"What hurt most was I'd been conned": The risky reality of the smartphone trading apps promising to make you rich

It’s one of those hazy London summer evenings. Out on the ninth-floor balcony, a group of twenty- and thirty-somethings are talking and mingling, looking out over the glass, steel and concrete City skyline. The majority of the crowd is male, variously attired in business-casual shirt-and-chinos combos or less corporate (and entirely unremarkable) T-shirts and trainers. Occasionally, people break off and float over to join a different group, pick up a slice of Franco Manca pizza or help themselves to a bottle of Corona.

It feels not unlike a very polite, slightly awkward networking event at the end of a full day’s conference for IT technical support specialists. But that’s not what’s brought these people here.

“Thank you for spending a beautiful, sunny day sat inside talking about finance,” says a man into a microphone, as people are ushered through the sliding doors and encouraged to join those gathered inside. At the front of the audience are three men seated on stools. Behind them, a screen with the words “New age investing” projected on to it. So far, so self-help convention.

All those in attendance today are readers of Finimize, a financial email newsletter targeted at millennials. After the speakers have finished taking questions, exiting their stools to a light smattering of applause, I get chatting to Rob. He’s 25, works in tech and sports a full-length beard that gives him that ‘urban lumberjack’ look not uncommon in this part of east London. He came along because he’s been trading on financial markets in the evenings, but is looking to put his money into something ‘“a little less risky” now that he’s saving up for a deposit on a house.

Another man, Gui, a 22-year-old in a leather jacket and jeans who works in media, says he wanted to get an idea of how a recession would affect his savings if he entrusted them to an AI ‘robo-advisor’. James, a 21-year-old law school student, assures me that he is “actually interested in finance” after his modest investments in Bitcoin acted as a “gateway drug” to finding out more about the way money makes the world go round.

The people here might come from different backgrounds, work in different industries and have different outlooks, but they all have one thing in common: they believe that new technology – the kind freely available, that each and every one of us already carries around in our pockets – might be able to make them a bit richer. Or maybe even just plain rich. And they’re in the right place to learn how to do it.

It makes a certain kind of sense that young people are starting to talk about finance. As a generation, millennials have been handed a pretty rough deal. Having entered the world of work just as the worst financial crisis in almost 80 years began to bite, they are now struggling to get on the property ladder. In the UK, 55 per cent of Generation X owned their own home by the time they were 27, but the equivalent figure for millennials is just 32 per cent, according to analysis by market research firm Ipsos Mori. Another report, by the Resolution Foundation, predicts that a third of them are destined to rent for ever, while earning, on average, £8,000 less during their twenties than Gen-Xers did.

“It has been fairly bleak,” acknowledges Hannah Shrimpton of Ipsos Mori. “Young people in particular are feeling financial pressure. They have less disposable income, less pay progression. They also have less secure jobs.” Millennials are not the only ones who could do with a fiscal foot-up. Record-low interest rates and inflation mean that anyone who actually manages to scrape together some savings can expect their hard-earned sterling to be worth less in years to come than it was when they put it in the bank. On top of that, longer life expectancy and less generous employer pension schemes mean the government now estimates that 43 per cent of working-age Brits aren’t saving enough for their retirement.

It’s a bleak picture. But there might just be some light at the end of the tunnel – if you’re able to take advantage of a new wave of tech that’s already helped some people turn themselves from have-nots into have-yachts. 

Monetary salvation, according to a new breed of investors, could come in the form of the booming financial technology – or ‘fintech’ – industry. The sea of coral Monzo debit cards at the bar near your office on a Friday night is evidence of the 600,000 or so people who have signed up to just one of several new banking apps that are challenging the established players that have been slower to move with the times. But there’s also a new wave of online platforms, tech and apps that aren’t just designed to help you spend and save, but to invest and trade on the financial markets.

One such platform is Revolut, a banking app similar to Monzo, which has made it possible for its customers to invest in cryptocurrencies and will soon introduce zero-commission share trading. The share-trading app Robinhood, meanwhile, recently doubled its userbase to four million inside a year and is now valued at $5.6bn (£4.2bn). (For now, it’s only available in the US, but international expansion is planned.) And Etoro, which allows normal people to ‘copy’ the investment decisions of high-performing traders for free, added one million users in the last quarter of 2017 alone. In May, a new ‘social trading’ platform, Freetrade, raised more than £3m in 28 hours and crashed crowdfunding site Crowdcube in the process.

