Tag: Interactive Brokers

Interactive Brokers

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Discount Brokerage Weekly Roundup – July 26, 2021

The Olympics are a very public stage on which athletes have to be prepared to do their best. In more ways than one, this year’s games serve up some lessons to online brokerages on how to stay cool in the public eye, as well as under the pressure of intense competition.

In this edition of the Roundup, find out which US online brokerage appears to be taking the lead when it comes to innovative approaches for the new terrain of online investing and what it could signal for Canadian online brokerages looking to get creative with client experience. Next, we recap the highs and lows for Canadian online brokerages this week and close out with healthy dose of debate and chatter from DIY investor forums.

Interactive Brokers Positions Itself for a New Normal

There’s no doubt the upcoming Robinhood IPO is going to capture a lot of attention from curious onlookers, analysts, and investors this upcoming week.

As a publicly traded company, there will be a lot of scrutiny on the operations and performance of Robinhood, and a lot more information to dive into on the kinds of efforts Robinhood is going to undertake to drive reasonable rates of return to investors.

While reporting performance might be new to Robinhood, one online brokerage that has become well-practiced to life in the public markets is Interactive Brokers. This past week, Interactive Brokers held their regularly scheduled earnings call, and while there were some blisteringly high headline numbers on client growth to report on, there were several interesting things that surfaced that appear to have flown under the radar that we see as reflecting a very agile move to navigate the new normal of online investing.

Record-breaking Client Growth

There’s no question about what the headline is with respect to the latest earnings release.

Client growth compared to a year ago was up 61% to over 1.4 million client accounts. And while it may pale in terms of number of accounts when compared to Robinhood (which is estimated to have 22.5 million funded accounts), what stands out about Interactive Brokers is that the average account balance is $250,000. By comparison, the reported median balance of Robinhood account holders was $240. 

Even though Interactive Brokers has a competitor offering to the Robinhood cost model (i.e. IBKR Lite), the primary revenue driver for the online broker is still trading commissions, not payment for order flow.

There were two other interesting things that popped up in the earnings call which didn’t get much attention and one that should have gotten more attention but was not covered in the analyst Q&A.

Inactivity Fees Lower Friction to Restart

Earlier this month, Interactive Brokers made an interesting move by removing inactivity fees. On the surface, the move seemed to suggest that Interactive Brokers might be positioning itself to make an overture to some of the clients that would typically not qualify to have the inactivity fees waived – namely, individuals with less than $100,000 in assets or those who didn’t generate at least $10 per month in commissionable trades. For an online brokerage that deliberately sets its sights on active traders, this seemed a little unusual.

Fortunately, this past week, the founder (and still active spokesperson) for Interactive Brokers, Thomas Peterffy, provided additional context for dropping the inactivity fees. Peterffy stated:

“we would like to hold on to the people who have had accounts with us to run them to continue to have accounts with us even if they become inactive for a while. And so, the account is open even if they just leave a few dollars. And then, when they are ready to invest again, they will do it with us.”

Thus, the decision to waive inactivity fees was actually a move to hold onto active trader customers who would want a pause from trading. Instead of closing an account while it is not being used and potentially going to another source to reopen it when wanting to restart trading, by waiving the inactivity fees, Interactive Brokers is hoping that those lucrative, highly active traders will find it easier just to restart an existing account rather than try to open a new one.

This use case is a great example of looking at client behaviour and finding an opportunity to reduce the friction for a client who is behaviourally inclined to actively trade to be able to restart again.

As all online brokerages are aware, active traders are particularly hard to come by, so the motive behind the move for Interactive Brokers to remove inactivity fees makes a lot more sense when positioned in terms of retention as opposed to new client recruitment.

Investor Education Innovation

Another interesting development that was mentioned in the latest Interactive Brokers earnings call was an investor education initiative developed for the online learning platform Coursera. Interactive Brokers has developed and launched a specialization, entitled a “Practical Guide to Trading Specialization,” which is actually comprised of four courses covering the following topics:

  • Fundamentals of Equities
  • Forex – Trading Around the World
  • U.S. Bond Investing Basics
  • Derivatives – Options & Futures

As of the date of publication of this edition of the Roundup, the Interactive Brokers course had a 4.3 rating (out of 5) from 45 participants and enrollment of just over 2,450 students.

In addition to being free, there is a significant bonus feature of getting a “shareable certificate” which can be displayed on LinkedIn. The very interesting catch is that in order to receive the certificate, attendees must complete a hands-on project. And one of the tools that students can use in order to complete the hands-on project is the Trader Workstation (made available via free demo account), which is the Interactive Brokers trading platform.

Investor education was mentioned in the quarterly results, indicating that this feature continues to serve a strategic purpose to better educate investors on how markets work – especially those investors who are newer to investing. Interestingly, this theme is also echoed among several Canadian online brokerages who are investing additional efforts to provide educational resources to online investors, many of whom are just getting started on their online investing journeys.

For Interactive Brokers, the Coursera investor education offering is a very polished mechanism to generate awareness and interest in the Interactive Brokers platform.

Beyond just awareness, however, the fact that users are being nudged to download the Trader Workstation is a savvy move by Interactive Brokers to directly market to, if not, onboard new customers. Granted, a course as demanding as this won’t see a crushing flood of individuals flock to it; however, Interactive Brokers understands that their strategy on new customers is about quality rather than quantity. The added bonus that individuals who complete this course can share it on their LinkedIn profile will advertise the course as social proof and underpins just how innovative this latest move is from a marketing perspective.

As online brokerages here in Canada and in the US wrestle with trying to provide educational content that DIY investors will actually consume, this Coursera offering by Interactive Brokers provides an interesting example that other online brokerages are likely going to be inclined to consider replicating.

Crickets on Crypto

Of course, one of the big developments that we were listening for more information on, which surprisingly, did not get discussed on the conference call, was the launch of cryptocurrency trading on Interactive Brokers.

Earlier this year, we reported the launch of crypto trading by Interactive Brokers; however, there hasn’t been much in the way of details provided since then. Perhaps not entirely by accident, Thomas Peterffy – a notable critic of cryptocurrency – also went on record as saying that he himself now owns some cryptocurrency.

The shift, it seems, sounds like capitulation.  

Peterffy has clearly seen that there is at least some possibility of cryptocurrency becoming a valuable asset class regardless of his personal belief on the thing. Most traders understand that it’s best not to fight the tape, and for the foreseeable future, cryptocurrencies continue to be a part of where money is flowing to.

What was said about the cryptocurrency trading at Interactive Brokers was minimal – the only update we received is that there is more news to come at the end of the month.

Once again, the remarks made over the earnings call and during the Q&A component of the call provide a unique window into the mindset and possible strategic direction of Interactive Brokers going forward. While the kinds of disclosures and discussions are usually well-vetted and rehearsed, the reality is that the occasional hint or nugget gets dropped.

By their own admission, despite the strong numbers posted for the quarter, Interactive Brokers (like other online brokerages) is seeing that there is a slowdown in the pace of online investors rushing to open an online brokerage account and trade it with the same fervor that they had last year or during the first calendar quarter of 2021.

To navigate the next normal, it’s becoming clearer that new features and offerings are going to be required. In this case, it seems that for Interactive Brokers, features such as cryptocurrency trading, as well as client experience features, like reducing inactivity fees, educational resources, and ramping up of customer service are going to be important drivers to hold onto existing clients rather than purely seeking out new ones.

Canadian Online Brokerage Updates

While there’s been lots happening with US online brokerages this past week, Canadian online brokerages have also been busy juggling their own ups and downs.

On the upside, National Bank Direct Brokerage announced the conclusion of the Biggest Winner competition. The ETF picking contest, organized by Horizons ETFs and sponsored by National Bank Direct Brokerage, is now in its 10th year with National Bank Direct Brokerage, having sponsored the competition for the past nine years.

This year, there were 2,620 registrants which, according to contest organizers, was the highest registration since the first edition of the competition. The winner of the competition managed to generate a six-week return of 25.67% and took home the top prize of $7,500. Second place won $2,500 and there were six weekly prizes of $500.

For National Bank Direct Brokerage, this contest is a unique way to boost awareness of the online brokerage and position itself alongside an important selling point: the fact that they offer commission-free trading of ETFs. Of course, the challenge for all Canadian online brokerages coming out of the pandemic is to find creative ways to connect with investors, especially at a low cost.

With a prize payout of $13,000 and just over 2,600 registrants, the numbers from an advertising point of view work out to just under $5 per registrant, which is an exceptionally good deal if some of those registrants end up taking a closer look at either Horizons ETFs and/or National Bank Direct Brokerage.

Even though National Bank Direct Brokerage has been a long-time sponsor of this event, the past year seems especially relevant in terms of the attention that this bank-owned online brokerage has been getting from online investors. And (see forum post below), the additional marketing activities that NBDB is undertaking will almost certainly help in generating more interest and curiosity.

On a literal down note, this past week also saw a number of online brokerages in Canada impacted by a technical outage from Akamai that took down brokerage trading during market hours. More than just online brokerages were impacted, with major banks in Canada, as well as major tech and business names, experiencing service interruptions.

