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ToI investigates

Ex-securities regulator now works for fintech firm that pushed him to weaken law

In 2017, Israel Securities Authority chair Shmuel Hauser agreed to water down a bill that would have significantly curtailed eToro’s global expansion. Now he’s a board member

A page from a 2021 eToro investor presentation touting the platform's popularity among young people (Screenshot)
A page from a 2021 eToro investor presentation touting the platform's popularity among young people (Screenshot)

Shmuel Hauser, Israel’s former top securities regulator, has taken a job as an advisory board member at one of Israel’s fastest-growing online trading companies, The Times of Israel has learned.

The company, eToro, falls into the category of online trading firms that were under Hauser’s purview when he was chairman of the Israel Securities Authority (ISA) from 2011 to 2017.  In 2017, eToro lobbied for, and Hauser agreed to, the watering down of a Knesset bill banning the fraudulent binary options industry. EToro did not sell binary options. Nevertheless, the original draft of the bill, if left intact, would have restricted eToro’s overseas activities by banning it from operating in countries where it does not have a license.

EToro is an online brokerage that allows mom-and-pop traders, also known as retail traders, to buy and sell stocks, commodities, cryptoassets, currencies, indices and ETFs (exchange-traded funds) as well as derivatives of some of these assets. Riding the wave of Millennial and Generation Z interest in online trading, eToro reported more than 275 percent growth in funded accounts in 2020, and is set to go public in the United States at a whopping $10.4 billion valuation in the coming months. The company reported $605 million in gross revenue last year.

Hauser has been advising eToro for a year, The Times of Israel has learned, focusing on regulation matters around the world, and serving on the company’s senior advisory board ahead of the SPAC deal that is due to take eToro public in the US. The Times of Israel asked him whether and how much eToro pays him. He declined to comment for this article.

Israel Securities Authority chairman Shmuel Hauser at a Finance Committee meeting in the Knesset on September 11, 2017. (Miriam Alster/FLASH90)

Critics of the company claim that a significant share of eToro’s revenue comes from leveraged CFDs, a complex financial product ill-suited for unsophisticated investors.

It is illegal to offer CFDs to retail traders in some countries, including the United States, and other countries are considering bans or restrictions. EToro does not offer CFDs in the US.

Most mom-and-pop traders lose money on CFDs. At eToro, “67% of retail investor accounts lose money when trading CFDs with this provider,” according to the company’s homepage.

Critics have also slammed eToro’s business model, whereby eToro reserves the right to make money from its customers’ losses, and does not always hedge its positions on CFDs. They further claim that eToro advertises aggressively, touting its website as a safe and easy way to trade on financial markets, when in fact many of its customers lose their money.

In at least two cases, eToro has also accepted customers in countries where it lacks a license, even when the country’s laws explicitly prohibit this.

Finally, critics have pointed to staffing connections between eToro and Israel’s outlawed, largely fraudulent binary options industry: More than two dozen past and present employees of eToro have also worked for a binary options company, according to their LinkedIn profiles.

EToro told The Times of Israel that the vast majority of its users do not trade CFDs. It said that “since our users do not trade CFDs exclusively, the performance of the majority of eToro users is significantly better than the performance cited in the CFD disclaimer.” (EToro’s response to all of ToI’s questions appears at the bottom of this article in full.)

EToro refused to specify what percentage of its overall revenue comes from the trading of leveraged CFDs, saying in a phone interview that this was “material nonpublic information.”

Hauser is not the only former Israeli regulator to have gone to work for eToro. On April 7, eToro announced that it had appointed Hedva Ber, former supervisor of banks at the Bank of Israel, as its deputy CEO and global COO.

Nir Barkat, a senior Likud Knesset member and former mayor of Jerusalem, is a shareholder in a venture capital fund that invested in eToro, his spokesman confirmed to The Times of Israel. According to Israel’s Channel 12 News, the imminent deal to take eToro public in the US will turn Barkat into “the Knesset’s first billionaire.” Barkat’s spokesperson did not answer the question of whether Barkat would make money from eToro’s IPO.

