Trying to better understand eToro’s business model

Question

As far as I understand CFD’s on eToro, I believe I am entering in a bet with eToro directly every time I go long on a stock CFD and they take the opposing side. If stock that CFD tracks goes up and I close the position, eToro is again the one paying me back. There is no direct buying and selling CFD's to other users and therefore there is also no real market, no order book, no need to predict behavior of other eToro traders. Predicting real market behavior is still the name of the game.

If all the above applies, that must mean that trades should be executed immediately when the live stock market data feed reaches eToro servers and no amount of opening and closing positions on eToro has any market consequences. If eToro user has set a buy/sell limit order, there should be no slippage because there can’t be any unless stock just dropped passed the set prices on the real market. Here I see a major problem for eToro if they would allow me to open a massive position and then take profit when I am happy with the price increase without worrying how long it would take to sell it and how much I’ll effect the market on, especially on stocks with very small float. I guess that explains why I can’t find any small float stocks on eToro:D

I believe they make their money by having minimum allowed spreads on equities they offer CFD’s on and by charging fees on open positions when account holder is using leverage. I tested it without leverage and there was no commission for going long for several weeks.

I don’t think there is a way to go short on eToro (it could be my cash account limitation) so that leads me to believe eToro always takes the opposite “short” position when people buy their CFDs. Even if you can short, most users avoid it.

If everyone bought CFD’s with them without leverage and held it, they would go bankrupt or be forced to start charging fees on not-leveraged long positions. It would make sense that they would also buy stocks for which they sold CFD's to users as a form of hedging.

They encourage swing and even day trading, but I don’t understand how can one effectively day trade with eToro because they provide no tools to do it well. No proper charts, no trading platform with hotkeys, not even standard types of buy/sell orders by which a day trader could trade effectively and manage their risk. Setting stop losses and take profits buttons takes too much time. What is even more disappointing is that they provide no trade API beyond querying them for data, as if they want users to be stuck with their clumsy web platform or mobile app. They benefit if people open and close positions several times during the day even when stock prices are not moving much because they get to charge them the spread when traders close positions.

Let me know if I am wrong in any way or if I forgot something important. I hope to get some opinions from people who specifically know eToro, not just how CFD's work in general.

Answer 1

eToro's makes money with spreads.

CFD providers often times do take positions in the underlying assets and stocks, eToro being one of those. As CFDs are effectively banned in the United States, it is still telling that the SEC has charged non-US CFD traders with insider trading, with the added detail that the CFD broker is effecting sells and purchases in the underlying equities. There are several charges with that language and color in them from the SEC which provides insight into what CFD brokers do.

The reinforces what eToro says they do as well.

And as always, they can also sell trading data to people that want to understand what a particular audience is buying and selling. Data brokering has been a standard business model for any data aggregator over the last decade. And they should fire their CFO and business development team if they aren't doing that.

Answer 2

This is a great question because, regarding eToro from Israel (I believe they use paper in Cyprus as the corporate seat)

• nobody knows how it works

• beyond all belief, nowhere at all on their web site or anywhere else, does the business actually explain what eToro "is". Astonishingly - astoundingly - there is nowhere that eToro says something like "We are Brokers" or "We buy and sell currencies" or whatever. This is truly amazing. Like, it's just breathtaking.

• what the OP asks here is absolutely, totally unknown: what "is" eToro, what is the basic paradigm of buying/selling. who or what are you buying/selling from?

Anyone reading might find this answer whacky, but if you actually have the answer to the "eToro mystery" - put in an answer.

Are they market makers? Dealers? A bucket shop? Brokers? If they are "brokers," what the hell markets specifically (ie, which actual system) are they brokering? And is it all actual brokering or do they carry or what? What the hell is eToro?

Note - eToro gabble about "social trading" which is a few lines of code you add so that one can follow other traders. This is meaningless and does not relate to "what the hell a trade is" on eToro. Any financial service could add on a "social! trading!" feature, much as you can add "colored graphs!" or the like. They've even managed to massage their Wikipedia entry so that it leads with "eToro is a social trading company!"

Great question here.