In predictable (and understandable) fashion, Twitter and reddit were awash in acrimonious posts from unhappy online investors, many of whom learned the hard way just how fragile the online trading environment can sometimes be. And even when online brokerages aren’t themselves the culprit, the fact that customers can’t get what they want, when they want it, is enough to leave a digital trail of negative sentiment.

Interestingly (and fortunately), the immediate reaction from investors who were frustrated by the outage were tempered by other online investors and users who posted that the outages were impacting other sites and companies, and this was not an event that was broker-specific.

Nonetheless, the lesson for online brokerages is to be prepared for some (or many) users to take a shoot-first, ask questions later approach to service interruptions. The easier it is for online brokerages to communicate service status and cause of interruptions, the easier it will be for the “fact-checkers” to be able to broadcast reliable information to those users simply blowing off steam.

From the Forums

Word on the Street

When it comes to questions about online brokerages, there are the usual suspects that DIY investors are curious about. Lately, however, we’ve spotted more questions being asked about National Bank Direct Brokerage, such as this post from reddit, in which one user is looking for opinions from fellow DIY investors on this increasingly popular online broker.

Banter Ads

When it comes to advertising, there is simply no pleasing everyone. Of course, if the goal is to generate an emotional response to get people thinking (and talking), then mission accomplished. This fascinating reddit commentary emerged from the recent advertising battle taking place between popular online brokerages Questrade and Wealthsimple Trade.

Into the Close

That’s a wrap on this week’s online brokerage activity. There’s no question that the Robinhood IPO and associated fanfare are going to be in the spotlight. Like everyone else, we’re curious to see where the dust (and price) will settle on the first day, but this is certainly a week for the history books. And, speaking of history in the making, the Olympics are now well underway. Congratulations to team Canada for already making a splash at the games.

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Discount Brokerage Weekly Roundup – July 12, 2021

Seems like soccer and hockey players aren’t the only ones working overtime this summer – online brokerages are keeping themselves (and their competitors) very busy. While there might not be any big trophies or awkward press conferences, it seems like there is no shortage of things for online investors to be cheering about this summer.

In this edition of the Roundup, we highlight the biggest small development: the arrival of fractional stock trading in Canada. Next, we dive into a fee drop announcement that appears to be a much bigger deal than it seems. As always, we wrap up with DIY investor chatter from the forums.

Fractional Shares Now Available at Wealthsimple Trade

Thirteen isn’t usually considered a lucky number, but for Canadian DIY investors, it just became one.

This past week, Wealthsimple Trade launched fractional share trading in Canada (albeit on a limited basis), and as result, the landscape of online trading appears to be poised for yet another big change.

Although the list of stocks eligible for fractional stock trading is small, by introducing fractional share trading to mainstream investors in Canada, Wealthsimple Trade has managed to take yet another highly sought-after feature from the US online brokerage space and make it a reality for Canadian DIY investors.

Ever since fractional share trading became commonplace among mainstream US online brokerages, such as Schwab’s “Stock Slices” and Robinhood’s fractional share trading program in late 2019, Canadian DIY investors have been vocal about wanting this kind of feature to be launched by Canadian online brokerages.

This launch is yet another example of Wealthsimple Trade following the lead of US online brokerage Robinhood in delivering online brokerage services in a commission-free way. It also comes at a time in the Canadian online brokerage market when new features and value-added offerings are flooding the market. Given how popular this latest release will be, however, other features being released by brokerages are now going to have to compete even harder for user attention.

There’s lots to unpack with this latest announcement by Wealthsimple Trade, perhaps the most significant being that the die has been cast for fractional share trading here in Canada.

To tease out how the rest of the online brokerage field might respond, it is valuable to look at some context around fractional share trading, especially focusing on who this feature is most appealing to.

To level set, fractional share trading is when online investors can purchase a fraction of a share instead of a whole share. In some dividend reinvestment schemes, investors have been able to do this with dividends but never when buying a stock that doesn’t offer a dividend.

The primary appeal of fractional share trading is that investors with limited assets can still participate directly in purchasing shares of companies whose stock prices might be quite high. For example, one of the names on the list of eligible stocks, Shopify, is currently trading at almost $1,863 per share (closing price at the time of writing), which would require an investor to pony up at least this amount to purchase one whole share. With fractional share trading, investors can now own the amount of a stock that they can afford to buy.

Clearly, fractional share trading is not something that ultra-high net worth clients might be interested in as much as DIY investors who are just starting out, or who have modest investable assets. And that, it seems, is a key driver behind why we’re seeing fractional share trading at Wealthsimple Trade before we’re seeing it elsewhere – they’re deliberately launching features that would appeal to their core customer demographic base. Although the target audience for Wealthsimple Trade is younger and therefore not flush with a large amount of investible assets (yet), the reality is there is a very large target audience to who this applies, which provides the scale required for a program like this to be economical for Wealthsimple Trade.

Another interesting angle to this launch is that Wealthsimple Trade opted to have only four Canadian securities and nine US-listed securities to start. Of the four Canadian stocks, Shopify seems like a shoe-in based on its price and trading volume, but the remaining three choices seemed somewhat arbitrary. Even if Royal Bank and Canadian National Railway could be attributed to the combination of relatively high price and high liquidity, TD Bank – which at last check was trading at $84.70 – is lower in price than say BMO or CIBC, so it is curious as to why the one bank was included in the first list and not several others. It was also curious to see why only four names made the starting grid in Canada, but twice as many in the US.

Based on the business model of Wealthsimple Trade, offering up more choices for investing in fractional shares in US-listed stocks makes sense. Not only are there more “high priced” stocks to choose from to be a part of this program, but Wealthsimple Trade stands to make more money per trade (1.5% foreign exchange fee) for US-listed stocks.

And therein lies the fly in Wealthsimple Trade’s “low cost” ointment.

There is a growing “awakening” taking place among online investor communities that while Wealthsimple Trade’s zero commission pricing is a good deal for Canadian investments, it can actually be more expensive than a traditional online brokerage for US-listed stocks. The fractional share trading model unfortunately does nothing to alleviate that situation for smaller investors, and gives them the unenviable choice to pay a premium to participate on a fractional basis, or to use an ETF to obtain fractional exposure (potentially at another online broker).

There is no doubt more buzz to come around fractional share trading at Wealthsimple Trade. Competitor Canadian online brokerages are almost certainly going to have to follow suit in much the same way that several US online brokers did when fractional share trading went live in the US. That said, until Wealthsimple Trade changes their business model to allow for more competitive pricing to trade or invest in US-listed securities, incumbent Canadian online brokerages have a narrow window of opportunity to highlight their own cost efficiency in this regard and bring to market the ability to trade fractional shares.

We don’t anticipate Wealthsimple Trade’s list of eligible stocks for fractional share trading will stay at 13, however, the longer they keep their pricing for US-listed securities in place, the unluckier they may become.

Interactive Brokers Eliminates Inactivity Fees

If there’s one thing that online investors collectively enjoy hearing about, it’s a fee drop. Interactive Brokers announced this past week that effective July 1, 2021, they are no longer charging the $10 per month of inactivity fees to their clients. News of this move made a big splash.

While inactivity fees are sometimes a deal breaker for beginner or less active investors, at Interactive Brokers, their core customers have usually been highly active investors or day traders. So hitting the $10 per month in commission spend or having more than $100K in assets was not much of an issue.

Data from their most recent monthly metrics reveal, for example, that clients are averaging 500 trades per year for 2021 (estimated from the annualized Daily Average Revenue Trades or DART data per account for the first six months, and then averaged), which works out to about 2 trades per day – a threshold that would handily get most clients past the $10 per month in commission fees generated. As such, inactivity fees are likely not a material source of revenue for Interactive Brokers – although the impact of this move will be something we’re looking out for on their next earnings release.

Despite the $10 fee per month not necessarily being relevant to active investors, for passive or less active investors, the fee was a point of contention. It was interesting to note that coverage of the fee drop made it to Barron’s magazine, and among Canadian online investors, there was significant chatter about the decision to drop the monthly fee.

It is helpful to note that among online investors in DIY investor forums, Interactive Brokers is (and has been for many years) a very popular recommendation among active and value-conscious investors. With low commission charges and incredibly low margin rates compared to peer firms, one of the few things that kept coming up among online investors as a strike against Interactive Brokers was the inactivity fee. Thus, while it is not surprising to see some level of discussion take place about this latest development, it is remarkable that there is THIS much discussion about it.

As it happens, there’s a good reason for Canadian online investors to be extra happy about the inactivity fee drop.

Inactivity fees are one place that TFSAs are susceptible to being charged. Given the contribution limits and the caution against over trading in a TFSA account (lest one catch the ire of the CRA), it seems only natural that this account type at Interactive Brokers would attract inactivity fees (a similar case could be made for RRSPs as well for many investors). As such, inactivity fees served as a major deterrent to investors being able to consolidate accounts with Interactive Brokers until now.

Although it might be a function of the demographic that both trades online and who frequents reddit, the names that continuously came up in forum threads alongside Interactive Brokers were Questrade and TD Direct Investing.