Hauser was the chairman of the Israel Securities Authority until December 2017, when he stepped down more than a year before the end of his term, at the height of several high-profile anti-corruption battles. His spokeswoman said at the time that Hauser had no immediate plans, other than “to rest.”

While by no means illegal, Hauser’s transition from heading the ISA to working for a company that had been under his purview raises concerns about a “revolving door,” whereby former regulators obtain lucrative jobs with companies they were previously tasked with scrutinizing for wrongdoing.

Turning trading into a game

EToro was founded in 2007 by Israeli brothers Yonatan and Ronen Assia as well as David Ring.

In the beginning, it billed itself as a forex trading platform that would “democratize” financial trading by making it more “game-like.”

“Currencies run marathons, pull ropes or relate to each other connecting strings between their countries on a world map. Users trade with a cowboy or a sumo wrestler, they participate in prize-winning championships, chat, and trade for practice as well as for real money,” read a 2007 eToro press release.

Over time, eToro began to emphasize CFDs over forex trading and began marketing a “copy trading” feature whereby users can share investment ideas and copy the trades and portfolios of successful traders on the site. EToro currently describes its mission as “to build the world’s largest social trading network.”

The firm is licensed in the UK, Cyprus (which covers the rest of the European Union), and Australia. In 2020, eToro got a broker-dealer license from the Financial Industry Regulatory Authority (FINRA) in the US and will launch stocks and copy-trading in the US later this year, the company said in a recent investor presentation.

The rise of forex in Israel

In the mid-2000s, a new industry appeared in Israel and Cyprus simultaneously. It was known as “retail forex” and consisted of websites that purportedly allowed ordinary people to trade on foreign exchange markets, a type of trading that had previously been restricted to big banks, hedge funds and other sophisticated investors. Many of these forex trading websites used the Metatrader software platform developed in Russia. They proliferated very rapidly in both Israel and Cyprus.

But most had a business model that rested on a conflict of interest with their customers, meaning that the company sometimes or always made money as a direct result of customer losses. One of the more reputable forex companies operating from Israel, FXCM, proclaimed that it did not make money from customers’ losses, but in 2017 several of its entities were fined $7 million by the United States Commodity Futures Trading Commission for failing to disclose that it did in fact have a conflict of interest.

EToro has in the past insisted that it was different from other forex companies, that it did not take the other side of forex trades, and that it did not have a conflict of interest with traders.

But when it comes to CFD trading, which the company appears to have introduced about a decade ago, a representative of eToro acknowledged to The Times of Israel that eToro does have a conflict of interest with its customers.

 “There is a conflict of interest,” Elad Lavi, eToro’s VP of corporate development, said of CFD trading on eToro’s website. “But it’s managed. We’re regulated by the FCA and in Europe. We’re audited. We add risk disclaimers wherever needed, saying that eToro is acting in a conflict of interest. Everything is transparent for clients.”

Lavi refused to disclose what percentage of its revenue eToro derives from CFDs.

What’s wrong with a conflict of interest?

Why is this important? Jacob Ma-Weaver, an investment adviser in the United States who has closely followed the battle against online investment fraud in Israel, told The Times of Israel that the question of whether or not an online trading website has a conflict of interest with its investors is one of the most important things a potential investor needs to know.

Jacob Ma-Weaver (Courtesy)

When trading stocks, investors generally own the shares outright, and brokerages make their money from commissions on the transaction. But with many online trading platforms, investors are actually buying a complex derivative from the broker whose value is based on the value of the underlying shares.

One such derivative, known as a Contract for Difference, or CFD, tracks the movement of a share or other financial asset. If the underlying price rises, the buyer of a CFD makes money while the seller of the CFD loses money. If the price declines, then the buyer loses money and the seller makes money.

EToro allows its investors to buy equities, commodities, currencies and crypto assets. The investor can choose whether or not to leverage these assets. If there is no leverage, the investor is buying the underlying asset, representatives of eToro explained to The Times of Israel.

However, if the assets are leveraged, then the investor enters into a contract for difference with eToro as the counterparty.