These platforms function in a number of different ways, but they all make it possible for users to take a more active role in managing their money. On Etoro, you simply sign up, create a profile, and within just a few clicks are credited with 100,000 virtual dollars with which to literally ‘play’ the stock market; or if you’re feeling braver, deposit from as little as $200 (£150) of your own cash and trade for real. In either case, you can buy stocks in companies including Apple and Facebook, make bets on the price of commodities such as gold or oil, and invest in funds that group certain types of investments together.

Now a quick trip to the App Store is all you need to set yourself up to trade and – with a little luck – generate more meaningful returns than the ones on offer at your high-street bank. Unlike Damian Lewis’s hedgefund manager in Billions, Bobby ‘Axe’ Axelrod, you don’t need millions of dollars or a swanky office in Connecticut to do it. Armed with nothing but a smartphone, you can play the high-flying, tax-dodging, bonus-claiming fat cats at their own game. You can, in other words, become the Wolf of Any Street.

Jay Smith has no formal training or background in finance. With his bald head, goatee and plug earrings carving holes the size of a pound coin in his lobes, he looks like he’d be more at home in the mosh pit at a Papa Roach gig than on the trading floor at Goldman Sachs. Yet his returns would make sharp-suited bankers drool. Trading from his lounge in Basingstoke, Jay increased the value of his initial investment by a whopping 82 per cent in the 12 months between June 2017 and June 2018. (I don’t know about you, but that compares pretty favourably to the one per cent interest I’m getting on my ISA.)

Now 28, Jay has been trading in his spare time for a decade, while holding down day jobs that have ranged from temping at ParcelForce to working in the computer games industry. But two years ago he packed it in to trade full time. “At the time it was a big risk,” he says. “But in hindsight, it was a good decision. It has boomed since then.”

Related

- I made £1k on cryptocurrency in two weeks and I don’t even know what a bitcoin is

- This expert says Bitcoin prices will soar this year – should you invest?

Jay is now the most-followed ‘social trader’ in the world. The investment decisions he makes on Etoro are automatically shadowed, with real money, by 11,424 people who have chosen to copy him. That means that if he uses 10 per cent of the funds in his own account to buy Apple stock, then the accounts of the 11,424 people who copy him will automatically use 10 per cent of the money each of them has allocated to copying him to do exactly the same.

If Jay’s followers want to actively monitor the markets and the breaking news that affects their investments, they can. (Many of them tune in to his weekly updates and quarterly reports by watching live video streams and Q&As on YouTube and the gamers’ platform Twitch.) But – the theory goes, they don’t have to – because Jay is keeping an eye on all of that for them. If he thinks the time has come to sell those Apple shares, then his copiers’ accounts will automatically follow suit.

To get this same service from a hedge fund – professional insight coupled with market-beating returns – you would traditionally have to invest a hefty minimum sum, usually something between £40k and £800k depending on the fund, and also pay the fund manager 2 per cent of that money for the privilege, plus 20 per cent of any gains that are made. (That’s how ‘Axe’ can afford to keep himself in private jets and Ferraris.) But to hear Jay tell it, the model of social trading is much more democratic: it’s win-win and anyone can reap the rewards.

“What hurt the most wasn’t the money… It was the fact that I had been conned.”

“Copying is much better” than paying for a financial advisor or fund manager, he says, “because you learn the terminology and the reasoning. You’re better able to make good decisions, whereas if you invest in a fund, you’re doing it blindly.” And it works out well for Jay, too. Etoro pays him a fee equivalent to 2 per cent of the funds that are allocated to copying him per year. At the moment, that equates to about £320,000 a year. He earns a significant amount extra from the returns on his own money, too. And the beauty of it is that he could do the same job from anywhere in the world with an internet connection, from a co-working hub in Brooklyn to a beach in Bali. “But,” he says, “I like Basingstoke.”

If it’s so easy, if you can simply sit at the bus stop and make a mint while waiting for the next 189 to roll past, then why aren’t more of us App Store Axelrods? It all sounds too good to be true. And maybe, that’s because it is. 

Predictably, perhaps, social trading isn’t all plain sailing. One formerly successful social trader – whose downfall was so spectacular it inspired a research paper by MIT questioning the soundness of this practice – saw almost the entire value of his portfolio wiped out in one fell swoop, dragging his copiers’ money with it. To protect its users, Etoro only lets customers put a maximum of 20 per cent of their funds behind one person. But still, letting untrained, unqualified punters loose on the financial markets can have severe consequences.

