Analysis

The Zero-Fee Stock Trading Race to Become Europe’s Robinhood

Firms are racing to create a new segment for retail traders, while others use it as a marketing strategy

I am more than certain that even though you might not be living in the US or Canada, you have heard about Robinhood and zero commission stock trading. The company is causing a small revolution among discount retail brokers across the Atlantic with zero-commission stock trading.

After years of development, which started around 2011, the app really took off in recent years. The company’s founders say they got inspired by the Occupy Wall Street movement, which exposed to them the true state of the stock market. At the time they were working for a high-frequency trading outfit.

Whether this is a very picturesque story of how a new brokerage brand is born or not, the fact is that Robinhood grew to a company valued at over $5.6 billion and has a user base of over six million people.

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At first sight, the company’s success across the Atlantic is unprecedented and similar offerings in Europe should be widely available. That, however, is far from the case. The fragmentation of European stock exchanges and the lack of investing culture on the continent make it a much more difficult market.

Breaking the Status Quo

Over the past year, several companies started preparations to deliver a similar product to the European market. Some firms like Amsterdam-headquartered BUX announced that they are planning a new application for zero-commission stock trading.

Other mobile-centric companies such as Revolut are said to be working on a zero-fee stock trading product too. At least one major developer of a mobile trading app is working on implementing zero-commission stock trading. Crowdfunded UK startup Freetrade.io is also preparing to launch this spring. 

All that said, the current status quo in Europe is that retail investors willing to purchase stocks typically need to either open an account with a broker charging rather steep commissions or contact their bank. The latter isn’t cheap either and the remaining CFDs and spread betting products are still not the same as owning stocks.

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Meanwhile, traditional forex and CFDs brokers are launching their own products that resemble zero-commission stock trading. In order for those to be anything more than a marketing gimmick, however, they have to also deliver tight spreads. We’ve already seen some companies pushing their zero-commission stock trading to the market, but the spreads they deliver to their clients are far from market rates.

Offering zero-commission trading while charging half a cent spread on any stock pretty much puts the product on par with paying the commission. Suddenly a product that is marketed as revolutionary is nothing more than an opportunity for the broker to open a communications channel with new customers.

Forex and CFDs brokers would love to have more new clients especially at a time when the industry is struggling to onboard new clients in the new EU regulatory environment. What many of the players in this space, who claim to be zero-commission, would do is up-sell their newly minted customers to forex, CFDs, and spread betting.

Gaining Trust of Retail Investors

Both strategies can be successful and both strategies are looking for different clients. Just like with the market making and STP business models, we will have zero-commission and true zero-commission offerings. The difference will be paid by the clients, their level of sophistication, as well as their effort committed to market research.

The most difficult problem to solve on part of EU-based companies aiming to attract retail clients to invest in stocks is culture. Despite multi-year lows in interest rates, European investors have remained conservative when looking at ways to diversify their savings.

The Bitcoin bubble last year didn’t help, with the mood of relatively young millennial investors souring throughout 2018. EU citizens are trained to avoid risky investments, especially in rich countries in the North of Europe.

Cultural shifts take time and the 10-year old stock market rally is in its late stages according to many analysts. Brokers and mobile app developers will have to go an extra mile in order to convince Europeans that zero-commission stock trading is a valid alternative to… well zero-rates.

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