such a huge bank like Sberbank. When we talk about building our business in Russia, we see it as moving in tandem with Sberbank”.
Some consider you to be Sberbank’s outsourced broker, an unofficial subsidiary where it concentrates its over-the-counter trading offers. Is this true?
Yoni: “I think this is a reasonable understanding of what we do. In general, we’re very much relying on Sberbank as our main partner, which will help us to expand eToro into Russia. So yes, this understanding rings true.”
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Does Bank of Russia listen to your opinion or only to Sberbank’s?
Yoni: “Sberbank works together with us in full cooperation to find a solution for the way eToro will offer its services in Russia legally. Meanwhile, as you know, the Russian over-the-counter market is under construction right now. This is why we are happy to have such a partner as Sberbank who can help us to better present our know-how in terms of technology and trading, do not forget we are a fintech start up.”
Does Sberbank present eToro to the Bank of Russia as a forex broker?
Yoni: “No, on the contrary we strongly disagree with associating eToro with forex companies. We are a social network which allows people to observe and copy other traders’ deals. FX is just one among five types of instruments we offer and, by the way, not the most profitable for us.
Even though we just started our conversation with the central bank, we are already trying to apply responsible trading ideas on our platform and to work accordingly. In the next few days all new clients will be limited to leverage 1:50 (and right now on some currency pairs you can trade with leverage 1:400). This is matching our main goal to educate people about investments with as low risk as possible. You can judge yourself by checking out our platform – we evaluate the risks of every trader on a scale from 1 to 10, limiting copying for traders with risk score higher than 6 and default leverage of 1:100 on the most volatile instruments (will be lower with the incoming changes). That’s why limiting the leverage for new users is the next step for responsible trading implementation.
As I was saying, maximum leverage will be 1:50 and default 1:25 (1:10 and 1:5 for shares accordingly). It doesn’t mean that traders are not able to use higher leverages – they can do it by special request to customer support.”
Monitoring the general regulatory formation in Russia
Earlier you noted that in the case of Russia passing a law on CFD regulation, you will start the process of obtaining a broker license. What does that mean?
Yoni: “As I already said, we are monitoring the general regulatory formation in Russia. One of the subjects discussed during meetings with the Bank of Russia was ‘responsible trading’ – what it is, and how we can adjust clients’ copytrader risk appetite to their profile (information that we get from their answers to the ‘Know Your Client’ form). The regulatory authority tries to find products and services that are best suited to the consumer. We’re going to work within the framework that would be established for us. Our common goal is to create a technological platform by using Sberbank’s capabilities.”
What is eToro?
Yoni: “The main goal of eToro which was announced to the whole financial world is to allow everyone to manage their wealth in a simple and transparent manner. For this purpose, we created one of the largest social trading networks in the world. Or to put it more accurately we are the company that invented social and copy trading. There are hundreds of other companies that claim that they offer social trading but this is false. If clients cannot talk to each other while using the system how can it describe itself as social?
“Moreover, in every system that is based on MetaTrader 4 copytrading simply does not work. You can offer signal trading but this is not the same. We are the alternative to the investment managers (portfolio managers). The world makes advances to financial markets by removing existing barriers in its wish for transparency. Currently we employ 350 people in London, Moscow (15), Ukraine, Shanghai, Tel Aviv and Cyprus. So far we were able to raise $62 million in investments. The term ‘Copytrader’ is patented by us. And our CySEC license allows us to also offer portfolio management services.”
Yoni, you’re also a renowned trader, is it possible to copy your portfolio on eToro as well?
“So far, it is not. At this moment we do not allow to copy our employees’ trades but we are thinking of implementing such a feature in the future”.
What is robo-advising? Which stage are we talking about?
Yoni: “It’s a machine (machine learning system) which can recognize the best traders on eToro and automatically recommend them to other traders for copying. Naturally it adjusts its recommendations based on changes to their performance. Our robo-advisers are funds that choose the best traders. The adviser’s element (advising) is to demonstrate operations executed by the trader”.
Is the Russian model to be extended to other regions?
How well did Russian consumers receive the idea of social trading in general?
“In principle, we see interest from people who are looking for foreign investments. In general, we are talking about a region that was somewhat closed. People in Russia are generally skeptical towards financial markets. Unlike in the West they still don’t have the confidence that it is possible to earn money on the financial markets. Also, the local stock market is quite small and you cannot consider it as a separate type of asset. In the United States everything is simple: if you want to invest you have infinite opportunities, assets and regulation. Russian and Chinese investors allocated almost all of their capital into local assets at a local stock exchange or into real estate. But what if the local market crashes? People immediately lose confidence in financial markets in general.”
Are you planning to use the Russian model in other regions?
Yoni: “Yes. But now social trading attracts more interest from emerging markets than from the developed Western ones like the USA, for example. Our main business now is in Europe, and we are looking forward to begin building our solid business in Russia. For now we are just growing more confidence in our brand.
What is the difference between the social trading offered by eToro and popular in Russia and CIS region PAMM services?
Yoni: “In PAMM everyone invests into one account which follows the operations of a certain trader. It requires a much greater degree of trust to this trader than in copytrading. First, you allocate all of your money to this trader and second, he or she does not have to trade with their own real money. We have much greater transparency, you can monitor all the information about the trader: his portfolio, trading history, risk score, how much he allocates to a trade, etc”.