Ma-Weaver said that in order to mitigate the conflict of interest inherent in a CFD transaction, a broker should ideally go out into the market and hedge. Hedging is the practice of shifting price risk to a third party that is willing to take on that risk. It is analogous to buying an insurance policy.

A CFD brokerage that does not hedge its risk is similar to the “house” in a casino, Ma-Weaver said. It will make money if the investor loses a trade, and lose money if the investor wins.

When a trade is not hedged, explained Ma-Weaver, “it creates a direct conflict of interest. Even if the broker has policies to manage the conflict, the power imbalance is not in the customer’s favor, especially when leverage is involved.”

The Times of Israel asked eToro whether it always hedges transactions and if not, why not.

EToro responded that “when an eToro user opens a stock or a cryptoasset on the eToro platform, eToro purchases such asset on behalf of the user via top-tier liquidity providers, in accordance with market practice. Once an asset is purchased on behalf of a user, eToro will hold the asset on behalf of the user in segregated accounts.”

EToro did not respond to the question of whether it always hedges transactions involving leveraged CFDs. But in a recent version of its terms and conditions, eToro UK explained that it does not always hedge transactions.

“We are required to act in your best interest when providing our Services. However, there may be instances where your interests conflict with our interests, or with another client’s interests. For example… we may execute hedging transactions before or after entering into a transaction with you to manage our risk in relation to the transaction, which may impact the price you pay or receive for such transactions, and we will retain any profits generated by such hedging. However, we are not required to hedge transactions if we do not want to.”

Several experts told The Times of Israel that not hedging some or any transactions is common practice in the retail CFD industry. “In my experience, most CFD brokers don’t hedge,” said Paul Barnes, a former professor of finance at Nottingham Business School in the UK. “There’s nothing wrong with that business model. It’s like a casino or a betting shop. The question is do their customers know that is the case?”

The problem with leverage

Critics have pointed to another problem with CFD trading platforms like eToro’s. Often, such platforms allow “leverage,” meaning that the trader can experience profits or losses based on many multiples of the value of the asset they hold.

Leverage sounds attractive, but critics call it “a ticking bomb,” something that will enable investors to win or lose money very fast, because once a trade is leveraged it becomes more volatile.

Nimrod Assif, an Israeli lawyer who represents clients of online trading websites who lost large amounts of money, explained leverage in the following manner: “If you buy shares and enter the transaction without leverage, if the share registers an average change per day of some 2 percent, for a $1,000 investment, the investor would lose $20 or make $20.”

Nimrod Assif (Facebook)

“That’s not dramatic,” he said. But if you enter a leveraged deal, at, say, 100x leverage, then the volatility rises by 100 times. That means that a 2 percent move in the share will lead to a 200% move to the leveraged share you hold.

“Thus, just a small move in the share can lead to a massive loss for you,” he said. “This is simple but very difficult for customers to understand.”

As required by UK law, eToro posts a disclaimer on its website about the risk of trading leveraged CFDs:

“CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.”

In the past, the website stated that 76 percent of CFD traders lose money.

An April 30, 2019 screenshot of the eToro website, with a disclaimer stating that 76 percent of its CFD traders lose money (Screenshot)

“It ends up looking a lot like gambling,” said Ma-Weaver. “Gambling has its place, as long as the risks are disclosed. If you go into a casino you know that the house has an edge, but retail investors may not realize that their broker sometimes is the house. Gambling with financial products is especially pernicious because investors can end up losing not just the money they would have spent on entertainment, but savings they may have intended to rely upon for the long term. And that is really the core of why the entire industry is concerning.”

The Times of Israel put this criticism to eToro and asked it to respond. The company said that the vast majority of its users do not trade CFDs and that “CFDs need not be leveraged and our users can elect their level of risk prior to entering into a trade.”

EToro declined to answer The Times of Israel’s questions about how much leverage it offers in various countries, and whether it differs from country to country, saying only that the company operates transparently and follows “all relevant regulations and laws.”

“EToro operates in transparency and is rigorous in complying with all relevant regulations and laws in all of the jurisdictions that we operate in. EToro complies with all regulations and limitations regarding the offering of leveraged products in the countries in which it operates and offers leverage on some assets to certain clients resident in certain countries who meet the necessary criteria,” the company said in an email.

