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Discount Brokerage Weekly Roundup – September 28, 2020

It’s kind of hard to ignore the elephant in the room. In this case, the US presidential election is going to be the focal point for the next six weeks (maybe even more), and it seems like markets are bracing themselves for what is going to be a wild ride. Interestingly, this time around, it seems some online brokerages are doing more than just buckling up in preparation.

In this edition of the Roundup, we look at how one agile online brokerage is positioning itself once more for the volatility it sees heading into the US presidential election. On the topic of change, one popular Canadian online brokerage is providing an early look at its new online trading experience, starting first with a soft launch in beta. As always, we’ve got the latest commentary from DIY investors on Twitter and in the online forums.

Interactive Brokers Braces for Risky Times Ahead

When it comes to volatility in stock markets, online brokerages certainly have cause for optimism. Generally speaking, more uncertainty for stock prices is a good thing. It tends to mean more trading activity, and that means greater revenues. Of course, sometimes there can be too much of a good thing. For online brokerages, when it comes to volatility, there are also considerations that need to be made for the amount of risk that gets extended to investors for trading on margin. When prices for stocks move around too dramatically, there’s a good chance that traders can get caught offside, meaning they end up owing more than their account has available to finance a trade.

This past week, online broker Interactive Brokers once again tightened the risk belt by increasing the initial margin lending requirements from 50% to 67.5% for a new position and from 25% to 33.75% for maintenance. The underlying cause of volatility cited by Interactive Brokers is the run-up to the US presidential election. Despite the change in risk requirements being communicated directly to clients (rather than in a press release), the move has caught the attention of financial writers and media outlets.

At face value, prudence seems like a sound move. However, in the world of online trading, raising margin lending requirements is akin to raising the cost of doing business, which is a tricky proposition in a very competitive landscape. That said, the risk has to be worth the reward, and, in this case, there is some additional context that makes this move even more interesting.

Several years ago, Interactive Brokers made a similar forecast for volatility approaching in markets and were not only right, but their peer firms were considerably underprepared when volatility struck. The result: several large online brokerage firms in the US suffered some embarrassingly high trading-related losses as a result of client margin accounts going offside. Earlier this year, however, it was Interactive Brokers that was left stung by margin losses incurred by traders when oil prices went negative. So, though it might be cautious for Interactive Brokers to take some potential revenue off the table by raising margin requirements, the resulting savings from possible losses seems like the right tactical move.

As of the publication of this Roundup, it was not clear that any other online brokerage had made a similar move. Nonetheless, having served as a canary in the volatility coal mine before, Interactive Brokers is once again sending a signal that trading risks are likely going to intensify in the coming weeks.

For Canadian DIY investors, the important takeaway is to prepare appropriately for possible market volatility.

This year (and in previous years), volatility has tended to introduce unpredictability into trading systems. It is not unheard of for trading systems to fail during trading hours and/or even be unpredictable for days afterward. In fact, even when markets have not been facing exceptional trading volumes, there have been trading platform outages and connectivity issues, which makes the prospect of heightened volatility that much more worrisome.

Comments from social media this past week, for example, reveal that two of Canada’s largest bank-owned online brokerages suffered trading-platform connectivity issues, and Twitter comments from Canadian DIY investors show that several online brokerages continue to wrestle with getting their trading platforms up to the point where they can keep pace with the elevated interest from online investors. For active investors on these platforms who are using margin to trade, the move by Interactive Brokers should be a signal that more caution should be heeded throughout October.

No doubt active investors and traders will want to sail into the storm, but good traders know that it’s also important to be able to make it to the other side of the that storm intact. Here’s hoping both online brokerages and investors prepare accordingly.

CIBC Investor’s Edge Teases Changes

This past week, some chatter on investor forums put the latest move by one of Canada’s largest bank-owned online brokerages into the spotlight.

CIBC Investor’s Edge launched a new beta version of their online trading platform earlier this month, and even though there are still more changes to come, the first look at the user-experience enhancements points to a simplified and more modern look and feel to the platform.

For the moment, the updated sections include “My Accounts” and “Account Holdings,” with updates to accessibility features also reported to be available in the new version of the site.

While consumer response via the forums to the new site format was lukewarm, the interesting feature of some of the comments was the interaction with the feedback form, which is part of the new beta site experience. Rather than roll out the new site in its entirety, this partial rollout presumably enables design teams to hear from customers as to the things they do or don’t like about the new site direction. In particular, navigation has substantially changed, which can certainly confuse many users at the beginning of a new layout.

Although the full extent of the new site has not been revealed, it is interesting to see CIBC Investor’s Edge taking the approach to roll out portions of the new look and feel to their clients.

One of the areas of particular interest will be the new trading interface. Will active or somewhat active traders feel confident using it for order entry and execution? Standard commission pricing for CIBC Investor’s Edge is among the least expensive of the largest bank-owned online brokerages, which is why many online investors turn to this online brokerage. That said, platform experience has also been one of the major hurdles to adoption. If CIBC Investor’s Edge can get the new design and rollout to go smoothly, there’s a good chance that more DIY investor interest will turn their way.

Discount Brokerage Tweets of the Week

From the Forums

First-Time Caller, Long-Time Listener

A trepidatious Redditor looking to get into investing turns to the forum to determine what the best course of action might be. In this post, users give advice and list the merits and downsides of buying individual stocks.

Which Way Is Up?

In this post, a forum user asks about the continued impact of COVID-19 on the markets and sparks a conversation on what current trends may indicate for the near and distant future.

Into the Close

That’s a wrap on what was yet another bombshell-filled weekend. From COVID numbers to CERB to jobs reports to unpaid taxes, filtering through the noise will be especially challenging. On the plus side, working from home in sweatpants is probably going to be a thing for a while longer.

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