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Discount Brokerage Weekly Roundup – March 18, 2019

With spring around the corner and coming off St. Paddy’s Day weekend, green is definitely a theme colour for March. Of course, while investors are seeking a green of their own, Canadian online brokerages are also green with envy (perhaps even seeing red) with the official roll-out of a new competitor.

In this edition of the roundup, we cover THE story that has been waiting in the wings now for many months: the launch of Wealthsimple Trade. We’ll take a deep dive on the new platform and the early responses to see what DIY investors and online brokerages alike can expect with a zero-commission trading experience. For a little extra variety, we’ll also toss in some of the other things DIY investors were buzzing about on Twitter and in the forums.

Wealthsimple Trade Goes Live

The day that many of Canada’s discount brokerages were hoping would never come is finally here. Zero commission trading for Canadian DIY investors is now available thanks to the official roll out of Wealthsimple Trade.

Although it wasn’t clear exactly when this moment would come, it was just a matter of time, since Wealthsimple Trade was officially announced last year and beta testing has been taking place over the past few months. So, while it wasn’t necessarily a surprise, the official release brings with it the impetus for existing online brokerages to decide how (and how quickly) they want to compete with Canada’s newest online brokerage.

Now that Wealthsimple Trade is officially live, we can shine a spotlight on the new discount broker to see how it stacks up against existing online brokerages, and see what early reactions by consumers suggest are the strengths and limitations of the new provider.

Platform: Wealthsimple Trade is Mobile Focused

One of the first ‘features’ that is bound to be a source of contention with DIY investors and traders is that Wealthsimple Trade is only available (for now) on a mobile device – specifically those running either iOS 11+ or Android 7+.

Going mobile first with a launch is a radically different user experience for investors who are used to desktop (including laptop) environments to place their trades and manage their portfolios.

To be fair, the mobile-first approach does put a focus on making trading on the go or from other locations in one’s house, hotel or from wherever, a feature rich experience.  That said, the decision to go ‘mobile-first’ means that Wealthsimple Trade skews towards users who are generally younger and more comfortable interacting via smartphone instead of on a desktop/laptop, and who could conceivably spend hours on their phone researching and monitoring stock prices and news. So, in a nutshell, zero commission trading is probably great for your wallet but not so much for your posture.

Early responses from the respective app reviews show that there are mostly positive experiences, with iOS users rating it 4 out of 5 stars (based on 87 reviews) and Android users giving it 3.8 stars (out of 5) based on 34 reviews.

Security: Read the Fine Print

Another very interesting set of concerns raised by DIY investors out of the gate relate to security. While Wealthsimple Trade (like other online brokerages) is covered by the CIPF, it is actually funding the account where the trepidation lies.

To fund your trading account, Wealthsimple Trade requires that users provide their banking information to a third-party platform, Plaid, that is then able to authenticate and transfer funds into (and out of) a Wealthsimple Trade account.

Many initially curious users pointed out that by providing their bank details (i.e. their username and password) to this third party, their bank’s anti-fraud guarantee would no longer be valid.

This means that anyone who has provided Wealthsimple Trade their banking login information might be trading away their coverage in case of theft or fraud. For some, it is clearly a deal breaker – and seemingly unnecessary as other online brokerages (such as Questrade) do not require login information from a user’s funding source to deposit funds.

Of course, for others, the trade-off appears to be acceptable – perhaps a younger demographic is not as skeptical or cautious about third party vendors being part of Wealthsimple Trade’s process; the lure of commission-free trades is worth possibly waiving their agreement with their banking provider.

Interestingly, it is not possible at this time to be able to transfer funds in from either Wealthsimple or a Wealthsimple savings account, which means to get money into a Wealthsimple Trade account, it has to come from an external bank account.

Frequency: How Much is Too Much?

When it comes to commission-free trading, there is going to be one category of user that immediately perks up to take notice – the folks who typically generate a lot of commissions trading. That said, the idea of active trading or trying to outperform the market by trading securities rather than passively and over the long term appears a tad antithetical to the Wealthsimple approach. As a result, and perhaps to keep costs from spiralling out of control, Wealthsimple Trade imposes a somewhat ambiguous restriction on the frequency with which an individual can trade intraday.