Bad optics

Assif told The Times of Israel that he was troubled by the fact that Hauser was chairman of the Israel Securities Authority in 2015 when the Knesset determined how much leverage would be legally permissible on financial products like forex and CFDs.

“Hauser, as the head of the ISA, participated in some of the parliamentary hearings concerning this regulation — hearings in which the industry’s lobbyists also participated. The final legislation is a product of these discussions, and to some extent a product of a compromise between the ISA and the industry’s representatives,” he said.

“One of the most important elements of the legislation was the maximum level of leverage that trading platforms would be permitted to offer customers. High trading leverage was a core problem in the way the forex industry operated, and perhaps the main cause for the extremely high losses that customers suffered. The industry’s representatives cared a lot about this aspect of the legislation, and eventually succeeded in achieving a very high level of permissible leverage, allowing up to 100x leverage with respect to some financial instruments, which is a lot.”

An ad for eToro on the London Underground in 2018 (Facebook screenshot)

When Hauser was the head of the ISA, an eToro entity applied for a license to operate a trading platform in Israel, though it withdrew its application in 2016. The company is thus not licensed to operate in Israel, rendering the Knesset’s 2015 decision on leverage moot in the case of eToro.

Nevertheless, the fact that Hauser was involved in the legislative process around the issue of leverage troubles Assif.

“Naturally, it’s hard to tell whether Hauser took any lenient position, or didn’t push back hard enough, in anticipation of the possibility that one day he himself would work for a trading platform entity. But the mere appearance here is troubling.”

Misleading advertising?

In recent months, eToro has come under fire from financial journalists in Australia and the UK who claim that despite eToro’s disclaimers, the average investor does not understand when they are trading high-risk products as opposed to low-risk ones.

The Times of Israel asked eToro whether, when investors copy another trader on eToro, as they are encouraged to do, and that trader is trading high-risk CFDs, the copier is trading high-risk CFDs as well and is aware of the fact.

EToro did not directly respond to this question.

The Sydney Morning Herald lamented in December that eToro was marketing high-risk CFD trading using language that made it seem simple and safe. For instance in the following ad, viewed almost 3 million times on YouTube, actor Alec Baldwin touts the ease of using eToro.

“As in the Baldwin ad, the new trend is marketed to young people as a safe way of trading if they don’t understand markets and the products they’re using, or don’t follow financial news. It’s sold as being so simple that you just click a button to copy a trader and all the trades that follow are completed without you doing a thing,” wrote Sarah Danckert in the Sydney Morning Herald.

In fact, many investors end up losing money, Danckert reported.

In February, The Financial Times’ Jemima Kelly criticized eToro for putting unleveraged products and much-riskier leveraged products on the same web page.

“While Trading 212 [a competitor to eToro] keeps its actual stock trading slightly separate from CFDs on its platform, in eToro it’s a much more seamless experience,” she wrote.

“So seamless, in fact, that as an inexperienced retail customer you might not quite be aware when you are moving from one product to the other, because it’s all in the same place. So seamless, in fact, that one might almost think that it had been set up in this way deliberately,” she wrote.

The Times of Israel asked eToro to address this criticism but the company did not directly do so.

EToro appears to have spent vast amounts of money on marketing. In the UK alone it has published an advertorial in The Telegraph, advertised prominently in the London Underground, sponsored six Premier League soccer teams (and six more in Germany), and paid academics to publish “research” claiming that cryptocurrencies will soon become mainstream.

The firm posted revenue of $605 million in 2020, and had some 18.7 million registered users in January 2021. Europe accounts for 69% of its funded accounts, Asia-Pacific for 18% of the accounts, 8% in the Americas and 5% in the Middle East and Africa, as of the end of January 2021. The median age of its customers is 34, according to an investor presentation.

EToro and Israel’s binary options legislation

During the period that Hauser headed the ISA, Israel spawned a massive, criminal online trading industry. The financial instruments most popular with Israeli investment scammers were forex and later binary options. Not only did websites offering these products make money when investors lost money, but many engaged in outright fraud, lying to investors about the identities of their owners, manipulating the outcomes of trades and refusing to let investors withdraw their funds.

