Custody and Commissions to Support Revolut Trading Service

The challenger bank told Finance Magnates that it will not be selling client order flow.

It’s been almost a week since Revolut introduced a commission-free stocks trading service. Though it’s only accessible to fee-paying members of the challenger bank, for now, Revolut has said that it will be expanding the offering to all of its clients very soon.

The London-based firm is not the first company to offer easy access to equities trading. Across the Atlantic, trading application Robinhood has taken the US by storm and is valued at approximately $7 billion. In Europe, retail brokers such as Trading 212 and Invstr have been offering a similar service for a couple of years.

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In fact, Invstr have been using the same broker and technology provider that Revolut partnered with to facilitate their trading service – DriveWealth. A US broker-dealer, DriveWealth provides both technology and access to securities and fractional stocks trading.

Joint effort

But, even though they are working with the same broker, that doesn’t mean the service that Revolut is providing will look like Invstr’s.

“The platform is really [Revolut’s],” said Mark Snedley, head of partnerships at DriveWealth. “They built it and then connected it to our existing application programming interface.”

That sentiment was echoed by Andre Mohamed, Revolut’s head of trading product. Mohamed joined the challenger bank in September of last year from Freetrade, a commission-free investing platform that he co-founded.

“It’s been a joint effort,” Mohamed told Finance Magnates. “We built the front-end of the trading application and the middleware to connect with DriveWealth’s own technology.”

Into the HFT meat grinder?

A partnership with a broker-dealer is obviously necessary to provide trading services. But the behavior of Robinhood has led many

Andre Mohamed, head of trading product at Revolut
Andre Mohamed, head of trading product at Revolut

to be skeptical of the commission-free trading model.

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The American firm has been making millions by selling its clients’ order flow to high-frequency trading (HFTs) companies. This practice is not unheard of, but Robinhood appears to be doing it at a far higher rate than any of its competitors.

And HFTs are hardly likely to be buying the broker’s order flow out of the kindness of their hearts. The only reason they would pay the company so much for it is if they could make even more money from it.

So is Revolut going to operate under the same model? According to Mohamed, the answer to that question is a resounding ‘no.’

“We will not be paid for any order flow we send to DriveWealth,” said the Revolut executive. “Our trading service operates under a ‘freemium’ model, so our money comes from subscription fees plus commissions from trades placed outside of the monthly quota.”

Tracking the flow

At one basis point per annum, Revolut’s custodial fees will be substantially lower than some of its competitors. That might give the bank a competitive edge, but it’s unlikely it will enable the firm to rake in a substantial amount of cash.

It’s also unclear as to how much money the challenger bank will be able to glean from fees applied to trades made outside of a user’s monthly quota. For now, Revolut is offering 100 commission-free trades per month. After that, users will be charged £1 per trade.

Revenue projections aside, users of the challenger bank’s new trading service will only be able to put forward market orders during trading hours. Mohamed told Finance Magnates that his team is working on bringing out limit orders and out-of-hours orders.

Users will also be able to trade in fractional shares. If they do that, then they’ll be trading with DriveWealth as their counterparty. The broker-dealer’s website states that it acts as principal for its fractional share trading offering.

Conversely, if they buy a whole share, then DriveWealth is likely to act as an agent and pass their trade on to another broker. Regulatory filings indicate that most of DriveWealth’s order flow is sent to Cuttone & Co. – a NYSE floor broker.

With that set up in place, and as the challenger bank is not planning on wiping out traders with high leverage, the stock trading solution that Revolut is providing to its clients appears to be of a decent caliber. Assuming it doesn’t start selling order flow to HFTs, the real problem the company may face is actually making a significant amount of money from the service.

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