Trading Shares Just Got Disrupted. What Lessons Can the CFD Industry Learn?

The zero-fee trading phenomena took the US industry and investors by storm in 2019. Is there anything that the CFD industry as a whole can learn from it?

We had to wait until the end of 2019 to fully understand what the term "disrupted" means. The last quarter of the year brought a real tsunami to the financial world, particularly the US trading market. The biggest names in the industry, such as Charles Schwab, TD Ameritrade, and Etrade, became involved. Recently, even FXCM presented its own zero-fee stock trading offer. Why did the firm suddenly make such a move? Mostly because of Robinhood, one of the newcomers on the market, that actually disrupted it after entering the scene only a few years earlier.

Who buys into zero-fee trading?

While more than a decade ago, retail 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 tradi 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 tradi Read this Term trading (and CFD outside the US) brought markets to smaller traders who were willing to trade and take a risk, Robinhood went even further. It managed to capture customers who previously were not interested in stock trading at all and did not want to take any risk.

From what is known, the average age of Robinhood's customers is around 32. Most often, they are first-time investors, drawn to the easy experience of the trading process and low prices. They don't even have to understand charting or operate advanced trading platforms. It is an entirely new category of customer, far less knowledgeable and demanding than FX/CFD traders. They are millennials, looking for simplicity, lack of risk, and low or no costs.

Obviously, young and inexperienced millennial stock investors can be a tasty bite for CFD or spread-betting providers. First of all, they can be onboarded by CFD brokers faster as they already have their most difficult decision on putting capital to risk behind them, especially since the CFD industry offers trading instruments based on shares, which should be already familiar to millennial investors.

Secondly, we can imagine that smaller fintech firms, which will not succeed to the extent they wished, could sell their clients to CFD or FX brokers. Either way, with the zero-fee model disruption, a new wave of potential clients emerged, and that is something traditional OTC brokers should not miss.

To get the full article and the bigger-picture perspective on the zero-fee phenomena, get our latest Quarterly Industry Report.

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