EToro has never been accused of such criminal practices. The company itself has often stressed how it is different from other online trading companies operating from Israel.

In a 2013 affidavit, Avi Sela, a senior executive of eToro, said that “unlike many other actors in the online trading market, the eToro Group has always taken care to operate in a legal and transparent way and in keeping with any relevant regulations.”

Participants in a July 31 Reforms Committee meeting on binary options (Times of Israel staff)

But when Hauser — after a stream of binary options exposés by The Times of Israel that began with the March 2016 article “The wolves of Tel Aviv: Israel’s vast, amoral binary options scam exposed,” and under massive pressure from regulators overseas — introduced a bill in 2017 to ban the overwhelmingly fraudulent binary options industry, eToro decided to get involved.

EToro actively lobbied to have the bill watered down from its original version. The original bill would have severely curtailed eToro’s global expansion.

The bill Hauser introduced in February 2017 would have not only banned binary options companies but also banned online trading companies that sold forex and CFDs in countries where they lacked a license. EToro did not sell binary options, but it sold other financial products and operated in some foreign countries without a license.

For instance, in September 2018 eToro was reprimanded and fined over $2 million by the Ontario Securities Commission for selling its product in Canada without a license from 2008 to 2017, despite having received repeated warnings to stop.

“EToro admits and acknowledges that it has breached Ontario securities law and acted contrary to the public interest,” EToro’s 2018 settlement agreement with the Ontario Securities Commission read.

The Times of Israel asked eToro why it had operated without a license in Canada despite being warned to stop. 

EToro said that it has stopped operating in Ontario since the settlement agreement.

“Being an innovative and disruptive company, some of eToro’s product offerings are governed by dynamic and evolving regulatory environments,” it said. “As such, regulators may assert authority over activities that they deem to take place within the jurisdiction they regulate, and new laws, rules or regulations may be enacted that change the regulatory landscape and result in new, or clarify preexisting, registration or licensing requirements. Such was the case in Ontario, Canada, where eToro ceased its activities and reached a settlement and understanding with the local regulators.”

EToro in the Knesset

EToro successfully lobbied Hauser’s ISA to have the forex and CFD proviso removed from the binary options bill; it would have curtailed eToro’s activities in countries where it lacks a license. Representatives of the company commented extensively on the proposed law [Hebrew link] during the public comments period and attended all three Knesset committee hearings on the bill.

“The previous draft of the law would have affected us,” Debbie Kahal, eToro’s general counsel told a Knesset committee hearing [Hebrew link] on July 31, 2017. “[Our product] is very different from binary options,” she insisted.

During the Knesset hearings in summer 2017, Hauser defended the amendment to the draft bill that would allow trading platforms to sell forex and CFDs even in countries where they lacked a license. He argued that binary options trading should be banned because it is like gambling, but that forex and CFDs are different and should not be outlawed.

EToro General Counsel Debbie Kahal (LinkedIn)

“There is a big difference” between binary options and other financial instruments, Hauser told a Knesset hearing on July 31. “I can give you a lecture, but I’ll spare you. This instrument is gambling pure and simple,” he said, referring to binary options.

Ultimately the watered-down bill, which allowed eToro and other companies to operate in countries where they lacked a license, was passed.

After one of the three Knesset hearings on the binary options law, reporters and other attendees saw Kahal and Hauser embracing and kissing on both cheeks, a greeting that is customary between friends or close acquaintances.

More ties to binary options

While eToro has historically taken pains to differentiate itself from Israel’s fraudulent binary options industry, many of its employees come from binary options and related industries.

EToro’s deputy CEO and chief financial officer, Shalom Berkovitz, was previously the CEO of DSNR Media Group, an Israeli digital marketing firm that counted the binary options firm Banc de Binary as well as the Green Card lottery boiler room Memo Global among its clients.

A LinkedIn search reveals more than two dozen employees of eToro, past and present, who say they also worked in binary options.

EToro is also a 3.22 percent shareholder in a company that provided services quite extensively for the binary options industry. That company is C-Pattern, which says that it uses big data to detect patterns in the trading behavior of users on online trading websites, in order to provide information to the operators of the sites that will help them retain more customers.