Like Interactive Brokers, Questrade and TD Direct Investing also allow for options trading, which is typically associated with active investing. One of the quirks that characterizes Canadian DIY investors is that they often have more than one online brokerage account – with different accounts at different providers serving different purposes.

With this latest announcement from Interactive Brokers, it is likely that both Questrade and TD Direct Investing are going to see existing clients – especially active traders – move some of their other less active registered accounts over to Interactive Brokers. In industry lingo, it means that Interactive Brokers is poised to win a greater share of wallet.

For DIY investors, it won’t necessarily be all upside though.

If online investors aren’t mindful of transfer fees, leaving one brokerage to go to another could incur some non-refundable transfer fees. Unlike most Canadian online brokerages, Interactive Brokers doesn’t cover the transfer fees charged by another online brokerage. As the tweet below shows, it’s because Interactive Brokers doesn’t charge them when clients transfer out, and as such, IB doesn’t believe they should pay for them when other brokers charge them.

Another feature that investors used to the bank-owned online brokerage experience may not factor in is data subscription fees. At some online brokerages in Canada, data fees are included for level one or two quotes. At Interactive Brokers, however, clients must pay extra for snap quotes or real-time data, which drives up the cost for the casual user.

Despite Interactive Brokers’ largely active trader customer base, the elimination of an inactivity fee will likely have a positive impact on those Canadian clients who have multiple types of accounts with Interactive Brokers, or who have until now elected to not have less active accounts.

The fact that something as seemingly benign as the removal of an inactivity fee has generated as much discussion as it has points to there being significant user interest to consolidate some or all eligible accounts into Interactive Brokers.

As is the case in the US, around the world it appears that Interactive Brokers is squaring off against low-cost players that can attract less active or less affluent clientele. By reducing the hurdle to being a client, Interactive Brokers is embarking on an interesting direction to become much more appealing to mainstream investors than a niche trader-focused tool. In Canada specifically, this small but important fee change appears to be enough to trigger a wave of account transfers, and as a result, we expect to see some interesting developments in the active trader segment in response.

From the Forums

Need Some Pace

The innovation game is tough, especially among Canadian online brokerages. In this post, one user laments a perceived lack of innovation at a popular online brokerage once seen as cutting edge.

Storied Service

One thing is true about social media, folks aren’t shy to complain about what is not going well. For that reason, this post on reddit where someone took the time to relay their positive service experience at an online brokerage, stood out as unusual.

Into the Close

That’s a wrap on an especially nail-biting week (at least for sports fans). Of course, heading into earnings season (again) with economic data looking especially bullish and vaccination rates continuing to creep higher, there’s likely no shortage of excitement coming. Here’s hoping you find a fun way to stay cool and take time out to enjoy a treat (or two)!

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Discount Brokerage Weekly Roundup – June 28, 2021

There’s no doubt about it, summer is here. While the prescription for most folks is to take it easy, online brokerages have been doing anything but resting up so far this year.

In this month-end edition of the Roundup, we focus on the launch of a new trading dashboard by a big bank-owned online brokerage who is hoping to make strides with the active DIY investing crowd. More new features abound as we highlight announcements at popular online brokerages and some associated chatter from the DIY investor forums.

RBC Direct Investing Launches New Trading Tools

As any seasoned online investor knows, being adaptable and capable of change is a prerequisite to finding new and interesting opportunities to invest in. That said, when it comes to the platform and interface used to pursue those opportunities, changing things around can often be a stressful affair – especially for those individuals who like to have things “just so” or who are familiar enough with the way things have been for some time. Inertia, it seems, is the enemy of momentum.

This past week, one of Canada’s largest and most recognizable bank-owned online brokerages, RBC Direct Investing, officially announced the launch of yet another new feature this year: a new trading dashboard.

At its core, the trading dashboard is intended to provided active investors with a nimble environment in which to manage and execute trades of stocks and ETFs. Actively trading stocks is more time and opportunity-sensitive than passively trading stocks, and as a result, the features required to make and act upon decisions quickly need to be able to support that.

As popular as RBC Direct Investing may be with investors, one of the areas in which several of their bank-owned peers, such as TD Direct Investing and Scotia iTRADE, have managed to outcompete RBC Direct Investing has been in the active trader segment, specifically because of the trading platform experience.

The existing (and now “Old”) RBC Direct Investing trading dashboard provided some of the essential features of a trading-focused user experience, such as the ability to efficiently place trades, and monitor watchlists and level 2 activities.

In the newest incarnation of the active trading experience, RBC Direct Investing has maintained the purpose of the trading dashboard, which is to provide a streamlined trading experience, but has completely redesigned how users can manage information related to tracking and trading stocks and ETFs.

Of the many changes to the user experience that the new trading dashboard introduced, one of the most striking is that the new dashboard enables significant customization of how information gets organized.

By using floating windows, known as widgets, inside of a “workspace,” a user can organize account information, watchlists, charts, quotes, and more in virtually any layout that best suits them. And with five workspaces that can be easily navigated through, there is enough opportunity to track a respectable amount of information quickly and efficiently.

Another huge improvement to the trading experience is the charting on the new trading dashboard. Although it takes a little getting used to, once over the learning curve, there are multiple chart indicators that users can do research with. And, for active traders, it is nice to be able to look for different kinds of technical setups as well as to create notes on the charts themselves. Being able to annotate things like entry and exit points along with reasons on the chart is a big time-saver.

Ironically, one of the biggest strengths of the new approach to design and rendering of trading-oriented information is that with so many moving parts, finding where things are is going to take some getting used to. While watchlists are at the core of the transition from the old system to the new, not all the information about a security that was available in the old version is available in the new (yet).

On that last point, it is clear that RBC Direct Investing is actively collecting feedback on their new trading platform experience, and will (likely) be continuously working to enhance the offering for DIY investors, so this new platform will still evolve from its current state. The nice thing about the configuration of the design is that it is very modular, so changes and improvements can be made without negatively impacting all clients and new enhancements.

In turning to design and modern interfaces, the new dashboard feels more at home in 2021 than does its predecessor. That said, the new interface also has new jargon for DIY investors to have to learn in order to navigate this platform. For example, labels such as “Hub” and “X-ray” do not clearly convey what those things do, which then requires users to learn and remember this information. If there’s an area in which the dashboard will have to be mindful, it’s focusing on being intuitive while at the same time providing something unique to the brand.

Recognizing that active investors and traders have different, and likely more complex, needs and requirements than novice investors, the new trading dashboard is a step in the right direction for RBC to provide these valuable segments of users with enhanced functionality. By enabling a highly customizable interface, the platform experience can be configured by the user and thus change along with their changing needs and preferences. If there’s one thing that can be counted on, it’s that the world of DIY investing is going to continue to change. The challenge for all Canadian online brokerages is whether or not they can keep up.

More Online Brokerage Features Keep Coming

RBC Direct Investing wasn’t the only Canadian online broker making big feature announcements this past week. Three other online brokerages had new features to showcase, which is a clear signal that the self-directed investing space is going to be incredibly busy heading into the end of the year.

All of the new features will undoubtedly need to be marketed as well, so it seems like even though new items are going live in the summer, they’re going to be around and in the spotlight for quite some time.

Here’s a run-down of some important new developments:

Interactive Brokers Launches Credit Card in Canada

Convenience has always been one area that bank-owned online brokerages in Canada have enjoyed a clear advantage over independent brokerages. Whether it’s Canada Post, tech giants like Apple, or retailers like Walmart, the walls around the banking business are being pursued on a number of fronts. This past week, the credit card landscape in Canada just got a little more crowded, and the online brokerage space a whole lot more interesting, as Interactive Brokers Canada announced the arrival of the prepaid Mastercard for Canadians.

This credit card has been available to Interactive Brokers clients in the US for several years, and offers incredibly low interest rates. The fact that it is now being rolled out into Canada is a signal that this program can be delivered cost effectively and with a high degree of confidence. In short, Interactive Brokers has likely figured out how to position this service to its clients – many of whom are active traders – as a way to deepen the relationship with these clients.

While the headline and interest rate will undoubtedly get the attention of financially savvy investors, the details for this card will certainly be a bit of a barrier to adoption. In particular, there are restrictions on the number of point of sale transactions that can be done in a day, as well as limits on withdrawals and purchase amounts.

That limitation in mind, combined with the ultra-low interest rate, suggests that this product offering may represent an alternative to having to tap into a HELOC. With an advertised interest rate of 1.63% (at the time of publication), it will almost certainly raise some eyebrows. In several reddit forums, it has already generated an interesting discussion regarding how and when this kind of card could be useful.

Questrade Bulks Up on Research

This past week, Questrade announced its latest feature category: more robust research. Using “big data” to process multiple input points, the new service for Questrade clients, called TipRanks, aggregates and reports investor data and provides tools for DIY investors to conduct additional research.

While research may not seem like the most popular user feature, in reality it makes a big difference to finding or validating a trading decision. Historically, Questrade has lagged behind its peers in the research component, however, this latest foray into the research pool will be interesting to watch.  

From the Forums

Who Let the Doge Out?

This past week offered Canadian online investors a boost as Wealthsimple added 14 new coins to its suite of cryptocurrencies offered to trade. With so many coins available to be traded now, users on this reddit post weighed in on the expansion of crypto trading at Wealthsimple, and shared what coins they’d love to see become available.