Wealthsimple Trade’s official position on “day trading” (i.e. buying and selling a security on the same day) is that it is technically possible but the degree to which it is permissible is unclear. They state that “trading the same security in the same day can be flagged as inappropriate trading activity – as such Wealthsimple reserves the right to block transactions and accounts at our discretion.”

If there is one thing that spooks traders and markets it is uncertainty. With respect to traders, not knowing whether or not they will be able to execute certain trades makes it less likely that they will trust the platform as a ‘go-to’ for primary trading needs.

Yes, commission-free trades are nice but not being able to move on volatile stories – which are typically the most exciting for active investors – is a serious drawback. So, from a risk-management perspective, Wealthsimple Trade might not appeal to the active investor nor the day trader at this point until further clarification is delivered on exactly when the threshold of “inappropriate” is reached. Of course, there are some traders that just might try it out to see what happens but for many others, it will need to be clarified in writing first.

To truly appreciate the conundrum here it is important to understand that the most vocal advocates for Wealthsimple Trade would come from the active trading community online. After all, they are the ones who would stand to benefit the most from commission savings.

Active traders are typically on social media and reddit, and are the folks who would be influencing the demographic of interest that Wealthsimple Trade would be targeting. They (like most investors) would be interested in knowing where the ‘exciting’ trades are (e.g. in cannabis) and like most savvy traders or investors, they would be looking to minimize transaction costs in order to get the most bang for their buck. This hypothesis is supported, at least in part, by a recent post on Benzinga that revealed that during the beta testing phase, the three most traded securities on Wealthsimple Trade were all cannabis stocks (Aurora Cannabis, Canopy Growth, and Aphria).

As an aside, another feature which would make it challenging (perhaps even inadvisable) for active investors to trade using Wealthsimple Trade at this time would be that data for quotes is supplied on a delayed basis.

This means investors looking to make quick moves are receiving outdated pricing information when looking at a particular security. Again, if the stock is having a volatile day – such as Boeing did last week – then the price difference for a market order could be very different from the time a quote was viewed to the time the purchase was made.

Selection: Your Mileage May Vary

Another important category for DIY investors to have to consider when trading with Wealthsimple Trade is the selection of securities available. This is perhaps the most challenging area of the user experience that DIY investors will encounter in contemplating this platform because of the different conditions attached to which markets investors have access to, as well as the eligibility requirements for securities to meet in order to be traded.

Specifically, here are the conditions that Wealthsimple Trade currently has to be able to purchase a security:

  1. That is listed on the Toronto Stock Exchange (TSX); TSX Venture Exchange (TSXV); New York Stock Exchange (NYSE) or NASDAQ
  2. It can only be a stock or ETF – so options, preferred shares, mutual funds and other products are not available to be traded through this platform
  3. Must be CDS eligible
  4. Have a 52-week high that exceeds $0.50 (stocks only)
  5. Have an average daily volume that exceeds 50,000 shares (stocks only)
  6. Be the Canadian-listed security if dual-listed

Unlike at most of Canada’s other online brokerages, there generally aren’t stipulations on whether or not you can purchase a particular security because of its trading price or its liquidity.

Ironically, the notion of ‘buy low’ is somewhat challenged by the watermark on price having to meet that minimum threshold. For example, on the TSX Venture Exchange, there were almost 500 securities out of 1649 that would not be eligible to be traded based on this price threshold requirement.

Another ambiguous requirement is the average daily volume – it is not stated clearly on the help section as to what time frame that daily volume is calculated over (e.g. 10d, 30d, 60d, 90d are all possible choices). We have reached out to Wealthsimple Trade for clarification and they have stated 30 days is the time frame over which the average is calculated. Nevertheless, that window of time means that it would be possible that a security someone would be watching could be eligible to be traded and then lose eligibility based on a lack of activity – something that Canadian securities are prone to doing based on the size of our market.

Finally, based on the interest and popularity of cannabis-related stocks, it is interesting that the Canadian Securities Exchange is not on the list of markets that users can trade. With almost 500 securities listed on the exchange, if individuals wish to trade this market directly, they are currently not able to do it using Wealthsimple Trade.

Another part of the selection conversation that is important to consider is the account types that DIY investors would have access to in Wealthsimple Trade.

