On Sunday evening, I was at a friend’s house eating nachos and cheese. We were watching (the American version of) football and the Seattle Seahawks were on the cusp of coming back, for the second time, against the Cleveland Browns.
Why am I telling you this? Well, in one of the game’s many ad breaks, something caught my eye. It was a Charles Schwab commercial for – you guessed it – commission-free trading.
The decision by those big companies to launch such an offering is indicative of how seriously they take the newcomers to the stockbroking game, most notably Robinhood, that have sold themselves to younger people with a more tech-oriented product.
And it’s not just in the US that new stock trading companies are sprouting up. In Australia, Stake has become one of the first stockbrokers to offer Aussies cheap access to American equities. Across the world in Europe, a number of firms – new and old – have also begun offering commission-free trading.
Anyone that has been to one of Finance Magnates’ many excellent events will know that most CFD brokers have to work with third-party companies for a number of different services. Payments, liquidity, and trading platform providers, to name just a few, all work with the derivatives brokers to help them improve their service.
A similar situation exists in the stockbroking space. And one firm has been at the forefront of the move towards commission-free trading – DriveWealth.
Based in New Jersey, the company made some headlines after it was announced that it had helped the challenger bank Revolut develop its stock trading offering. The firm also works with Stake and looks set to announce some other big-name partnerships in the next couple of months.
“We have two or three very significant partnership announcements on the horizon,” Mark Smedley, head of partnerships at DriveWealth, told Finance Magnates.
“And we’re also expanding our operations. We have some interesting ongoing discussions in South America, in Japan and some of the Gulf Cooperation Council countries.”
In an interview with Forbes this August, DriveWealth CEO Robert Cortright described his firm as “the plumbing” that supports financial institutions set up an equities trading offering.
It wasn’t always that way. For a long time, the firm, which was founded in 2012, had its own stock trading application for retail customers. But, speaking to Smedley, it was clear that the technology company is moving away from the B2C business.
“The app is legacy tech,” he said. “We’re going to sunset that set of operations and focus entirely on providing B2C infrastructure for other companies. We have a complete offering. That means we can provide KYC and AML systems, help you with funds movement, trading technology and access to US stock markets.”
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That doesn’t mean DriveWealth’s clients are forced to purchase the ‘whole package.’ As in any industry, different companies, being better in some business areas and worse in others, have different needs.
As such, DriveWealth works with companies to figure out what they actually need. Once they know that, they then provide them with the services they require to start offering their clients a trading service.
“Revolut is a great example of this,” said Smedley. “Despite what some reports have said, Revolut is not using our white label. They built their own front end in their own banking app.
“They then integrated with us at the back end – via an API – to provide their customers with access to US equities markets.”
More products, more money
Just as different companies require different services, so too do their reasons for offering stock trading vary. One firm might be offering an equities-only trading product to its clients. Another, like Revolut, will have stock trading as part of a wider set of services.
Regardless of how a company is set up, the question everyone wants an answer to is, ‘will a commission-free offering actually make you money?’
“I think there has been some misinterpretation of ‘commission-free,’” said Smedley. “It doesn’t mean that there are zero costs, just no commission fees on trades. We think there are 7 or 8 other ways to monetize your offering and we’ve seen them work for our clients, including those that are offering a core, equities-only product.”
“You also have to remember that offering equities trading can be a great way to acquire new customers and cross-sell them other services. So, on top of any money you make from a stockbroking service, you can also generate revenue indirectly via your other products.”
“We’ll see CFD providers move into equities space”
That final point is particularly pertinent to CFD brokers. Speaking to Finance Magnates in September, eToro CEO Yoni Assia said that half of all customers that come to his firm to trade in one product will move on to trade in another.
For an industry that has been under intense regulatory pressure for over a year, that’s good news. If adding more products brings in more customers then commission-free trading, even if the service is not itself a big money maker, can help CFD brokers generate more money.
“You’re going to see a serious move amongst CFD providers into the true, listed equities space in the near future,” said Smedley. “I think we’re already actually seeing the beginning of that movement now.
“For DriveWealth, that’s obviously great news. We can work with these companies in a number of different ways. For instance, if they want to plug into our services via MetaTrader 5 then that’s something we can do.”
That’s good news for CFD brokers and good news for DriveWealth. After seven years in business, the company has managed to position itself so that it can ride the crest of the commission-free trading wave.
“Keep your eyes peeled,” said Smedley jokingly. “There’s a lot to come and we are just getting started.”