Trade in Groups

Any investor or trader who has ever perused typical stock message boards knows they are a wasteland of spam, pumping, and otherwise useless information. Having once owned a small stake in an online investing forum, I know this first hand. And at the same time, in the post-full-service brokerage era of decentralized research and personal asset management, having like-minded associates to communicate with online can be an enormously beneficial resource to the self-directed investor.

The easiest way to cut through a cluttered commodity like stock talk is to create an exclusive, premium area – this filters out the annoying spammers and pumpers, because the people who are participating actively want to partake in exchanging information. Of course, this runs into a problem because even the best premium investing content sites have a hard sell pitch in a world of increasingly disintermediated investing information – so who would want to pay for access to RealMoney at TheStreet.com, as well as a premium forum subscription for discussion? The solution, it turned out, was creating an online brokerage built around the idea of turning customers into a community. This eliminates the problems with undesirable members, and allows for people interested in such a service to naturally gravitate together. The first mover in this space to achieve notable scale was TradeKing, and although their model is now being copied by brokerages like Scottrade, imitating something reliant on network effects to deliver value is a poor business model.

Network effects, as most business school students would know, is a trait whereby a product has more value given the number of existing users – think the telephone, fax machine, EBay, and the like – and note how those are all communication devices, just like online investing communities. Because TradeKing made community an integral piece of their platform from early on, it obviously attracted people who valued that service, and as their business grew it only reinforced the trend that traders looking for a serious place to discuss their ideas would use the TradeKing community site.

Contrasting with this is new offerings from brokerages like Scottrade, where a cursory view of the members makes it seem like a gathering of tech support personnel. Because Scottrade has never had a community-style site before, it remains to be seen whether their existing clientele has any interest in such a feature – and it’s particularly difficult to get a forum started with only a handful of members participating. TradeKing’s established user base means it has a higher volume of posts, more members looking to discuss trading and options, and this should be self-reinforcing over time. Scottrade’s major group effort right now is geographically linking members together, and actual investing conversation is scarce. Think about it: if you wanted a place to discuss trading and learn new techniques, where would you want to go? The obvious answer is the place where you’d be talking to the most people, and that place would be TradeKing.

This isn’t meant to be overly critical of Scottrade’s efforts, but merely to point out that not every company can be good at every facet of business; for example, Scottrade does have a very good setup for managing low-cost retirement accounts. But trader networking has never been a key point of having an account there, and I doubt it ever will be. TradeKing, on the other hand, is geared more toward traders (particularly of options) who want to have the ability to chat with like-minded people in a conducive environment – that’s simply how the management team at TradeKing (where the CEO maintains a blog full of great entries) wanted to run their business. While the Scottrade website requires opening a brokerage account beforehand, you can check out the TradeKing community site without any such obligation.