4 Nov, 2020

Race To Zero Fees Changed Retail Trading Industry

Seven years after Robinhood launched toll-free trading, almost all major brokerage houses have caught up with a overflow of ads last year that eliminate fees. More than a year after the change, it is worth considering how the race to the bottom represented an important turning point in the retail industry.

The commissions zero, of course, led to increases of up to 100% of trading volumes and have helped the broker body to use a new category of investor private individuals. But despite an influx of models and a dramatic increase in the volume of trade, the movement will ultimately prove painful, and deserting revenue will not be easy in the long run.

Trading revenues have not yet prevailed, as a decline in commissions has been offset by record volumes. While retail investors may have increased their trading activity partly due to the commissions ofbucks 0, the main factor determining the origin of volumes Records was the volatility of the market, spurred on by the Corona and the orders to be able to stay at home.

Sooner or after, brokers will feel the heat as economies reopen, people return to work, and volatility declines. In other words, brokers may not see the explosive growth in 2021 that has saved trading revenue in the previous year.

No-Commission Trades Are Part of the Intense Volumes’ Story, but recent times Indeed Accounts for the Bulk of It.

If this happens, the shift to zero commission by industry players would require a major change in the business model for many of these Low-Cost Brokerage companies.

From another perspective, the new wave of retail investors brought in by free trades was probably less experienced or just played. Therefore, it is possible for these investors to leave the market as soon as they have entered.

In addition, many high-flying applications are already facing careful scrutiny by regulators for alleged violations of the protection of inexperienced investors while aggressively promoting their products.

Treating trade as a game and getting young customers to make more and more transactions is not only unethical, but also falls under the radar of regulatory concerns.

According to the Massachusetts Securities authorities, 68% of Robinhood’s state-based clients were eligible to trade options even after reporting Limited or nonexistent investment advice.

A Shift in Both Business and Transparency Models

The most burning question was how Retail brokers offset the loss of commission income. In fact, there will never be a free lunch in the financial services industry.

Not surprisingly, brokers have an opaque pocket of revenue sources. As such, they involve a greater focus on other sources, such as the spreads of negotiations, the commissions on the fixed-income securities and other assets, the cost of loans on margin and various other costs of tickets. In addition, they have expanded their auxiliary activities such as research and consulting and tried to use the diversification of their product portfolio.

Others in the industry are now more dependent on revenue from the “payment flow for orders”. This includes selling customer transactions to Market makers and high frequency trading firms that pay millions for discount brokers as they can trade profitably against Orders.

However, this controversial practice has led to violations of the broker’s obligation to obtain the best execution price for their clients. In addition, discount brokers pay their contractors a percentage of the spread for each transaction they sell, leading to a conflict of interest, according to some critics. A bigger difference between offer and price presentation means that customers do not get the best prices.

US regulators have already fined State Street and Robinhood for failing to fully disclose this practice. The toll-free application has paid US bucks 65 million in the most important and notable matter of this market practice, which would have robbed customers of US bucks 34.1 million, even after taking into account the savings made by paying a commission.

Outside the United States, the UK regulator FCA warned the industry and raised concerns about a lack of structure, conflicts of interest and limited competition for retail brokers in the UK.

The Emergence of New Trends Such as Fractional Trading

As mentioned above, the investment application favored by the Millennium Robinhood has turned stock trading upside down. But the old-school brokers also hit back. Not only are catching the wave to allow investors to trade at no cost, but they have improved their offering to attract savvy and younger investors.

In addition, Robinhood has started the Trend of offering its customers the opportunity to buy and sell partial shares with as little asbucks1. However, the Trend was first introduced by start-ups such as Square, but the launch of Robinhood caused a stir as the App tried to further woo its young investors, which exploded to over 13 million.

The fractional shares feature allows small investors to diversify their Portfolios by distributing their relatively small capital across a wider range of shares.

Shortly afterwards, the brokers took the train on the spot. TD Ameritrade and eTrade quickly equalized, Schwab and Fidelity was followed a month after. All of these platforms see a steady increase in product adoption among their customers.

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