Social Trading – Interview with: Dominic Crosthwaite, Black Swan Partners

Dominic Crosthwaite is a thought leader in the online Forex industry, specialising in Social Trading.  As one of the founders of data analysis and consultancy firm Black Swan Partners in 2008, which has worked on projects for the likes of NYSE Euronext and LMAX, he specialises in the legal, operational and compliance challenges that social media and big data are bringing to trading and finance. Prior to that, he was a Partner at online trading firm Cantor Fitzgerald LLP, making several key innovations including the first FCA compliant real-time online account opening system.

Recently, he has been working on the impact of UK/EU regulation with relation to social trading products, a fast-expanding industry that is revolutionising the online trading space. We are delighted to have an exclusive interview with him today on Traders DNA, where he gives us his views on the past, present, and future of the online Forex industry, and how he sees his role within it developing.

Can you tell us a bit about your background?

I have always had an interest in start-ups and developing new businesses and the commercial application of new ideas. I studied Environmental Science at University with a view to applying commerce to the environmental sector, but realising in the late 90’s that timing was not quite right, moved my focus to helping companies leverage this new opportunity. This resulted in me joining Cantor Fitzgerald in 2001 where I became MD of its financial spread betting business, before leaving to set up Black Swan Partners in 2008.

blackswanpartners - forexthinkCan you tell us about the blackswanpartners.co.uk project and the company behind it?

I set it up with 3 colleagues from Cantor Fitzgerald. We specialise in data analysis and generate significant advantages for our clients by taking innovative approaches to analysing sports data. Our consultancy arm focuses on emerging technologies in the retail fintech sector, with a particular interest in helping clients understand the technology requirements and the impact these technologies will have on a company’s regulatory position and business models.

What were the motivations behind the initial launch of blackswanpartners.co.uk?

Black Swan Partners was set up for three main reasons. We had the initial seeds of a potential team, we had the motivation to apply what we had all learnt to the sports data and retail capital markets and wanted to be self funded to ensure we kept control over the future of a business we were putting our lives into.

As the capital markets continue to grow and the industry matures, what do you think are the main challenges faced by the industry at the current time?

We focus on capital markets from a retail perspective with a particular expertise in emerging trends. The maturing part of retail capital markets is the use of internet technology to deliver customer experiences. The emerging aspects are how proliferation of mobile internet connectivity and smart devices is going to drive the next change and how the new mobile connected generation is going to demand new product experiences. The challenge is to harness that growth whilst complying with local market regulations.

How do you see the trading ecosystem and industry at the present? With disruptive innovation changing the face of finance industry, new regulations, financial instability and increasing compliance challenges, what in your opinion are the key subjects to consider?

When launching a regulated product that can reach a global market the first decision is where to base your businesses from a regulatory stand point. The internet allows for regulatory arbitrage between different suppliers targeting the same customer groups. Established players need to harness technical innovation whilst complying with local market rules whereas new up and coming brands can gain critical mass in light touch regimes and modify their business models as they mature and seek regulation in new jurisdictions. Companies that see innovation as critical to growth are beginning to gravitate to jurisdictions which make it simpler to innovate – a survey in Nov 2013 by Berwin Leighton Paisner identified that 58% of companies in Japan, Singapore, China and Hong Kong are considering moving to lighter touch regulation climates compared to only 30% in Europe.

What do you think have been the biggest changes in the past few years for traders and investors?

The biggest change over the last 5+ years has been the improvement in the quality of trading services available and the reduction in the associated costs paid by the customer for these services, in particular in the FX and CFD markets. This has all been underpinned by the improvement in internet connectivity, growth in mobile and relatively lower costs of transacting business as the majority of account opening and trading is dealt with ‘online’. The result is that better informed traders have a better chance of generating profit as less and less is paid away to the providers and the market.

What are your thoughts about the rise in algorithm trading, machine / high-speed trading, and how traders and the industry can cope with / adapt to that?

It is human nature to try and gain an advantage and this is reflected in the investment in technology based trading. Electronic trading and algo based trading helps keep bid/offer spreads low so ultimately benefits the retail customer. The advent of ‘Expert Advisors’, the FX equivalent of black box trading on MT4, has meant retail can also benefit from algo trading and demand for MT4’s EA’s has contributed to the evolution of the current social trading phenomenon.

The last few years have given rise to a massive online community of forex traders and social media trading. How can traders use this digital and social networks to their advantage in your opinion?

There are significant differences between the quality and usefulness of the range of social trading platforms in the market for the retail customer. Many traders have reasonably good trading ideas, but are poor at managing risk. Using community based services to generate trading ideas, but also improving risk management will greatly benefit end users. This will be of even more use to traders when there is a greater choice of providers and more competitive spreads available on the social trading platforms.

What are your views about platforms such as eToro, MT4 and copy trading?

These types of services allow customers to automatically follow other users. My view is that whether trading to make money or as a pastime, traders should first look at the quality of the trading platform, the prices/spreads they will pay and any other charges. If these are competitive then they should look at whether a copy trader approach is of interest. As this sector evolves and the providers reduce their spreads and improve how they qualify and identify true leaders then the end user will benefit. What is clear is that social trading is growing the retail FX / CFD sector.

What are your thoughts on the evolution of online marketing and social media in the trading and investment sphere?

Retail finance companies have embraced online marketing, but have been more cautious when it comes to social media. Regulatory uncertainty around certain aspects of social media has restricted innovation and limited the number of effective social media strategies implemented by FX / CFD companies. The cost and regulatory restrictions around acquiring customers in the retail financial space continues to escalate, yet social media provides an alternative, giving brands the opportunity to create thousands of their own ‘un-regulated’ advocates and providing significant competitive advantage through low client acquisition costs, high numbers of customer referrals and customer loyalty.

