Robinhood Versus eToro: Brokerage Showdown Looming in Stock Market Investing

Photographer: Mary Turner/Bloomberg

A showdown is coming in the fast and furious world of online trading.

EToro, an Israeli-British firm that has corralled millions of millennials outside the U.S., is going after Robinhood, the Silicon Valley startup with the hottest trading app in the U.S.  

With 15 million registered users in dozens of countries and more than $1 trillion in trading volume, eToro is no greenhorn. Starting early next year, the 13-year-old firm finally plans to plunge into the U.S. stock market with what it touts as the newest new thing to win over a new generation of investors:  a “social trading” network that lets millions around the world share their opinions and market exploits and copy the bets of the best performers on the system. Think Facebook meets eTrade.

“Traditional financial institutions don’t really offer a relevant experience for our generation,” says Yoni Assia, the 39-year-old co-founder and chief executive officer of eToro. “We expect everything to be in real time, to be mobile, and to be social. That’s what differentiates our platform.”

Assia will be jumping into a rapidly changing marketplace whipsawed by the Covid-19 pandemic, the explosion of zero-commission trading, and rampant speculation. Do-it-yourself traders piled into hot stocks like Netflix and Apple and helped drive the Nasdaq and S&P 500 indexes to record highs this summer even as the economy cratered. They’ve also bet heavily against market darlings — Elon Musk’s electric automaker Tesla Inc. was both the No. 1 bought and the top shorted stock on eToro’s platform in the third quarter. 

At the heart of the action, discount brokerages have been posting gaudy numbers. Robinhood now boasts 13 million users, triple the number in 2018. And Charles Schwab, which raked in $20 billion in new money in August, has grown its total client assets more than a fifth in the last 12 months. The U.S. digital wealth management sector could exceed $2 trillion in assets this year, according to research firm CB Insights.

Even without a significant presence in the world’s biggest market, Tel-Aviv-based EToro has kept up. Since January, the firm has added 3.4 million customers and produced $400 million in revenue from transaction fees and capturing the spread between the prices of securities. That’s double the pace of what it did last year, Assia says.

But luring away clients from entrenched players in the U.S. poses a new challenge. Older investors are loath to go through the hassle of changing their brokerage accounts even if they’re unhappy with their providers, says Michael Wong, an analyst with Morningstar. He estimates clients stay with brokerages 10 to 12 years on average.

When it comes to winning over rookie investors, Robinhood has a big head start. And its brand is becoming a household name as it reshapes the brokerage industry. Thanks to its runaway growth, the upstart helped push Schwab and the old guard to stop charging trading commissions.

Both eToro and Robinhood have had brushes with controversy. In June, a 20-year-old Robinhood customer killed himself after believing he’d lost about $730,000 on options trades, a tragedy that raised questions from lawmakers about the wisdom of letting inexperienced investors use tools normally deployed by professionals. The firm is also facing a U.S. regulatory probe into whether it properly informed clients before 2018 that it sold their stock orders to high-frequency trading firms. This summer, it abruptly called off plans to enter the U.K. market. A spokesman for Robinhood said the company is constantly working to improve its products and communications with customers, declining to comment on its interaction with regulators. On the decision not to expand into Britain, he said the company opted to concentrate on its home market.

As for eToro, it has long used a derivative called a contract-for-difference to let retail traders easily apply leverage and execute short positions on securities, commodities, and cryptocurrencies. In 2019, the U.K. Financial Conduct Authority imposed new restrictions on the sale of these instruments, including guaranteeing customers’ losses don’t exceed the funds in their accounts. The U.S. prohibits contracts-for-difference.

When it comes to their ambitions, the two firms are racing to become more than brokerages. Robinhood offers insured cash-management accounts and debit cards. EToro is working on its own debit card. Just type eToro into YouTube and you’ll get a fire hose of videos, from trading webinars to ads featuring actor Alec Baldwin rapping about stocks and cryptocurrencies with a sock puppet. The company even offers its own version of mutual funds, which it calls CopyPortfolios. They assemble securities under a theme — its InTheGame offering, for instance, comprises stocks of companies connected to the gaming industry. Would-be investors can simulate trades with $100,000 in fake money before they plunge into reality.