Mass Market

With a clear interest in increasing the accessibility of investing, is it any wonder that marketing would need to be involved? Cue Wealthsimple Trade, who was called out in a (mostly respectful) exchange on reddit. At issue is the saturation of advertising for Wealthsimple Trade and how clients and observers are “not over it.”

Into the Close

Canada Day is just around the corner, and the week ahead will be shorter because of the statutory holiday. Similarly, the US statutory holiday the following week will also slow things down on the trading front for Canadian DIY investors. Wherever you choose to spend this year’s holidays, we hope it is safe and restful.

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Discount Brokerage Weekly Roundup – June 21, 2021

Welcome to the official start of summer. With the weather getting nicer, and folks making plans to get out and about, you might be pondering some big thoughts, like where a cow goes on vacation – it’s to the moovies. Yes, pun intended. Here’s hoping all the dads and father figures enjoyed Father’s Day.

Blockbuster features continue to surface this year, and in this summer-ized version of the Roundup, we review an interview with the founder of Interactive Brokers who talked about meme stocks (like the movie chain AMC) and several new features that are slated to be game changers for this innovation-focused brokerage. Also in the new features column, a potentially big new feature – fractional shares – possibly being tested. Find this and DIY investors encountering trading outages in the stories from the forums.

New Feature Spotlight: Interactive Brokers Reveals Big Features Coming Soon

There’s an old trader’s adage that says don’t fight the tape. Most people understand this in terms of the saying “the customer is always right,” or “listen to what the market wants.” In looking at the online brokerage industry, it seems that catering to what the customer wants might be setting the financial and social infrastructure of the world down a dangerous path – or so one executive at an online broker might have us believe.

Heading into the summer, we’ve already observed a flood of new features being announced at Canadian online brokerages, as well as at their US counterparts. Earlier this month, for example, we’ve noted that, at Canadian online brokers, faster account funding has started to surface as an incremental innovation. In the US online brokerage space, this year we’ve seen some interesting developments come from Robinhood in the form of early access to IPOs (likely as a lead up to their IPO), and just announced this month from Interactive Brokers, the launch of cryptocurrency trading by the end of the summer.

News of the announced rollout was delivered by Thomas Peterffy, the founder of Interactive Brokers, at the most recent Piper Sandler Global Exchange & FinTech Conference on June 9.

The interview itself was very intriguing. Contextually speaking, it was fascinating to hear Peterffy’s pessimism with the global state of affairs and disbelief at people buying digital coins on the one hand, while later announcing the launch of cryptocurrency trading (of those very same coins) on the other.

Although he has formally stepped down as CEO of Interactive Brokers, he is still actively campaigning on behalf of the brand, and his lack of enthusiasm about the cryptocurrency product was evident.

Normally, Peterffy brings a clear passion for all things trading. But in this case, it seemed like capitulation to what customers and the market was asking for that led to the decision to launch a cryptocurrency trading offering. One of the formal challenges he cited was ensuring that the trading of cryptocurrencies would be 100% safe – something he deferred providing details into until the product launch at the end of the summer.

While the news of a new product offering launch is big, Peterffy also dropped a hint of another feature announcement that is “coming soon.”

When asked about the way in which the impact of the global pandemic affected customer service, Peterffy revealed that automation was the key to solving many problems, but it could not solve all of them. His answer to discussing customer service was positioned from the perspective of the business itself, breaking down the need for customers to access speaking to an agent in terms of dollars per hour spent on servicing a client.

In the final analysis, Peterffy’s view was that it should not cost more to service the client than the client is worth to the firm. And, it was at that point that he revealed that Interactive Brokers is working on something interesting related to client service, and potentially something that could bring down the cost of servicing clients.

There were several other really interesting nuggets revealed by Peterffy as to the direction and position of Interactive Brokers on a number of fronts, but the final one to highlight was his response to new account growth and what the future may hold for Interactive Brokers.

Specifically, as we’ve noted in the Roundup last month, there has been a consistent and significant downward trend in the number of new accounts being opened this year at Interactive Brokers since the numbers peaked in January. The graph below illustrates this trend, and based on the numbers from May, this is the fourth consecutive month over month decline in the net new account growth. Although there were just over 26,000 net new accounts opened at Interactive Brokers in May, this represented just shy of a 24% decline compared to the number of new accounts opened in April, and reflects a drop of just about 78% from the number of net new accounts opened in January.

Peterffy’s take on what drives new account growth was especially noteworthy. In his response, he stated that the biggest source of new clients at Interactive Brokers is through referrals – somewhere in the neighbourhood of 33%. Regardless of what channel a new client comes in from, the fascinating thing, according to Peterffy, is that the percentages from the sources remain about the same. So, what ultimately drives online investors into opening an online brokerage account is the “buzz” around what’s hot in the markets, and as it turns out, consumers will choose or consider an online brokerage that they’re familiar with. The implications of this revelations are really important – it suggests that online brokerages would be better off continuously advertising. However, the real advantage for doing so would emerge when a “hot” story drives online investors to market.

Although the interview with Peterffy was relatively short, there was a wealth (pun intended) of insights related to investing online. The pessimism about the global and financial state of affairs for online investors was palpable, and summarized by the following statement he made:

“We’ve completely lost our grounding, we’ve become unhinged, nobody knows what our values are, we are floating and hope we land right side up.”

The context of these comments generally center around what investors today are piling into – such as meme stocks – and that the shortcomings of the regulatory frameworks that are currently in place for investors are being laid bare by online investor “armies” that have shown the ability to push back against larger institutional players. This pessimism is worth paying attention to, however, as the domino effect of losses in the meme stocks has a possibility (and a likely one suggested by Peterffy) to be catastrophic.

In the meanwhile, the big picture takeaway from Peterffy’s comments is that whether or not he likes it, everyone, including online brokerages, will have to confront a brave new world of “investing.” That means preparing technical systems for wild volatility. And for other online brokerages hoping to push their own growth agenda, it means being ever visible in anticipation of when the next big thing hits. Because, when it does, that’s when investors will really start to pay attention.

From the Forums

Wealthsimple Testing Fractional Shares?

Online brokerages continue to push new features out this year, however, some may be dropping hints before they go completely live. If this new feature from Wealthsimple Trade turns out to be true, it is yet another possible game changing feature that will undoubtedly capture the interest of DIY investors. According to this reddit post, Wealthsimple Trade is apparently piloting fractional share trading on select securities. While it may be too early to trade in fractions of a share, the presence of a fractional trading tag is raising more than a few eyebrows among DIY investors. And, if true, it will undoubtedly push other Canadian online brokerages to move even faster to deliver innovative offerings for investors.

Stability Now

It’s been a tough month for system and trading outages at Canadian bank-owned online brokerages. Earlier this month, TD Direct Investing had an outage during market hours, and this past week, CIBC Investor’s Edge users suffered a trading outage during market hours. Angry clients took to social media to vent their frustration and provide a clear picture of what DIY investors think when an online brokerage system goes offline during the trading day. Check out what investors had to say in this reddit post.

Into the Close

This week, we’d like to call special attention to Indigenous People’s Day which recognizes the heritage, diverse cultures, and achievements of First Nations, Inuit and Métis peoples. It is our hope that readers make some time to reflect on the history of the Indigenous peoples in Canada, as hard as it may be, and be an advocate for a building a better future. An important starting point is the Final Report of the Truth and Reconciliation Commission of Canada.

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Discount Brokerage Weekly Roundup – June 14, 2021

Taking a Moment

There’s a lot that goes into the production of a Weekly Roundup that many readers don’t see. Looking back on the week that was is as much a habit as knowing which letters to capitalize in an online brokerage’s name. Despite the hundreds of times having done this, occasionally something happens in a week that forces a pause from business as usual.

This past week there was a terrible tragedy that took place in London, Ontario. Four members of a family were murdered simply for looking and being different than what someone decided was appropriately Canadian. They were murdered because they were Muslim.

Like many Canadians, it is hard to find words to capture how thoroughly awful and traumatic this event was. And so, we are left with yet another heavy but necessary exercise: to not turn away from the terrible news but this time to watch and engage.

The news cycle will move on before the people will. A young boy will be left to figure out the rest of his life without his parents and sister beside him. Muslims and other religious and ethnic communities across Canada will forever be slightly less trusting that everything will be OK.

Before getting back to business as usual, I wanted to call attention to Islamophobia and the responsibility all of us bear to call out prejudice when and where we see it.

Please take a moment and either watch or read about this family.

All of us have a part to play in looking out for each other.

A Tale of Two Tables: 2021 MoneySense Online Brokerage Rankings Released

It’s hard to believe, but the DIY investor datapalooza (or datastravaganza?) that is characterizing 2021 continues to chug along well into June.

Earlier this month, a popular Canadian investment publication, MoneySense magazine, published their 2021 Canadian online brokerage rankings, essentially capping off the last of the major discount broker rankings for the summer.

