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Discount Brokerage Weekly Roundup – January 15, 2016

Sooo this week happened. For the bulls it was definitely a rough week all around but for the bears it has been a fantastic 2016. Unlike the question people were asking about the powerball lottery or real estate prices in Vancouver and Toronto (which was how high can this thing go?), Canadian DIY investors are looking at the loonie and oil prices and wondering how low can these possibly go?

Canadian discount brokerages are now also a part of each of these two different conversations. On the one hand, there are deals and promotions that have started to heat up again and we find ourselves wondering how high they’ll go this year to win new clients. Interestingly, there was also an industry shaking headline put out by one discount brokerage that had us (and other DIY investors) wondering how low can commission prices really go?

In this edition of the roundup we cover the latest commission price drop that is bound to make waves through the year. Next we take a look at the two latest deals to show up in the growing deals and promotions race. From there we’ll take a look at the discount brokerage tweets from the past week and preview the investor education opportunities coming up in the next week. Finally we close out with a look at what investors were chatting about in the forums.

Virtual Brokers First Canadian Discount Brokerage to Offer Commission Free Trading

This past week Virtual Brokers boldly went where no Canadian online brokerage has gone by announcing completely commission-free trading on equities. You read that right, there is now a Canadian discount brokerage that is offering commission-free trading.

It seems like unfortunate timing that what should have been one of the biggest news events in the DIY investing space since the commission drop by RBC Direct Investing in January of 2014 actually got eclipsed by the major market meltdowns.

Make no mistake, however, the latest move by Virtual Brokers is definitely going to make waves.

Virtual Brokers’ latest pricing plan is actually a part of a much more transformational move by Virtual Brokers to streamline their commission-pricing schedule away from the multiple commission plan model and narrow their offering down to two choices.

Gone are the “penny plan”, the “per trade” plan and the “per share” plan. Instead there is now the “commission-free” trading plan or the “classic plan”.

First, let’s examine the rather mind-blowing move to offer completely commission-free trading on equities.

While many DIY investors are all for paying the least amount possible for commissions, the first question for the skeptics that arises is how exactly anyone can offer commission-free trading?

The simple answer is that even though commissions have been eliminated, other fees and costs haven’t.

In other words, this is not the ‘no strings attached’ commission-free trading offered by US online brokerage Robinhood. Virtual Brokers’ commission-free trading plan has many strings and they are important to know about before considering this plan.

One of the most important pieces of Virtual Brokers’ new commission-free trading structure is the requirement to use one of their application-based trading platforms to place the trades. These platforms include Edge Trader Pro, PowerTrader Pro, RealTick EMS, ITS TraderLite and IRESS. The latter three platforms are typically geared towards and used by professional traders however this commission plan is only offered to non-institutional margin accounts and not for algorithmic trading.

The consequence of using the application-based trading platforms (rather than the web-based ones) is that the application based trading platforms are associated with monthly platform fees starting at $150 USD (for Edge Trader Pro) and going as high as $1344 USD per month (for IRESS and factoring in the 20% markup charged by Virtual Brokers for this platform).

Thus, DIY investors considering the “commission free” plan need to be prepared to pay at least $1800 USD/year in platform and data fees. At current USD/CAD conversion rates (1 USD = 1.45415 CAD) this works out to about $2618 CAD/year. Under the $9.99 flat commission structure which is their new standard offer, this works out to about 262 trades per year (or about 22 trades per month).

Of course, there are a few other important strings to factor in as well as the data/platform costs.

Under the new commission-free plan, ECN fees are charged on the trade and the interest rate associated with trades in this account are 1.5% points higher than the standard margin rates. Add to that the condition that the minimum account balance has to be greater than $2,000 at the time of placing a trade and it starts to become clear that the cost of commission-free equity trading can start to add up.

Finally, unlike the mobile-trading oriented Robinhood platform in the US, Virtual Brokers’ commission-free trading plan only works on the application based platform. Mobile trades are charged at the classic commission rates of 9.99 per trade. Similar to the Robinhood model, however, Virtual Brokers will likely be compensated for routing orders through various exchanges (i.e. they will be paid for the order flow). Exactly how much they earn and whether or not this impacts the ability to clear trades at the best-available market price for the quantity may be a source of controversy (as it has been in the US for brokerages doing the same thing).

The bottom line for DIY investors is that the economics and the conditions of the commission-free trading plan need some careful consideration.

In particular, the fact that the monthly price of the platforms is priced in USD instead of CAD is a very interesting and perhaps necessary move on Virtual Brokers’ part to keep their costs in check. The consequence of the huge difference between the US and Canadian currency means that the cost for this commission free plan will fluctuate in CAD – an extra piece of math that DIY investors may not want to do. Also active traders looking to exit or enter fast moving trades will have to factor in execution costs associated with ECN fees and potential fill issues based on order routing.

With all of the caveats above, however, Virtual Brokers has become the first Canadian online brokerage to offer a very different model for equity trading. They are the first Canadian discount brokerage to take equity commissions all the way to zero and that alone makes for headline grabbing marketing.