Assia is betting this content-rich ecosystem, as he calls it, gives eToro an edge.

“EToro could potentially carve out a niche but it would be going after the same young clients as Robinhood,” Morningstar’s Wong says. “Then again, many people, including me, didn’t believe Robinhood would make a dent, so maybe eToro’s social networking will make a difference in a changing market.”

Assia, a chatty computer scientist fond of using jargon like “synergy” and the “wisdom of the crowd,” set up eToro in 2007 with two partners — his older brother Ronen, a product designer, and computer whiz David Ring. They catered to amateur currency traders and set out to build a digital brokerage that would be lively and easy to use. The site enabled investors to create and share profiles of themselves and chat online as they traded. Soon enough, Assia hit on the idea of letting clients share their portfolios.

“We built an open book so people could see everybody else’s trades and performance,” Assia says.

After opening a U.K. operation in 2013, eToro became a fixture in the capital’s bazaar of foreign exchange and cryptocurrency shops, sponsoring professional football teams such as Tottenham Hotspur and Leicester City. 

The key was an offering called CopyTrader that enabled investors to duplicate the bets of top-performers on the site with the tap of a button. So-called mirror-trading had been kicking around the outer rim of the digital-brokerage market for a few years, but Assia succeeded in turning amateurs into de facto money managers.

Jay Smith, a 32-year-old onetime pro gamer in the U.K., is the No. 1 CopyTrader on eToro today. That means his 21,400-plus followers set their accounts to automatically buy and sell everything he does; so when he loaded up on shares of FedEx recently, so did they. His social media feed on eToro under the handle Jaynemesis is brimming with hopeful investors. “Hi Jaynemesis, newbie copier here!,” one recently posted. “I have no real idea on stocks but it seems like you do 🙂 I want to add my funds to copy with you.”

EToro pays Smith, who has no formal investment training, and dozens of other copytraders up to 2.5% of the assets that follow them. With $40 million tracking his moves, Smith is pocketing a cool $1 million a year (his portfolio is up 59% in 2020), according to performance data on his eToro profile. He’s now thinking of hiring an assistant.

Just like professional money managers, Smith posts dispatches on his ups and downs for his followers. When stocks skidded in early September he reassured them: “Perhaps you copied yesterday or today and you’re sitting down 4% already and you’re hovering over the uncopy button,” Smith wrote. “STOP — DON’T PANIC. You don’t need everyday to be in the green.”

Consumer-protection advocates decry how eToro and its ilk are turning the market into something that looks like a game. In making it easier than ever to copy amateurs, sell short, and use borrowed money — eToro’s limit for stocks is 5 to 1 — the platforms are magnifying risk and fueling speculation, says Rainer Lenz, the former chairman of Finance Watch, a Brussels-based organization.

“You should not be selling these products and tactics to retail investors,” says Lenz, a professor of finance at Germany’s Bielefeld University of Applied Sciences. “It just promotes gambling.”

Assia counters that eToro isn’t rife with reckless trading behavior and urges its customers to exercise caution in the markets. “As a company we are doing our best to help our users understand their balance between risk and reward,” Assia says.

In any event, he may have a tough time bringing its CopyTrading product into the U.S., at least in its current form. While there’s no law barring the practice, securities lawyers say firms may face liability if traders on their books aren’t registered investment advisers. Sharing opinions about stocks on eToro’s social media feed and influencing how customers invest could constitute recommendations as defined by the Financial Industry Regulatory Authority, says Adam Gana, a securities attorney with Gana Weinstein in Chicago.

EToro, which already provides copytrading for cryptocurrencies in the U.S., says it’s planning to introduce the same offering for equities after it irons out the details. Chances are the move will open a new legal frontier in retail investing. “This is going to be scrutinized by regulators,” says Amber Allen, general counsel for Fairview Investment Services, a North Carolina firm that advises and manages legal compliance matters for investment companies.  “At the moment, there’s not much in this space to address this model.”

For all eToro’s digital wizardry and social networking, Assia has recently discovered some old truths.