How do you define social trading?

Social trading is made up of a number of components, but essentially it is when customers communicate across a financial network, share individual and aggregated trade data and make manual or automated trading decisions based on this information. Often social trading is confused with social sentiment based trading, which is the use of Twitter and other social network posts to determine specific market sentiment. The network and humanisation of trading is the key difference between what we are seeing now and the ability to follow individual strategies alone which has been available through Metaquotes MT4 platform since 2005.

What are the main regulatory issues surrounding social trading?

There are a number of areas that need to be addressed. Firstly the governance of the network and the implications of sharing multiple clients data. Secondly clarifying what the regulatory status of the individuals providing the trade signals is and the suitability and appropriateness of the social trading service and finally when considering automated trading whether the individual (manual or bot trading) providing trading signals is deemed to have been given a mandate to manage the follower’s investments. Ultimately, regulators need to determine whether retail social trading can ever realistically be classified as managing investments or should simply be seen as another ancillary tool provided by executing brokers to improve the trading performance of their clients.

How can the FCA and other regulatory organisations answer to the new challenges of social trading?

The first step to regulating social trading is for the regulators to understand the scope of this sector, how it is being implemented, how it is being used by the end client and how it is expected to evolve. This can happen through close collaboration with the existing operators as well as third parties that have a direct involvement in the provision of social trading services. With this understanding the regulator will be able to ensure this growing sector is regulated appropriately and the individual countries’ consumers are appropriately protected. On the other hand if over regulated it will go ‘off shore’. Its online social network base and referral and SEO led client acquisition will ensure this sector can develop beyond the reach of local regulators if required.

How do you see the present social trading landscape?

The current retail landscape has until recently been dominated by eToro, growing its social trading network resulting in significant growth in trade numbers and active customers and other operators such as ZuluTrade, Currensee, FXJunction all developing their own business models.

It is also a truly global market space. A look at web traffic audience geography of social trading operators show similar interest in the UK and US as there is from countries including Mexico, France, India, Sudan, Italy, Russia, Pakistan, Germany and Brazil.

More recently the incumbent executing broker and FX trading providers have begun to respond, with companies including Saxo and FXPro launching social trading functionality and Oanda acquiring Currensee. These developments are increasing the availability of social trading functionality for end customers. Incumbent UK operator IG.com has focused on the sharing of client sentiment and launching MT4 as it positions itself for future strategic moves in the social trading space. This combined with new regulated entrants such as TradeSlide means this sector will continue to see investment and increasing options for end clients.

How do you see the future of the social trading industry?

Currently the social trading landscape is suffering due to a lack of clarity from the regulators as illustrated by the fact that no regulator has openly responded to ESMA’s June 2012 MiFID Questions and Answers document covering automatic execution of trade signals. This lack of clarity is making incumbents wary of investing in this new sector therefore slowing innovation. A secondary impact is that a lot of services are being implemented to take advantage of the current lack of alignment between closely related regulatory bodies and a limited number of companies having an open dialogue with the appropriate regulator. In the short-term this helps maintain growth in the sector, but long-term will result in a poorer quality and worse regulated service for the end user.

As a social trading thought leader and industry player, what advice would you offer brokers, traders / investors, and financial organisations regarding social trading?

The advice differs by individual group, so probably best to highlight the single most important view for each group. For the broker, they need to make decisions based on which regulatory jurisdiction they are based. Growth of new sectors as seen with the early online FX market is often fastest in grey markets. Incumbent regulated brokers need to understand the regulations so they can innovate with confidence to address the market challenges of social trading. Financial organisations, especially liquidity providers need to adapt as more brokers pass leaders and copiers FX and indices trade volumes directly through to their liquidity venues. Traders and investors/copiers need to start paying more attention to how they analyse the performance of the individuals they intend to follow and they risk they take. A lot of retail traders could benefit from following multiple individuals rather than their own trading strategies and as more companies deliver social trading products the spreads available will improve giving traders a fairer chance of winning following others.

Dominic Crosthwaite, founder of Black Swan Partners

Dominic Crosthwaite, founder of Black Swan Partners

About Dominic Crosthwaite

Since 2008, as a founder of Black Swan Partners a consultancy and data analysis company Dominic has worked in the retail investment and derivatives sector working on projects for clients that include LMAX, NYSE Euronext, Eurex and LCG. His experience includes setting up and running regulated and non-regulated start-up businesses.

Most recently Dominic has worked on the impact of UK and EU regulation on social trading product development in the CFD / FX sector and the identification and implementation of differentiators in the direct to consumer online investment market.

Dominic was previously a Partner at Cantor Fitzgerald LLP and Managing Director of Cantor Index, its spread betting, financial fixed odds and Spreadfair exchange business.

He joined Cantor Index in 2001 as a Business Analyst and was instrumental in the development of Cantor’s online account opening and Cantor FFO, the white label financial fixed odds platform, launched Cantor Spreadfair the first retail derivative exchange and developed Cantor’s Spot FX product.

Before Cantor he worked at US based consultancy The Hackett Group (answerthink). He is also an investor in Goddard Global, an issue advocacy company, specialising in social media and coalition building. Dominic has over 30 assigned patent applications and 12 granted patents in his name, including the first real-time regulated online account opening system.

Employment History

2008 – Black Swan Partners – Founder
2006 – Cantor Index – Managing Director
2001 – Cantor Index – Business Development
1997 – The Hackett Group (answerthink)
1996 – BSMG Worldwide, UK

Expertise

Derivatives, social trading, direct retail investment, retail exchanges, data analysis, trading systems, business strategy, regulation of social trading, product propositions, online product development.

Interview with the support of Paul Milne