It will be a challenge for other Canadian online brokerages to compete with the “headline” factor of no commission trading and while there is still a ways to go before Canadian investors can take advantage of zero-commission trading a la Robinhood, the cracks in the 9.99 per trade pricing are starting to form.

All this in the first two weeks of January means that there’s still a lot that can happen across the board yet.

Markets Drop, Deals Jump

Deals activity continued to pick up even though the markets continued struggle this past week. Two online brokerages added an offer apiece into the deals pool bringing the total number of openly advertised discount brokerage promotional offers to 16.

Starting first with Scotia iTrade who launched a commission-free trading offer which is good until the end of March. The promotional offer, which is open to new clients only, consists of at least 75 commission-free trades which are good for up to 90 days for a minimum deposit of $25,000. Deposit tiers go up to $250,000+ and the maximum number of commission-free trades weighs in at an impressive 500.

Interestingly, while Scotia iTrade has typically been the online brokerage that has pushed the large number trade or cash back offers (often associated with equally large deposits to qualify), they are not the brokerage with the highest deposit number offer this time around.

Credential Direct, not typically known for participating in deals and promotions, and certainly not at the very high ($250,000+) deposit tiers stepped into the deals action this month with a cash back offer of their own.

The offer itself is interesting because not only is there a cash-back component but also because they are donating to a good cause (Kids Life Line) for all new or existing clients that take advantage of the offer. In order to qualify, new or existing clients can deposit anywhere from $15,000 to upwards of $1,000,000+ and receive cash back offers ranging from $75 (for the $15,000 deposit) to $1,000 (for the $1M+ deposit).

The multi-tiered approach taken by both Scotia iTrade and Credential Direct is interesting because it is a way of competing with multiple brokerages’ offers with one umbrella offer instead of having to offer specific offers for different deposit levels.

That said, it is interesting to see Credential Direct being the only brokerage having an offer targeting deposits of at least $500,000 or $1M+. While unchallenged at these deposit levels, the cash back offerings are not necessarily as competitive as other brokerages’ offers based on the amount of deposit required.

For example, Questrade is offering a $500 Apple gift card for a $100,000 minimum deposit. And, while technically not an ‘apples to apples’ comparison to a cash back offer, the value gap is significant. When looking at cash back offers, however, BMO InvestorLine’s $600 cash back offer for a minimum deposit of $250,000 dwarfs Credential Direct’s offering at the same deposit amount level as well as at their next tier.

Where Credential Direct’s offer does stand out is at the low end of the minimum deposit spectrum. The cash back of $75 on a deposit of $15,000 is one of the more competitive cash back offers currently available at this deposit level.

History suggests that more deals are likely to emerge as we head into the storm of RRSP season. Add in the recent market turmoil and Canadian discount brokerages are likely going to have to ante up the offers significantly to provide some measure of confidence to rattled DIY investors.

That said, for investors in the market for an online brokerage, the lesson from the current range offers is clear – be sure to shop around and do some homework on the deals being offered. High deposit requirements don’t always offer the best return however since brokerages are clearly looking to pull in assets, don’t be afraid to ask brokerages to match a more competitive offer.

Event Horizon

It’s full speed ahead, and an interesting week ahead for discount brokerage-sponsored investor education events. Questrade looks to join in the educational event mix this week with a webinar on ETFs. Here are some upcoming sessions that may be of interest to options enthusiasts, and those who are new to investing. Technical analysis, strategy-based ETFs, and risk management round out this week’s selection.

January 18

TD Direct Investing – Understanding Margin & Short Selling

January 19

NBDB – Introduction to Technical Analysis : Supports and Resistances – [Fr]

Questrade – ETF Investing: why all ETFs are not created equal

Scotia iTRADE – Strategy Based ETFs with Pro Market Advisors

January 21

NBDB – Stop Orders: a Winning Solution Worth Knowing – [Fr]

TD Direct Investing – Introduction to Investing

TD Direct Investing – Introduction to Investing in Options

January 22

Scotia iTRADE – The Rubber Band Effect with AJ Monte

Tweets of the Week

The big news out of Virtual Brokers went mostly unnoticed by investors against the backdrop of a market meltdown. Other brokerages were in the spotlight for platforms going down during trading hours and for minor quirks.

From the Forums

Commission-free sizzle turns to fizzle

If there was one place that a commission-free trading offer was bound to get attention it was on RedFlagDeals’ investing forum. In this thread, it was interesting to watch how the reactions of excited investors changed as the finer details became apparent.

To HTML in a handbasket

2015 was a big year for web redesigns and even though RBC Direct Investing’s site is not directly referenced, it was interesting to read this post from Reddit about the RBC website front end change. One of the most interesting pieces had to do with communicating the site changing so that people don’t think they’ve been hijacked.

Into the Close

With a Bank of Canada rate announcement scheduled for next week, the drama for Canadian DIY investors could continue. For those that enjoy the volatility, however, this is prime time. On a sadder note, the world also bid farewell to an iconic artist in the passing of David Bowie this past week. Here’s a tip of the astronaut helmet to an innovator in his own right. Enjoy the weekend and hang on tight, next week could be bumpy.

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