“I started trading out of an emotional need,” says Chris Stringman, a teacher who began spread-betting online in 2007, trading on the value of the FTSE index of leading UK shares. “It was a way out: escapism from boredom and frustration. I wanted ‘success’.” Stringman, who has an economics degree, started well, frequently finishing a day’s trading with £100 profit. But after three or four years, he could be up or down as much as £10,000 in a single day. Unfortunately, he was down more often than he was up.

By the time he stopped trading in 2012, with a baby on the way, he worked out from reams of bank statements that he had lost £130,000 – much of the money that he’d made from the sale of his house. “What hurt the most wasn’t the money,” says Stringman, who wrote a book, Win, Lose, Repeat, about his experience. “It was the fact that I had been conned.”

“I’ve had patients remortgage their homes without their wives knowing, or being bailed out with their parents’ life savings”

He felt like “a gullible idiot for believing this bullshit”: the marketing material that encouraged punters to feel as though they were making strategic decisions when “really, it is gambling”. And he fears that the new wave of tech that allows people to do it more easily (and to trade in so-called contracts for difference, or CFDs, which work in a similar way and are available on Etoro and other platforms) is dangerous. “They don’t want to talk about it, but there are hundreds of thousands currently losing hundreds of thousands,” he says. And as these apps become more ubiquitous, there could soon be more losers. A lot more.

“The easier it is to access ways of losing money, the more likely it is that people who are vulnerable will experience problems,” says Dr Henrietta Bowden-Jones, founder and director of the National Problem Gambling Clinic, where about a fifth of the patients are City traders, and almost all are men. “People who have a disregulated reward system, who are impulsive or who have issues with substance misuse or dependency on alcohol are going to find this type of transaction very exciting.” And for people who lose money and start “chasing their losses”, the consequences can be crippling. “People carry on and on. They can end up homeless. I’ve had plenty of patients remortgage their homes without their wives knowing, or have to be bailed out with their parents’ life savings.”

The crucial thing, according to Dr Simon Hayley, senior lecturer in finance at Cass Business school, is to draw a distinction between investing and trading. “If [these new platforms] encourage people to save and invest, that’s great,” he says. “But if people are going to be sat on the bus using their phone to trade because it’s so easy to do, that worries me.

“Think who you’re up against in the market: serious full-timers who have got incredible data-sets, massive computing power, people with maths and physics PhDs. That should give people pause for thought.”

Back at the Finimize event on that sunny evening in east London, I speak with Iqbal Gandham, the UK managing director of Etoro. How does he respond to claims that encouraging inexperienced punters to trade CFDs is potentially dangerous?

“The thing that makes CFDs risky is the leverage,” says Gandham, referring to the way that people can borrow money through the platform to maximise their gains – and losses. He says that the company is “moving customers away” from such opportunities and has instituted ‘stop-losses’, which mean that customers can never lose more than their stake. More industry regulation is on the way, too.

“The industry has had to evolve,” says Gandham, whose slight cockney accent makes him sound more like a London cabbie than an economist. “Where it was two or three years ago – yeah, it was a fine line. If you have a look at it today, it’s definitely changed.”

Somewhat reassured, I return home that night and create a profile on Etoro. First, I experiment with a virtual account and sign up to allot some of my imaginary dollars to copying Jay Smith (who goes by ‘JayNemesis’ online) and a few other social traders. But I can’t resist picking some of my own investments – a tech stock here, a cryptocurrency there. I tell myself that they’re long-term investments, but even so, when I check back a few weeks later and they’ve risen by almost four per cent, it gives me a bit of a rush.

I may not even be investing actual money yet, and I’m certainly not going to be driving a supercar, buying a multimillion-pound mansion or spending my summers in the Hamptons anytime soon. No, I’m not giving Bobby Axelrod or any real-life hedgies a run for their money. But the more I think about my own modest ISA – and its even more modest returns – the more I think: maybe it’s time to raid the piggy bank, and put my money where my app is. 

(Illustrations: Ilya Milstein, other images: AllStar/Getty)

Read next

-Inside the mega mansions of the super wealthy

- I made £1k on cryptocurrency in two weeks and I don’t even know what a bitcoin is

- What will it look like when millennials rule the world?