Even though the fall feels far away, online brokerages are undoubtedly at work planning for their ramp up at the end of the year. These latest Canadian online brokerage rankings will ultimately prove to be a big part of what will help online investors shape their perceptions and decisions around which online broker they choose to go with, and ultimately impact how online brokerages market and talk about themselves for the rest of the year.

Why is this Online Brokerage Ranking Important?

Now in its ninth year, the MoneySense rankings have become a go-to resource for many DIY investors curious about the online brokerage marketplace in Canada. As the landscape evolves for online brokerages and self-directed investing, so too do these rankings.

Helping MoneySense stay on top of those changes is Surviscor, a financial services research firm that evaluates Canadian online brokerages across a number of different parameters.

Frequent readers of the Weekly Roundup will already be familiar with the research and in particular, the online brokerage rankings, produced by Surviscor. For a timely throwback, be sure to check out our Look Back/Look Ahead series featuring Glenn LaCoste, President and CEO of Surviscor, and the author of this year’s MoneySense online brokerage rankings.

With yet another online brokerage ranking appearing this year, it’s a lot for online investors to digest. The MoneySense rankings in particular offer an interesting way to see the importance of defining what’s “best” when it comes to online brokerages. Also, in digging through the data, we uncovered an interesting relationship between a major driver of investor decision making, cost of services, and the performance on measures of investor experience – like service.

There’s lots to dig into, so grab some caffeine and get ready to scroll.

Methodology

Online brokerage rankings and evaluations help to make sense of the often-confusing question: “which online brokerage is best?”

With several Canadian online brokerage rankings available for online investors to consult, it is important to come back to a familiar concept – that each online brokerage ranking measures the idea of what’s best in a different way.

The MoneySense online brokerage rankings are often cited as a resource to evaluate almost all of Canada’s online brokerages. Like most of the other comprehensive rankings, information is published annually, and as a result, the data takes a snapshot of the past year or so in the world of DIY investing at Canadian online brokerages.

It is important to note that the data for the MoneySense online brokerage rankings comes from financial services research firm Surviscor. Specifically, according to the methodology, the MoneySense rankings are based on a combination of the following Surviscor reviews:

1. Online experience

2. Mobile experience

3. Cost of services experience

4. Service experiences

Points were assigned to each online brokerage according to a points-based system in which each brokerage received a score based on its ranking within the seven sections of the review:

1st = 5 points

2nd = 4 points

3rd = 3 points

4th = 2 points

5th = 1 point

The overall score was the sum of the awarded sections and reported as points.

In addition to reporting on the points earned by each brokerage as part of this review, the MoneySense rankings also reported the “Best online brokers” by category. The breakdown is as follows:

  • Best online broker for fees
  • Best online broker for customer service
  • Best online broker for ETF investing
  • Best online broker for stock investing
  • Best online broker for financial literacy
  • Best online broker for market data
  • Best online broker for customer onboarding
  • Best online broker for mobile experience

Within each of these categories, the top two firms were reported.

Strengths & Limitations

One of the strengths of the review is that there is lots of data reported for investors to consider, and it has been published in a way that identifies the top two firms in each of the stated categories. This saves a lot of time for investors or readers who simply want or need a quick answer from a reputable source.

A big plus this year is that there is a companion publication on the Surviscor blog which dives into detail on the scores and provides more context on the process.

In terms of limitations, presenting this volume of information can be a challenge. For example, the methodology stated:

“Each firm was assigned a score based on its ranking within the seven sections of review (5 points for first; 4 for second; 3 for third; 2 for fourth; and 1 for fifth), and the overall score was the sum of the awarded sections.”

Given that there are eight reported categories (noted above), it was not immediately clear which seven sections of the review were being referred to, and as a result, validating the math or seeing how scores varied across sections would have added important context to rankings.

For example, one of the immediate questions that jumps to mind with the points system is what the maximum possible score would be?  Without that information, it is hard for the reader to get a sense of just how good a particular brokerage is. And, when the scores are close, or tied, the value of points and how they get calculated becomes even more important to contextualize results.

Results

The results for the 2021 MoneySense online brokerage rankings are shown in the following table.

FirmMoneySense PointsMoneySense Rank
Questrade361
National Bank Direct Brokerage312
TD Direct Investing253
Qtrade Direct Investing224
BMO InvestorLine95
Scotia iTRADE66
RBC Direct Investing57
Desjardins Online Brokerage48
Wealthsimple Trade48
Virtual Brokers48
Canaccord Genuity Direct48
CIBC Investor’s Edge212
HSBC InvestDirect113
Laurentian Bank Discount Brokerage014

Questrade took the top spot in this year’s rankings with a total of 36 points, followed closely by National Bank Direct Brokerage (31 points), and TD Direct Investing in third place (with 25 points). Again, without a maximum score, it is difficult to know exactly how well any one brokerage could have done.

The methodology states that there are seven “sections” and a five-point maximum which would imply a maximum score of 35. However, Questrade has clearly exceeded that score, hence some confusion.

Data outside of the top five brokerages was not published in the MoneySense rankings, however, it was available on the Surviscor site, which helped identify additional context on how the entire field of online brokerages performed this year.

One of the first noteworthy items is just how sharp the drop off is from fourth to fifth place in these rankings. Qtrade Direct Investing placed fourth with 22 points. However, BMO InvestorLine, with just nine points, managed to make it into the top five.

Even though on a relative basis, a top five finish may not sound so bad, in the case of this year’s ranking, the distance between fourth and fifth is materially different.

Another interesting observation about the data is the number of firms who tied for eighth place. CG Direct, Desjardins Online Brokerage, Virtual Brokers, and Wealthsimple Trade are very, very different firms, and yet each tied for eighth place with four points.

Somewhat stunning are the positions of CIBC Investor’s Edge and HSBC InvestDirect, who placed 12th and 13th respectively. In the case of the former, being a “Big Five” bank-owned brokerage should in theory enable it to have the resources to score better, but with a score of two points, it implies that Investor’s Edge was rarely a top five brokerage in any of the evaluated categories. Similarly, HSBC InvestDirect scored one point, and it too barely placed in a top five finish in any of the categories measured.

Surviscor’s “behind the scenes” look at the MoneySense rankings also provided some additional context and important takeaways when it came to this year’s analysis. The following five statements were made in reference to the data and the items that online investors (and online brokerages) should pay attention to.

  • Beware the marketing when it comes to fees
  • Firms never get a second chance to make a first impression
  • Financial literacy is weak
  • Mobile experience is still not where it needs to be
  • $0 commission is not always worth it

With so much data to crunch, it can be a challenge for DIY investors and industry analysts alike to form a “big picture” of what’s going on in the online brokerage space.

Surviscor’s multiple studies to measure online brokerages got us curious, so we compiled the ranking data from each of the four online brokerage analyses cited in the MoneySense rankings, and crunched the numbers to see what the correlation would be between the combined rankings of each evaluation and the MoneySense ranking data.

Methodology, Part Deux

First a(nother) note on methodology. The rankings in each of the four different Surviscor evaluations used in the MoneySense ranking were averaged out and reported along with a standard deviation. The computed rank is one that we generated based on the average rank across each of the evaluations.

 To try and get as close to an apples-to-apples comparison of how different online brokerages ranked against each other in each of the four evaluations, it was necessary to make some minor adjustments to the data.

In the Service Experiences, Interactive Brokers was actually evaluated, so for the sake of consistency across comparisons, they were excluded from the data and the ranks of other brokerages adjusted upwards by one. Wealthsimple Trade was assigned the lowest value for not having been able to be measured. For the actual service experience scores, check the link here.

Adjustments were also made in the Online Experience and Mobile Experience rankings. Laurentian Bank Discount Brokerage and CG Direct were assigned the lowest rank since they did not offer anything that could be evaluated using those tools.

Results

One of the first things to stand out is that the top four brokerages in the 2021 MoneySense online brokerage rankings are the same four online brokerages when computing scores across the four Surviscor evaluations, however, the order in which they appear is different.

In the computed rank, the measure that we calculated, Qtrade Direct Investing came in first, followed by National Bank Direct Brokerage, Questrade, and TD Direct Investing, respectively. What also stood out in the top three is that the average rank between Qtrade Direct Investing, National Bank Direct Brokerage, and Questrade is very close, ranging between 4.0 and 4.8. Having the standard deviation handy (shout out to the stats profs who drove home the point about standard deviations) as a measure of consistency, however, adds a bit more nuance to the top three online brokerages.

Specifically, Qtrade Direct Investing has a relatively low standard deviation (2.3) indicating their ranking is relatively consistent from one evaluation to the next. By comparison, Questrade has the highest standard deviation of the group (5.7), which points to the remarkably poor ranking they received in the Cost of Services evaluation (they ranked 13th). Having the context of all the data helps to illustrate where exactly the top three online brokerages excel relative to each other, and to see how consistently (or inconsistently) online brokerages are scoring.

Consistency cuts both ways, however.

RBC Direct Investing had the lowest standard deviation (1.2) of all of the rankings, implying a fairly consistent score across different evaluation studies. Their average rank was sixth, and the computed rank put them in fifth place overall.

By comparison, Virtual Brokers also had a very low standard deviation score (relatively speaking) at 2.1, but their average rank of 9.8 landed them with a computed rank of 13th overall. This implies that Virtual Brokers has consistently performed poorly on the four Surviscor evaluations for 2021.

