The chief executive of eToro, the Israeli "social trading" platform heading for a $10.4bn (£7.5bn) listing in New York, says regulators are right to probe the rise of Reddit traders and amateur investors.
"Regulators justifiably are taking a look at the levels of growth happening in the industry," Yoni Assia, the founder and chief executive of eToro, told Yahoo Finance UK. "The more people open accounts with various digital platforms — regulators, it’s their responsibility to make sure that they protect customers interests and obviously it’s our role as well to protect customers’ interests."
Retail investment exploded in 2020 as people used their time stuck at home due to lockdowns to get into stock trading. VandaTrack, a tool which tracks retail investor flow in the US, said net monthly purchases grew tenfold during the pandemic to hit reach up to $80bn.
As with other platforms that cater to the retail market, eToro saw an explosion in growth last year. Revenues rose by 147% to $600m in 2020. The platform now has over 20 million registered users.
eToro is now preparing to go public on the Nasdaq through a SPAC deal set to close later this year. The 14-year-old business announced earlier this month it would merge with Fintech Acquisition Corp V in a deal valuing eToro at $10.4bn.
"We were waiting for this inflection point and building for this inflection point," Assia said during a Zoom interview from his office in Israel last week. "We’ve really hit that point in time where suddenly you see — I don’t know what’s the right term — fire in a haystack?"
The rise of retail investors has become synonymous with Reddit, which is home to a new band of traders on the r/WallStreetBets forum. Their rise culminated in the targeted bidding up of stocks like GameStop (GME) at the start of this year, much to the chagrin of hedge funds that had bet against the stock.
"I think we’re seeing right now a change in market landscape," Assia said. "I think we’re seeing an inflection point of retail investors in global markets. That, again, has the potential opportunity of reshaping — or shaping a bit differently — markets. Stocks that are favourite picks of retail investors now require institutional investors to understand a bit better those retail dynamics."
The carnival surrounding so-called "memestocks," such as GameStop, has often resembled a pitched battle or a video game. It has provoked alarm among lawmakers and regulators around the world, many of whom fear retail investors are simply trading for entertainment or speculation rather than investing for the longterm based on fundamentals. The saga led to hearings in Congress and provoked a warning from the UK's official financial watchdog.
"I think we should expect regulators around the world to explore this industry trend, which we believe will continue," Assia said.
The growth of retail investors and their reliance on social media has validated Assia's vision. He set up eToro in 2007 as a combined social network and stockbroking platform. Investors can share ideas and "follow" one another, allowing people to automatically copy trades. eToro was an early adopter of cryptocurrencies, which helped fuel growth over the last five years.
"It’s been a very exciting journey to see all of our vision manifest to reality and we’re very excited," Assia said. "I’m constantly telling this to my management team: this is the beginning of the next stage of growth of eToro."
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Assia said he expected strong retail participation in stock markets to continue even after lockdowns end.
"The people who joined during the crypto rally 1.0 — we saw a huge spike in activity during December 2017 and we managed to retain those clients," he said. "The majority of the clients who joined us in December ‘17 are still active on the platform today.
"I think it’s a very unique point in time that happens once in a generation. We think this is the beginning of Generation Y waking up to capital markets."
Assia admitted there was some exuberance in the current market that would likely lead to a correction at some point.
"Is there going to be a market correction sometime? The answer is yes, in crypto as well as in stocks" he said. "Market corrections and bubbles burst is inevitable. It’s part of how the markets work."
Assia — who wore an "I heart stocks" t-shirt during our interview — said eToro was focused on educating its new customers on the risks associated with investing in capital markets and how to do it sensibly.
"I think capital markets should be taught in kindergarten," he said. "Learning how to manage your investments is an important part of your education."
He added: "There’s no other way to educate yourself other than experience. If you try to learn how to jump either by just looking at everybody else jump or asking someone else to jump for you, I’m not sure you’ll get to jump as effectively. Our feeling is it’s important for people to experience that.
"Having said that, it’s very important for people to understand the risks of what they’re doing. It’s important for people to understand how much they’re willing to risk on education. If you plan to jump, make sure you can withstand the fall. I have five kids now. Learning how to fall is as important as learning how to get up from the fall."
Assia said the social aspect of eToro allowed users to learn from each other and share mistakes.