C-Pattern’s clients have included the Israeli company H.T.S. Market Ltd., which operated the website HBCBroker.com, allegedly owned by extradited Russian businessman Ilya Sherman; A.D.S Blue Digital Management Ltd. which ran the website Optionridge.com, Protrader A.D.Y. Ltd., which ran Everyoption.com, and Maya Li (2009) Ltd., which operated the website YouTradeFx.com. These are all binary options firms.

Not a single one of the thousands of Israelis who worked in the now outlawed binary options industry has been prosecuted in Israel. The US has prosecuted a stream of binary options fraudsters, with the Securities and Exchange Commission in April filing fraud charges against SpotOption, the key binary options platform provider, for defrauding US investors out of at least $100 million.

When asked about these ties to the binary options industry, eToro replied that “eToro does not offer binary options trading.”

The company further emphasized the difference between binary options and CFDs, which it does offer.

“Despite the fact that both binary options and CFDs are derivative-based products, they are significantly different from one another,” it said. “Binary options allow a client to ‘bet’ on whether the price of a financial instrument will be higher or lower than a fixed threshold at a future point in time, typically several minutes… CFDs, on the other hand, allow retail investors to gain indirect exposure to the price movements in an underlying index, equity, commodity or currency, by trading on an over-the-counter basis… most CFDs do not have set expiry dates and are editable which allow users to properly manage their risk.”

A spokesperson for eToro further pointed out that while binary options have been widely banned internationally, CFDs have not similarly been banned by regulators and legislators in most countries.

Business is booming

Well over a year into the COVID-19 pandemic, online trading platforms are thriving. According to UBS Equity Research, retail trading volumes have jumped since the start of the coronavirus outbreak, and more than 20% of all trading volumes in the market are thought to be retail, more than double pre-pandemic levels.

EToro has benefited from this trend as well.

EToro has been popular among Millennial and Generation Z investors (Screenshot)

“2020 was an exciting year for eToro, with rising retail investor engagement all around the world,” the Tel Aviv-based firm said when announcing the SPAC deal. “We added more than 5 million new registered users to our social community, and generated gross revenues of $605 million, representing year-over-year growth of 147%. Today, we have over 1.2 million funded brokerage accounts from all over the world and over 1,100 employees across our global offices.”

The merger deal of eToro with the SPAC has been touted as yet another example of the success of Israel’s booming tech sector.

Upon announcement of the deal, hedge fund founder Daniel Loeb, one of the investors in the SPAC, tweeted “So much talent, energy and innovation come out of Israel, from its humble roots innovating in growing oranges and producing textiles to autonomous driving, AI semis, cyber-security to the most advanced social brokerage platform for equities and cryptocurrency.”

But Ma-Weaver begs to differ.

“I think Israel has a wonderful tech industry and there is a lot to be proud of,” he said. “But this export of basically online gambling businesses is the exact opposite,” he said, referring to platforms that offer CFDs. “It is not what the country should be proud of. Maybe it is legal, but it is hardly something to celebrate.”

———————

In full: eToro’s response to questions sent by Times of Israel reporter Simona Weinglass

Dear Ms. Weinglass,

Without derogating from the accompanied attorney letter or exhausting any of the subjects raised in your questions, we respectfully provide you with the following additional information and response.

We were taken aback by the blunt assertions alluded to in your questions about eToro, our officers and consultants. Your questions represent a deep misunderstanding of eToro’s business, scale and the complex and rigorous regulatory framework in which we operate. We have taken the time to draft the following response, in an attempt to furnish you with further information so that you can better understand our business and operations and prevent the publication of a misleading and defamatory article.

The eToro platform enables its users to trade and invest, share information and views and to interact with and copy other users. eToro is a multi-asset platform that offers users a broad choice of asset classes including commission-free equities, cryptoassets, commodities and indices, available both as underlying assets and derivatives, in addition to a suite of investment strategies.