It was also intriguing to note that after about eighth place in the MoneySense ranking, the divergence between these scores and the computed rank became more pronounced. In particular, CIBC Investor’s Edge ranked 12th in the MoneySense ranking but ninth in the computed ranking, only slightly behind Scotia iTRADE and Desjardins Online Brokerage.

Takeaways

Being able to step back and take a big picture view of the data provides a unique window into how the different evaluations generated by Surviscor come together, and how they compare to the MoneySense rankings.

When placed side by side, the combined Surviscor studies used in the MoneySense ranking show that firms that are strong on experiential factors, such as online, mobile, and service, tended to do better overall in the rankings.

Interestingly, with the exception of National Bank Direct Brokerage, firms that tended to do well on pricing had a negative correlation to performance on the MoneySense or combined Surviscor rankings. This points out that perhaps there is an inverse relationship between the cost of services and the experience of online investing.

Thus, having the additional data presented in a big picture format does help illustrate what exactly online investors would have to trade off. For example, in choosing between Questrade and National Bank Direct Brokerage, investors can see that the tradeoff might be one of “cost of services” versus “online experience.”

Clearly there is lots of data to explore, which can be both a pro and a con for online investors looking for a quick answer to “which online brokerage is best?”

The reality is that rankings help to compress a lot of the analysis into an easy to digest number. However, as illustrated above, how one defines “best” – even when using the same underlying data – can impact how specific brokerages are perceived and reported on by media, online brokerages themselves, and other DIY investors.

What is evident in looking at the big picture of this data is that the field of Canadian online brokerages is crowded, and with even more new entrants poised to add to the numbers, keeping on top of the evolving space is an ongoing challenge. For those that want to avoid the spreadsheets and comparisons, rankings offer a quick shortcut. But like everything else when it comes to investing online, it pays to do your homework.

Into the Close

That’s a wrap on this week’s Roundup. It’s been a difficult week but here’s hoping we can look for, find, and create the good in the week ahead.

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Discount Brokerage Weekly Roundup – May 31, 2021

It’s Memorial Day weekend in the US, which means that markets there are closed. Here in Canada, however, despite it being a short week last week, the volume of newsworthy developments was quite hefty. There’s lots to catch up on.

In this edition of the Roundup, we look at a big Canadian online brokerage making a splash by jumping into commission-free ETFs. From there, we continue to plumb the depths of more DIY investor data with an important online brokerage rankings release. As always, we cap things off with a snapshot of investor chatter from the DIY investing forums.

BMO InvestorLine Launches Commission-Free ETF Trading

Every now and then a tipping point development takes place in the Canadian online brokerage space. This past week, we might have just witnessed another important milestone in the price reduction for DIY investors.

News started to spread among DIY investors that BMO InvestorLine has launched commission-free ETF trading for a list of 80 ETFs.

This is clearly a big deal given the prominence of BMO InvestorLine in the Canadian online brokerage landscape. And, while they are not the biggest or most popular online brokerage, they do command a respectable amount of attention in online brokerage rankings, and they are part of the “Big Five” bank-owned online brokerages.

Commission-free ETFs at Canadian online brokerages are neither novel nor are they new to Big Five banks either.

Scotia iTRADE, for example, has a list of 49 (as of the date of publication). However, they launched this feature back in 2011 – almost ten years ago – and were followed by Qtrade (with a list of 100 commission-free ETFs) and Virtual Brokers in 2012.

National Bank Direct Brokerage also offers commission-free ETF buying and selling on all ETFs (Canadian and US) so long as minimum purchase amounts are met (minimum 100 units). And, for good measure, Questrade and Virtual Brokers offer commission-free buying of ETFs. Not to mention Wealthsimple Trade, where all Canadian ETFs can be traded commission-free.

Thus, BMO InvestorLine is not the first to jump into the pool by any means, but their offer is already making a splash among DIY investors, who are reacting with the same enthusiasm they did almost a decade ago when these free offerings first hit the market. The difference between now and ten years ago, however, is that commission pricing and consumer preferences and expectations have changed dramatically. Online brokerages in 2021 have to work a lot harder to impress investors today than they did in 2011.

What is interesting about the latest launch by BMO InvestorLine are the “strings” attached to trading these commission-free ETFs. While the list of eligible ETFs is respectable at 80, there is a restriction that investors must hold the ETF for at least one business day from the date of purchase, which is bound to create some friction with some active users. Upon deeper reflection, however, it seems like the math still works out in BMO’s favour.

By implementing the “speed bump” on the timing between purchase and selling, the day traders are going to be excluded (for now). This implies the feature is targeting “investors” (or swing traders), and will almost certainly challenge National Bank Direct Brokerage’s approach of the required minimum buy

Directly challenging Qtrade Direct Investing and Scotia iTRADE will come down to other features and conveniences that BMO InvestorLine can offer clients. As such, it seems like a faceoff between Scotia iTRADE and BMO InvestorLine – but in a great move at the puck drop, BMO InvestorLine has posted a public statement about wait times on its website. This is a direct shot at Scotia iTRADE, which has suffered extended wait times on its phone lines for years, reaching almost unimaginable durations during the past year.

BMO InvestorLine is a large enough competitor to the steady state operations of both TD Direct Investing and RBC Direct Investing, that this latest move to include commission-free ETFs will not go unnoticed. It will also not go unnoticed by the Wealthsimple Trade crowd who find the lack of additional features or slow money transfer annoying at times.

Interestingly, at the time of publication, we had yet to see a big, splashy announcement, but that is almost certainly forthcoming. What BMO InvestorLine’s latest foray likely signals, however, is that one of the standard features an online brokerage needs to come to the table with in 2021 and beyond is ultra-low cost ETF trading.

While wishing for industry-wide dominos to fall might have been premature in 2011, even with a prominent bank-owned online broker getting into the mix, the famous last words of “it’s this different this time” ring true.

Most of the Canadian online brokerage field has managed to do just fine up until now without having to concede ground on commission-free ETFs, let alone commission-free trading. That said, treading water when it comes to pricing or innovation in features no longer feels like an option when the investor tide has clearly turned towards lower-priced alternatives.

Latest Canadian Online Rankings Point to Underwhelming Experiences for DIY Investors

If April showers bring May flowers, it seems like those showers also have brought with them a deluge of data on the DIY investing space in Canada, the US, and even around the world.

The latest landmark data release to launch (publicly) occurred last week, when J.D. Power released the 2021 edition of their Self-Directed Investor Satisfaction Study for Canadian online brokerages.

Now in its 13th year, this study measures “investor satisfaction” among Canadian DIY investors who are clients at a number of popular online brokerages. This year, as in the past few years, eight of 14 or so Canadian online brokerages were included in the analysis, providing a reasonably good approximation of the state of investor satisfaction among Canadian investors.

Of course, regular readers of the Roundup know what’s about to come next when talking about another data report on DIY investors or online investing: we have to dive into the methodology to understand what is being measured and better contextualize the findings.

Like many other online brokerage rankings we’ve covered recently, this year’s J.D. Power investor satisfaction study contains a rich source of insight about DIY investors. And, while the reporting format is fairly standard to its historical structure, what caught our eye this year were the important changes that were made to how investor satisfaction was defined.

Methodology and definition changes aside, it was fascinating to unpack the data on this year’s win, but also to contextualize this year’s results against the historical data from this survey. This has helped to really clarify who has been working hard to consistently improve, who has struggled in 2020/2021, and what the DIY investor can expect when it comes to online brokerages in Canada (hint: it’s not great).

What are the rankings about – what do they measure?

Before diving into the results, it’s extra important to spend some time reviewing the methodology and what’s changed about what this study measured in its latest edition.

According to the press release announcing the findings, there were 2,011 Canadian investors surveyed from December 2020 to February 2021 about their perspectives on various components of the online investing experience.

As mentioned in previous coverage of this study, the definition of “investor satisfaction” is made up of multiple components, and this year the factors that comprise that definition changed. The table below shows the seven components that “investor satisfaction” was measured against in 2020 and in 2021.

Change in Definition of Investor Satisfaction: 2020 vs 2021
20202021
Firm interaction (1)Trust (1)
Account information (2)Digital channels (2)
Commissions and fees (3)Ability to manage wealth how & when I want (3)
Product and service offerings (4)Products and services (4)
Information resources (5)Value for fees (5)
Investment performance (6)People (6)
Problem resolution (7)Problem resolution (7)

While there are a couple of components, such as products and services and problem resolution, that appear in the same level of priority in both frameworks, the rest of the changes point to a significant difference in the drivers of investor satisfaction.

At the top of the list for 2021, “Trust” is now the most important driver, followed by “Digital channels” and the “Ability to manage wealth how & where I want.” In 2021, pricing – as measured in “Value for fees” – falls to fifth from third place.

One of the important limitations of the published rankings is that they did not provide detailed definitions of what these terms refer to specifically. And, with a term like “trust” there could be many different interpretations of what that refers to. Nonetheless, there are some reasonable assumptions that can be made around most of what these categories refer to. The most important point to take note of is that the construct of “investor satisfaction” – or even which online brokerage is “best” – is highly dependent on how that is being measured.

