Zero-Commission Stock Trading Can Redeem Retail Brokers
- Proper zero-commission without spreads inflation can change the perception of retail brokers with regulators
Last week we took a short drive into the world of zero-commission stock trading. Elaborating on the different types of broker offers out there, we explained how this new product could lead to a new business opportunity in Europe.
While the US stock market has seen massive growth in retail investors, partially thanks to the booming popularity of Robinhood, this trend has largely skipped Europe. For the time being, the complicated market structure and the lack of enough innovative market players has left the market untapped.
This is changing as companies such as BUX and Freetrade are entering the space. To the knowledge of Finance Magnates other players are also preparing to compete for this lucrative market but these two start-up companies are taking the lead as they prepare to go live this spring.
More importantly for existing retail brokers, zero-commission stock trading also opens an opportunity for them to redeem the reputation of the industry. Over the past several years retail brokers suffered immensely due to a number of bad actors.
From questionable products such as binary options to companies that failed to realize the gravity of the negative impact of chasing retail clients for negative balances, the end-result is last year’s new ESMA regulatory framework.
As firms are adapting to a new market environment, the main issue facing the industry today is to convey a message of stability and synergy with clients. Client losses making a broker’s gains is an unpopular narrative. Robinhood managed to successfully eliminate this perception in the US. The doors are wide open for market players in Europe to do the same on the other side of the Atlantic.
Dispelling the Marketing Gimmick
While some companies are merely using the product as a marketing gimmick and claim to be offering zero-commission trading, while charging hefty spreads, others can enter the niche market and attempt to attract long-term investors.
In short, firms that are charging spreads which are multiples of the one on the market and claim to be providing zero-commission trading are much closer to misleading marketing, rather than delivering added value to their customers.
Traders can always visit the website of BATS and check the quotes that they are getting and compare those to the application they are using. But not all customers of retail financial intermediaries know to do that. The industry is once again facing an education challenge, but not only.
Changing Investing Habits
The space might be competitive, but appropriate regional focus and smart targeting could work out well. The lack of prospects for the European Central Bank to increase interest rates, opens the doors to more risk-appetite on the part of retail investors, especially from the new generation that is just starting to build up its savings.
As the CEO and founder of BUX, Nick Bortot explains in a recent op-ed, “Unlike in the US, Europe does not have a strong investment culture. Traditionally, the government took care of our pensions, whereas Americans have always shouldered the burden of building their own retirement nest egg.”
The sustainability of the European pensions system is questionable at best. Zero-rates are not helping the matter, and savers are driven to riskier assets. While regulators were quick to dismiss the recent crypto boom which wreaked havoc among many investors, the risk-appetite of these same investors has been driven by governmental policies.
So if their savings are to be reinvested into the economy, they need to feel confident that they are paying the right amounts to do just that. European regulations in recent years have changed the landscape. While MiFID and MiFID II were categorized as very heavy regulations by the industry itself, their introduction fostered more competition between different stock trading venues.
Reshaping Retail Trading
While Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Read this Term and CFDs brokers continue providing a valuable service to clients willing to make levered bets, the regulators are much more likely to adopt a more favorable stance to non-levered instruments. Issues such as negative balances are non-present when no Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term is involved.
The unwritten rule that retail traders are always wrong will keep hanging over the industry. Regardless of the instrument and leverage, this may continue to hold true. But brokers have an opportunity to deliver a viable long-term product with zero-commission stock trading.
Since the dawn of the trading industry, intermediaries have been singled out as parties that are profiting at the cost of their clients. The technological advances of the 21st century bring an era that can genuinely change that image and put retail brokers under a new spotlight - as facilitators that deliver one efficient way to save money, designed for the broad public.
Last week we took a short drive into the world of zero-commission stock trading. Elaborating on the different types of broker offers out there, we explained how this new product could lead to a new business opportunity in Europe.
While the US stock market has seen massive growth in retail investors, partially thanks to the booming popularity of Robinhood, this trend has largely skipped Europe. For the time being, the complicated market structure and the lack of enough innovative market players has left the market untapped.
This is changing as companies such as BUX and Freetrade are entering the space. To the knowledge of Finance Magnates other players are also preparing to compete for this lucrative market but these two start-up companies are taking the lead as they prepare to go live this spring.
More importantly for existing retail brokers, zero-commission stock trading also opens an opportunity for them to redeem the reputation of the industry. Over the past several years retail brokers suffered immensely due to a number of bad actors.
From questionable products such as binary options to companies that failed to realize the gravity of the negative impact of chasing retail clients for negative balances, the end-result is last year’s new ESMA regulatory framework.
As firms are adapting to a new market environment, the main issue facing the industry today is to convey a message of stability and synergy with clients. Client losses making a broker’s gains is an unpopular narrative. Robinhood managed to successfully eliminate this perception in the US. The doors are wide open for market players in Europe to do the same on the other side of the Atlantic.
Dispelling the Marketing Gimmick
While some companies are merely using the product as a marketing gimmick and claim to be offering zero-commission trading, while charging hefty spreads, others can enter the niche market and attempt to attract long-term investors.
In short, firms that are charging spreads which are multiples of the one on the market and claim to be providing zero-commission trading are much closer to misleading marketing, rather than delivering added value to their customers.
Traders can always visit the website of BATS and check the quotes that they are getting and compare those to the application they are using. But not all customers of retail financial intermediaries know to do that. The industry is once again facing an education challenge, but not only.
Changing Investing Habits
The space might be competitive, but appropriate regional focus and smart targeting could work out well. The lack of prospects for the European Central Bank to increase interest rates, opens the doors to more risk-appetite on the part of retail investors, especially from the new generation that is just starting to build up its savings.
As the CEO and founder of BUX, Nick Bortot explains in a recent op-ed, “Unlike in the US, Europe does not have a strong investment culture. Traditionally, the government took care of our pensions, whereas Americans have always shouldered the burden of building their own retirement nest egg.”
The sustainability of the European pensions system is questionable at best. Zero-rates are not helping the matter, and savers are driven to riskier assets. While regulators were quick to dismiss the recent crypto boom which wreaked havoc among many investors, the risk-appetite of these same investors has been driven by governmental policies.
So if their savings are to be reinvested into the economy, they need to feel confident that they are paying the right amounts to do just that. European regulations in recent years have changed the landscape. While MiFID and MiFID II were categorized as very heavy regulations by the industry itself, their introduction fostered more competition between different stock trading venues.
Reshaping Retail Trading
While Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Read this Term and CFDs brokers continue providing a valuable service to clients willing to make levered bets, the regulators are much more likely to adopt a more favorable stance to non-levered instruments. Issues such as negative balances are non-present when no Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term is involved.
The unwritten rule that retail traders are always wrong will keep hanging over the industry. Regardless of the instrument and leverage, this may continue to hold true. But brokers have an opportunity to deliver a viable long-term product with zero-commission stock trading.
Since the dawn of the trading industry, intermediaries have been singled out as parties that are profiting at the cost of their clients. The technological advances of the 21st century bring an era that can genuinely change that image and put retail brokers under a new spotlight - as facilitators that deliver one efficient way to save money, designed for the broad public.