As a leading fintech company well on its way to becoming a company listed on the NASDAQ, eToro views compliance and adherence to regulatory requirements as a priority and we heavily invest in comprehensive compliance programs and legal advice. eToro has over 20 million registered users and operates in over 100 countries. In adherence to our compliance programs, eToro tailors its offerings, products and services to the applicable regulatory requirements and limitations of the jurisdictions within which it operates, including the types of products available (underlying or CFDs), the availability of leverage and its level, etc.

As we have scaled as a business, eToro has developed a robust, comprehensive risk management framework with both internal and external layers of defense, and we monitor and manage our overall market risk on an ongoing basis.

Being an innovative and disruptive company, some of eToro’s product offerings are governed by dynamic and evolving regulatory environments. As such, regulators may assert authority over activities that they deem to take place within the jurisdiction they regulate, and new laws, rules or regulations may be enacted that change the regulatory landscape and result in new, or clarify preexisting, registration or licensing requirements. Such was the case in Ontario, Canada, where eToro ceased its activities and reached a settlement and understanding with the local regulators.

Many of your questions are heavily focused on contracts for difference (CFDs) and binary options which shows a misunderstanding of eToro’s business. eToro has never offered its users binary options and the vast majority of our users do not trade CFDs. To ensure you have a full understanding we would like to share the following explanations:

  • Despite the fact that both binary options and CFDs are derivative-based products, they are significantly different than one another as outlined below.
  • Binary options allow a client to ‘bet’ on whether the price of a financial instrument will be higher or lower than a fixed threshold at a future point in time, typically several minutes; if at expiry a price is not above or below the threshold and position taken by the client, they lose their entire stake, but if a price has moved beyond the threshold in the direction predicted by the client, they receive a fixed pay out.
  • CFDs, on the other hand, allow retail investors to gain indirect exposure to the price movements in an underlying index, equity, commodity, or currency, by trading on an over-the-counter basis. In essence, a CFD is a contract for settling differences between the investor and the provider. Most CFDs do not have set expiry dates and are editable which allow users to properly manage their risk. Moreover, CFDs need not be leveraged and our users can elect their level of risk prior to entering into a trade. (We offer non-leveraged CFDs across
    all assets.)
  • The above differences are exemplified by the fact that regulators and legislators globally treat them differently and separately. While CFDs are widely available, binary options have been banned in most countries globally.

We believe in democratizing the investment world and providing our users with choices. By offering CFDs as one part of our diverse product range, we enable retail investors to invest in assets like gold which are less accessible to retail clients in other ways that allow transparency. The availability of a CFDs product to our user will depend on their country of residence and the application of our appropriateness policy. The eToro platform is designed to facilitate and encourage financial education. Our website contains extensive educational resources including guides to all the asset classes we offer.

We would like to address your remaining questions one by one.

  • The 67% figure you reference appears within a disclaimer made in accordance with the European Securities and Markets’ (ESMA) regulatory requirements and fixed formula. The formula takes into account only CFD activities of retail users. Since our users do not trade CFDs exclusively, the performance of the majority of eToro users is significantly better than the performance cited in the CFD disclaimer. Stocks and crypto which are the most popular assets by our clients are excluded from such a calculation, and therefore these figures are a non-representative sample.
  • When an eToro user opens a stock or a cryptoasset on the eToro platform, eToro purchases such asset on behalf of the user via top-tier liquidity providers, in accordance with market practice. Once an asset is purchased on behalf of a user, eToro will hold the asset on behalf of the user’s behalf in segregated accounts.
  • Additional public information regarding eToro’s users, marketing channels and budget, and the breakdown of revenues can be found in the Investor Presentation in the Investors section of our website.
  • All our employees, consultants and office holders are retained by law, and any business or employment relationship with any former public servant was made only after their public appointment ended and only after any mandatory leave periods had elapsed.
  • We protect all of our employees’ rights to privacy and do not provide information about their financial income. We take any attempt to defame any of our employees, consultants and office holders, through innuendoes or otherwise, without any basis or merits, very seriously, and will vigorously defend them from any such vial attempts.

We hope that our detailed response has enabled you to gain a better understanding of eToro and will ensure that any articles you write on eToro are an accurate representation of our business.

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