DIY investors place different weights on the importance of each of these factors, so although this survey provides a systematic approach to comparing investor attitudes and beliefs about the online brokerage experience, individual investors are likely to have differing opinions on how well or poorly these results match their own experiences.

What are the findings from this year’s results?

With some important qualifiers out of the way, the results from this year’s study paint a portrait of an industry that has struggled to keep pace with the level of demand from DIY investors. Whether it was on the customer service front, where wait times and getting through to a human was nearly Sisyphean, or it was on platform stability on the most volatile of trading days (or some not-so-volatile days either), how online brokerages weathered the storm became evident through the data gathered in this study.  

Perhaps the most telling finding in this regard is that 24% of investors reported having at least one problem with their firm in the past 12 months, up from 14% in 2020 and more than double the rate in the US (11%). For active investors, this is a big problem when it comes to assessments around reliability. For less active investors, however, if the most “exciting” days to be in the market are fraught with outages, delays, or interruptions to service, there is almost no second chance to make a first impression.

And, according to additional findings in the data, those hiccups matter. 20% of investors who experienced a problem stated they are considering switching, which is more than three times the rate of those without issues who would consider switching online brokerages.

According to Michael Foy, Senior Director and Head of Wealth Intelligence at J.D. Power:

“Especially for newer clients, those who have not yet developed strong loyalty with these firms, who are more likely to leave if they have a bad experience. Investors today have more choices and firms need to raise the bar on the experience they deliver.”

Of course, beyond the contextual information, the focal point of the rankings is the list of how each online brokerage scored.  

National Bank Direct Brokerage654
Questrade645
RBC Direct Investing615
BMO InvestorLine607
Desjardins Online Brokerage599
TD Direct Investing591
CIBC Investor’s Edge585
Scotia iTRADE576

The table above shows the numerical scores achieved by Canadian online brokerages that were reported on for this study. The scoring for the online brokerage ranking by J.D. Power is out of 1,000, so it was interesting to note that this year the scores were lower on average than they have been historically (more on that in a moment).

The average score across the eight online brokerages that were reported on was 602. On an absolute basis, it is tricky to compare year over year results now that the evaluation criteria has dramatically shifted. However, on a relative basis, it is possible to derive additional insight.

One of the first things that is important to point out is the spread between first and last place. In this case, the distance between the top and bottom of the ranking is 78 points. By comparison, last year’s ranking saw a difference of only 33 points between top and bottom. It is therefore fair to say that volatility in this year’s rankings reflect some meaningful differences in the way online brokerage operations are impacting investor satisfaction.

The difference between first place ranked National Bank Direct Brokerage and second place Questrade was only nine points, but the difference between second and third place (RBC Direct Investing) was a whopping 30 points. What this implies is the top two firms substantially outperformed the remainder of their peers on the measures contained in this ranking.

Curiously, the difference between placements from third place onwards is a fairly consistent six to nine point drop. This linear decrease is probably an artifact of certain kinds of measures, but it implies that the bottom six online brokers could make significant strides on this index with a minimal amount of effort invested in customer satisfaction.

What is not a coincidence, however, is that five of the bottom six online brokerages in this ranking are the Big Five bank-owned Canadian online brokerages. The differentiating factors between these brokerages are minimal, so it stands to reason that investor satisfaction levels with these bank-owned online brokerages is probably pretty close too.

In contrast, the data from the latest online brokerage survey imply that the firms at the top have found the right mix of service and pricing with DIY investors in 2020, which has created a big gap between these firms and the rest.

National Bank Direct Brokerage and Questrade were able to do something very different and appealing for their clients, compared to the rest of the industry in 2020.

How do this year’s results stack up over time?

It’s at this point that historical data is incredibly helpful to provide additional context around online brokerage performance on the J.D. Power Investor Satisfaction rankings.

Analyzing the results from 2017 to 2021, one of the first things that immediately jumps out is that the average investor satisfaction scores with Canadian online brokerages, regardless of how they’re measured, have been decreasing.

Scores from J.D. Power Canadian Self-Directed Investor Study 2017 to 2021 (heatmaps applied to each year).

The stretch from 2020 to 2021 is an anomalous one in terms of customer composition for online brokerages because so many new investors have joined the client pool.

As the J.D. Power study pointed out, many of these new clients haven’t had the benefit of seeing what the experience was prior to this year. With the number of service and performance issues many online brokerages suffered from, the risk of new clients who joined an online brokerage leaving shortly after joining is likely higher than it’s been in the past.  

For DIY investors who have been around since 2016 (which is what the 2017 data would have captured) or earlier, J.D. Power’s satisfaction scores imply being a DIY investor has probably felt like an investment with diminishing returns at most of the brokerages analyzed. Even if pricing has become more competitive, the value proposition has not improved overall, at least in the firms whose data was published as part of this ranking.

Since not all online brokerages were reported on, it is hard to say what the DIY investor experience has been like at Qtrade Direct Investing or Interactive Brokers or even Wealthsimple Trade, names that are often associated with significant enthusiasm in either rankings or DIY investor community discussions.

Another remarkably consistent pattern that stands out with these rankings is not so much who’s at the top, but rather who has remained at or near the bottom.

In three of the past four years, Scotia iTRADE has ranked as the online brokerage with the least satisfied clients, with TD Direct Investing not too far behind. Historical data also shows that CIBC Investor’s Edge has gone from being among the top online brokerages as recently as 2019 to second last in 2021.

Looking back over the past five years, Questrade stands out as an online brokerage that has continuously strengthened its satisfaction scores, and although it dropped from top spot last year to second place this year, it continues to move in a positive direction for DIY investors, even under the new evaluation criteria. On a relative basis, RBC Direct Investing has gone from a consistently average score to one that is better than average.

Historical investor satisfaction data also helps to quickly spot online brokerages who had an especially rough year in terms of maintaining investor satisfaction.

Desjardins Online Brokerage, for example, went from a market leading (or high scoring) position from 2017 through 2020 to being below average in 2021. Another unusual score was BMO InvestorLine’s. Like Desjardins, BMO InvestorLine consistently placed at or near the top from 2017 through 2020, however for the 2021 results, BMO InvestorLine just barely beat the average.

As mentioned above, the changes in the methodology used to define investor satisfaction make comparing absolute scores from one year to the next hard to do, but the relative position of each of these Canadian online brokerages to one another makes it clear who the leaders and laggards are. Perhaps most compelling is that the bottom of the pool did not really change in 2020 and 2021 despite the shift in how things are being measured.

Takeaways

There are a number of very interesting takeaways from the latest online brokerage rankings by J.D. Power.

As other data points have indicated, most Canadian online brokerages were not ready for the crush of new business in the form of DIY investors wanting to sign up for new accounts, or for the flood of investor trading volume that came with it. What the J.D. Power satisfaction study helped put into sharper focus was the impact to firms via the voice of their customers.

The new methodology by the investor satisfaction study puts Trust at the top of the criteria that they now evaluate online brokerages with. In a world where pricing among online brokerages is increasingly under pressure, DIY investors are still going to expect that an online brokerage platform be reliable, and when pricing is high, so too are expectations around the ability to perform when needed.

National Bank Direct Brokerage appears to have figured out some key ingredients. Low commissions, and entirely free commission buying and selling are important on the pricing front, and whatever they happen to be doing on the service front is working as well.

The latest evaluation by Surviscor highlights the pricing advantage that National Bank Direct Brokerage offers relative to other brokerages, and National Bank Direct Brokerage is starting to gain traction in discussions on social media channels. With this additional accolade, the “trust” profile and the interest in National Bank Direct Brokerage is sure to grow.

According to the J.D. Power Investor Satisfaction Study, Canadian online investing satisfaction scores are nothing to write home about. The troubling trend the historical data has uncovered is that there is a palpable gap in innovation and enthusiasm to do better for clients. Compared to the US, most Canadian online brokerages are trailing in areas that are critical to building loyalty and client delight.

The opportunity to any Canadian online brokerage who reviews this data is that an extraordinary service or innovative experience can earn and win a lot of praise. As the saying goes, there is far less traffic on the extra mile, so firms doing more in either service or innovation are going to stand out (in a good way).

From the Forums

Riding the Commission-Free Waive

It’s hard to keep a deal this good a secret for long. Eagle-eyed DIY investors spotted a new commission-free ETF feature at BMO InvestorLine before any official announcement. Here are a few links of interest worth browsing:

BMO InvestorLine Now Offering Commission Free ETFs (reddit)

Zero Commission ETFs (Financial Wisdom Forum)

Commission Free ETFs at BMO Investorline (Red Flag Deals)

Commission-Free at Last

Is the grass (and account statement) really greener on the other side of the $10 commission per trade? One forum user sparked a lively discussion of DIY investors on the topic of switching away from paying higher fees for trading online. Read more about what users had to say here.

Into the Close

With US markets closed, there’s only one story that matters to many Canadian DIY investors – will the Leafs beat themselves? Ironically the last time the Toronto Maple Leafs were in the Stanley Cup playoffs was the same year Friends signed off, which was 2004. In 2021, it’s going to be debatable who had the bigger comeback.

