Social Networking Hits Investing

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The Electronic Paper Trail

"We know if someone blogging is the CEO of Whole Foods (WFMI) and is blogging about Wild Oats (OATS) and we know that he's got a greater than 5% interest in Whole Foods," Montanaro said, referring to the recent controversy involving the chief of the No. 1 organic supermarket chain. "Being a regulated entity, this would be a really stupid place to perpetrate a scheme because you're creating a trail attached to your name with a regulated entity," he adds.

Massey says his team reviews every blog entry and takes steps to remove comments that can be construed as unethical or potentially harmful to investors. "We try to be as light-handed as possible. In one or two instances, we have removed the user and taken down the content [he posted]," he explained. TradeKing says it has no specific suitability rules beyond the warnings listed under the disclosures and terms and conditions tabs on its site, which customers are supposed to read before opening an account.

Zecco Trading takes it a step further by requiring prospective customers, as part of the application process when opening an account, to fill out a suitability form that lists their investment history, income, experience using various types of financial instruments, and the options strategies they've used in the past. Based on those responses, Zecco Trading assigns each account-holder a specific level of options permission, which he needs to stay within when choosing strategies, says Tim Krause, director of risk management at Zecco Trading.

Something in Common

Zecco.com—the name stands for zero commission costs—offers free stock trading through Zecco Trading to customers for their first 10 trades a day and 40 trades a month. Options trades cost $3.50, plus 60 cents per contract. Its biggest revenue source is interest earned on margin borrowing by its customers, says Gabriel Dalporto, Zecco's chief marketing and strategy officer.

Zecco Trading also allows customers to see what other customers are buying and selling as part of the individual user profiles, which also include preferred trading strategies. Users can contact each other and form relationships based on shared stock interests or investment approaches.

For Tom Sosnoff, president of thinkorswim.com, 80% of those transactions are options. It's the very complexity of options, which don't lend themselves to clear black-and-white solutions, that encourages participation in an investor community. Although it has a Web-based platform, most of thinkorswim's functionality is in its software and 95% of its customers use the software, which is free.

Not Another Facebook

Through a sophisticated technology platform that includes live audio, enabling customers to go into separate rooms to discuss a particular strategy, thinkorswim, a unit of Investools (SWIM) that launched to its first customers in late 2000, emphasizes investor education, which it's confident generates more transactions.

"The thing that intrigues customers is they like to be challenged intellectually," Sosnoss says. "When they're challenged, options traders become a successful community."

But Sosnoff eschews the idea of "social networking," which makes him think of his teenage kids surfing Facebook. He believes the reason people are communicating on thinkorswim.com is to learn how to be more effective traders, not to gain a sense of community for its own sake. "We build trading networks. Really what it is, we build technology that drives domain knowledge. The way you do that is you provide a network for customers to interact with you, as well as with each other," he says.

Listening to the Feedback

But O'Malley at Battery Ventures Partners argues it's hard to start with technology and assume that people will adopt it. "You have to start with well-understood social practices. Then you try to take technology to facilitate those practices and adjust the technology as you roll it out, as you see how people are using the technology," he says. TradeKing has been refining the technology on its Web site since it launched. Many of the new features it will add in mid-September, such as the ability to turn on the certified trades function without revealing the amounts bought or sold, are based on customer feedback on the blogs.

Until now, TradeKing user Jim Collins hasn't used the certified trades feature. "The actual dollar amount is something I'm not comfortable showing, but if they get that functionality [to hide the amounts] up and running, I'm ready to go," he says.

Future innovations that Zecco and TradeKing are working on will allow investors to form groups centered around common stock interests or trading strategies. And farther down the road, TradeKing plans to roll out a tool that allows users to search returns on investment and see which customers have been most successful over time.

One sign of the refuge some nervous investors are taking in online investor communities is the jump in volume of option trading at TradeKing on especially bumpy market days, says Montanaro. "They get some comfort and validation. People enjoy seeing both sides of experiences when markets are especially turbulent," he said. But Montanaro makes it clear that any technological innovations that TradeKing adds will be to drive higher usage and therefore greater profitability.

A Tip From a Friend

Collins, who worked for 10 years on the sell side for brokerages like Lehman Brothers (LEH) and Donaldson Lufkin & Jenrette (since acquired by Credit Suisse (CS)), said he's been getting investment ideas from people commenting on his blog posts. When he reported an interest in engineering and construction companies and that he had a "huge win" from buying options ahead of Foster Wheeler's (FWLT) first-quarter earnings, somebody recommended Perini (PCR) to him.

"[In the second quarter], the earnings went through the moon. I sold it with a 100% gain yesterday," he said. "Without that comment, I probably would never have unearthed Perini. That's a tangible example of an investable idea."

Whether these sites can truly unleash the wisdom of the crowd for market players remains to be seen. But you can bet that in investing, as in other corners of the Web, the urge for community will grow stronger—and the bigger players in online trading may have to respond to upstarts like TradeKing and Zecco.

For more on the latest in online investing, see BusinessWeek's slide show.

Bogoslaw is a reporter for BusinessWeek's Investing channel.