Currently there are only non-registered, cash trading accounts available. Individual investors who aren’t active traders would be more interested in accounts such as a TFSA or RSP accounts – vehicles that seem like they’d be better aligned with the structure of Wealthsimple Trade. Conversely, for active traders (and possibly one way to generate more revenue that comparable services like Robinhood have explored) margin trading isn’t available yet and as such, the scale of trading activity is limited.

Innovations: Wealthsimple Trade Doing Things Differently

Up to this point it does seem that there are a lot of gaps in the Wealthsimple platform as currently offered. While it is likely that they will work to iterate and close these user experience gaps over time, there are also features about Wealthsimple Trade worth highlighting out of the gate that will undoubtedly influence the market as a whole beyond just forcing a review on commission price.

One of the biggest and most obvious features is that DIY investing has been ‘reimagined’ in a mobile-first and aesthetically pleasing manner. With Wealthsimple Trade, the interface looks and feels modern, and while its worth will ultimately depend on its reliability and ease of use, the design features alone set them apart from anything currently on the market. It is fast to set up, there are no account minimums, and it looks and feels nimble.

Another less obvious but very interesting feature is their system status reporting. Wealthsimple Trade is the first online brokerage to report the real time status of their trading and supporting systems, bringing to the DIY market a level of transparency that up until now hasn’t existed.

If for no other reason than cutting down on the confusion of a technical outage that in turn leads to lots of unnecessary Twitter posts (ahem Facebook and Instagram), there is actually a system status page that publicly details multiple moving parts of the Wealthsimple Trade experience such as trading or market data or login capability. If you’re at all concerned about technical stability of the platform, this would be an important touchpoint to verify what’s gone off the rails because they also report historical data too.

Finally, it is worth noting that with the roll-out of Wealthsimple Trade, there is a genuine buzz and excitement about online trading and investing that hasn’t really been generated by a Canadian online broker in quite some time. It seems that there are users who, for now, are genuinely interested in seeing the ‘zero commission’ model take flight and are willing to provide constructively critical feedback to help improve user experience.

In addition to grabbing the spotlight on commission-free trading, Wealthsimple Trade has also captured the imagination of DIY investors. The prospect of being interesting and innovative (even shiny and new) is now something that other online brokerages have to contend with. People are genuinely excited about what this platform will do next. Will it be registered accounts? Will it be connecting to new markets? Will it be margin trading?

Regardless of the development pathway, as long as Wealthsimple Trade continues to move forward and roll out improvements, they have an audience that online brokerages are fighting hard to connect with. For investors and online brokerages alike, it appears that right now everyone is watching to see where things go from here and for that reason, it seems like we’re on the cusp of a truly exciting chapter in the online trading story in Canada.

Discount Brokerage Tweets of the Week

From the Forums

Buzz on the launch of Wealthsimple Trade

We couldn’t do a spotlight edition the launch of Wealthsimple Trade without a snapshot of the forum chatter about them. Here are links to the various forum threads celebrating the launch of zero-commission trading in Canada:

  1. Wealthsimple Trade – Free stock/ETF trades – Now available to all
  2. Personal Finance Canada on reddit: Wealthsimple Trade is Now Available to Everyone
  3. Canadian Investor on reddit: Wealthsimple Trade is live for everyone

Taking Stock

One investor has questions about holding US stocks in a TFSA. Other forum users on RedFlagDeals chime in with answers, advice, and some hard numbers. Read more here.

Strong Start

A newcomer to the investing world turns to reddit for advice on the best place to start. Fellow redditors deliver and provide a crash course in DIY investing. See more here.

Into the Close

Last week was an utterly tragic one for the people of New Zealand compounded by the perverse nature in which this tragedy was perpetrated and shared with the world. That it happened there, and here in Canada, are signs that the decisions we make, the words we choose and the people we elect matter. Being a fiercely proud Kiwi and Canadian, I am certain that collectively the people of New Zealand will move forward stronger as Canada and Quebec have. Learning to live together, peacefully, is something we often take for granted but in tragedies like the one that struck New Zealand, it is a stark reminder that the price we pay for indifference towards bigotry, discrimination and hatred is far too high.

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