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Discount Brokerage Weekly Roundup – May 24, 2021

Stock markets in Canada were closed for Victoria Day, but that did little to dampen activity and enthusiasm for DIY investors looking stateside (or further afield) for trading opportunities. And they’re not alone. On the unofficial start to summer, we decided to peek across the (still-closed) border with the US to catch up on important trends and developments in the US online investing space.  

In this America-focused Weekly Roundup, we look at interesting developments among the biggest and smallest online brokerages in the US, and how each is shaping what DIY investors can expect from their online investing experience. First, we focus on the biggest player in the space, Schwab, and what some recent data released by them suggests about DIY investing enthusiasm. Next, we turn the spotlight onto another online investing player, tastytrade, who has demonstrated just how far enthusiasm and community can take an online trading brand. As always, we cap things off with some interesting DIY investor conversation to ease back into the shortened week (here in Canada).

Scaling New Heights: Lessons from Schwab After Peak YOLO

When it comes to online brokerages, there’s big, there’s bigger, then there’s Charles Schwab. Given its gargantuan size and diverse business activities, it’s almost a misnomer to characterize one of the original discount brokerages as such in 2021.

With banking activities, managed wealth, and a host of other financial services that go beyond online stock trading, online trading makes up a small fraction of where Schwab makes their money these days. Even so, given the number of accounts and reputation in the US online brokerage market, Schwab is undoubtedly an influential force with retail investors.

Just how big is Schwab?

Their recently reported trading metrics from April listed  total client assets as $7.34 trillion (USD), an increase of 4% from March and 94% from April 2020 (not a typo). At these levels, spreadsheet columns have to be widened to accommodate the number of digits in a cell to properly total things up. So, if there’s one measure to indicate that you’ve made it in the world, it might just be that.

One of the reasons that they continue to grow at such an extraordinary clip was also reported in Schwab’s latest performance report.

In April, Schwab opened 609,000 new online brokerage accounts (also not a typo), which is over three times what they opened in the same period last year (201,000 new accounts). By comparison, Interactive Brokers, another popular publicly traded US online brokerage, opened about 34,200 net new accounts in April – not an apples-to-apples comparison, but it does provide a reasonable approximation of the scale of difference between the two online brokerages.

While the snapshot of data is mind blowing on its own, when put into context across time, the account opening data at online brokerages like Schwab and Interactive Brokers reveal a possible trend forming: a peak in the surge of DIY investor interest.

Of specific importance is comparing the drops in new account openings at Schwab and Interactive Brokers as an indicator that the “fast money” active traders have stepped away from the online trading space in larger numbers than less active investors have. Thus, Interactive Brokers and firms that cater to active traders will have seen a stronger pullback than firms that cater to “average” DIY investors.

Consider the following: compared to March, the number of new accounts opened at Schwab in April was actually down 28%. By comparison, Interactive Brokers saw a drop of 43% in net new accounts on a month-over-month basis. At both brokerages, new account openings have declined double digits for the past two months, and in the case of Interactive Brokers, the declines in new account openings started in February.

What this data signals is that US online brokerages are seeing elevated account openings relative to last year but a rapidly declining rate of new account openings from retail investors in 2021. In short: the flood of DIY investors appears to have crested.

Due to COVID-19, 2020 and 2021 have been strange years to say the least. Even though a lot has already been written about the elevated interest in investing online, industry analysts have understood that a drop off was bound to occur at some point. The profile of that drop off, however, is starting to become more clear and that has implications for online brokerages during the transition back to a more normal economy.

With May just around the corner, the volume of new accounts will be an important indicator to watch to see if the contraction in account growth is accelerating or decelerating.

Regardless of the direction of new account sign ups, the data on total accounts opened at online brokerages reveals an unmistakable feature: there are lots of new investors who decided to open up online investing and trading accounts in 2021 – a fact that is all the more impressive considering the surge in interest in online investing by investors last year at about the same time.

The question confronting online brokerages such as Schwab and Interactive Brokers is: will these new investors will stick around?

Some important clues to answering that question came from the spring business update presented by Schwab in late April this year.

One important data point (hooray, more data) is that 70% of clients new to Schwab’s retail trading business in the first quarter of 2021 were under the age of 40. Demographically, this sets the stage for long-term retention if the client experience and value proposition are in place to properly cater to this group of investors.

The strongest statement regarding the outcome of the increased interest by newer investors is seen in the slide shown above. Schwab expects retaining clients, and their assets, even if trading activity levels decrease as markets stabilize.

It is this forecast that spells out one the most important strengths of having the kind of scale that Schwab does. With that kind of size, even small percentage improvements in revenue generating activities can tremendously impact the bottom line.

For example, two trends on the above slide show that retail trades per account have more than tripled from December 2019 to March 2021, and that margin balances as a percentage of total client assets have also increased from 0.7% in Q4 2019 to 1.0% in Q1 2021.

A recent promotional email received from Interactive Brokers helps to illustrate why margin loans trending up at Schwab is so important: the margin loan rates at Schwab are substantially higher than at Interactive Brokers.

Thus, the interesting (no pun intended) picture emerging is that for the new investors who joined Schwab and who are going to be more actively trading, an almost 5x cost differential in margin lending rates is going to matter at some point. In case you’re curious, the margin lending rate at Robinhood is 2.5% at the time of publication, which underscores just how fiercely competitive Interactive Brokers is when it comes to features that typically appeal to active traders.

The challenge for Schwab, and really any online brokerage that wants to generate revenues in a zero-commission model, is to charge more for other features, like margin interest, to offset the forgone revenue from trading commission.

For Canadian online brokerages, margin interest rates are a feature that appeal to active investors or investors with larger assets who don’t trade as frequently but who use margin. Both these segments represent high value clients to an online brokerage, so rather than dropping commission rates to zero, savvy online brokerages in Canada may provide attractive margin rates in order to win new clients (or retain existing ones).

The US online brokerage market is fiercely competitive in many respects, however, because they have largely moved to a “zero-commission” world there are other aspects of their business, such as margin rates, that mainstream online brokerages have been slower to compete on. Here in Canada, where zero-dollar commission trading is not really prevalent, margin rates seem like an interesting area to watch.

As was mentioned last week in our coverage of Surviscor’s analysis of pricing among Canadian online brokerages, there is no such thing as a “free lunch,” and as a result, DIY investors can expect to pay the price for commission-free trades in other parts of the online trading experience.

The key takeaway from the latest set of data indicators at Schwab are that there is now a large cohort of online investors who have opened up online investing accounts, who will likely be in need of a very different kind of investing experience going forward than what spurred them to be interested to begin with. If the “fast money” has exited, and markets have less volatility, active traders are going to be hard pressed to find compelling trading opportunities – which is a need almost all brokerages will have an interest in trying to address regardless of size.

The Power of Small: Tastytrade Built a Billion-Dollar Business on Community

This past week, the online financial media powerhouse tastytrade celebrated an impressive milestone: their 10 year anniversary. As part of that accomplishment, they released a very interesting documentary that profiled how the tastytrade brand was conceived, launched, and has grown over the past decade.

The documentary is fascinating content on a number of levels. From the background of how the company came to be named after a popular Philadelphia-area snack, to the palpable enthusiasm for doing something different in finance, the video captures the journey of the tastytrade brand through their first 10 years and ends with an intriguing view of trading in the future.

What is most compelling about this documentary, however, is that it showcases how a powerhouse online investing brand can develop by focusing first on delivering engaging, people-centred content.

It helps to understand that one of the founders behind tastytrade is Tom Sosnoff, the founder of the ultra-popular options trading platform Thinkorswim. Thinkorswim was eventually acquired by Ameritrade (which was then acquired by TD, and the resulting entity, TD Ameritrade, was eventually acquired by Schwab). Thus, the roots of tastytrade’s success in talking in-depth about trading options trace back to Sosnoff’s pioneering work with the Thinkorswim platform.

In the documentary, Sosnoff’s journey from Thinkorswim to tastystrade helps to explain a lot about how the core team that started tastytrade came together, and more importantly, the fact that the focus behind tastytrade was to build financial content in a way that was as much entertaining as it was useful.

Really interesting financial content, it seems, is in very limited supply. And as a result, the business model for tastytrade appeared to be to create an audience of individuals who are interested in and educated about options trading, and that would ultimately set the stage for the online brokerage arm, tastyworks, to translate that viewership into clientele.

As with many great entrepreneurial endeavours, the founders of tastytrade didn’t envision exactly where the business would get to. The billion-dollar acquisition of tastytrade in January of this year, however, validated the premise that building an engaging platform to help investors navigate the world of investing – including something as complex as options trading – would be of real value.

Another very interesting facet of the documentary is the way in which the tastytrade “secret sauce” came together.  

Perhaps it was the comfort level with risk that naturally accompanies a lifelong trader, but the idea to staff a financial content company with comedians to deliver financial information is anything but traditional. In fact, what is genuinely interesting to witness over the journey of the past ten years, is the constant level of experimentation with different types of shows and formats that inevitably has led tastytrade to where it is today – being able to generate live programming seven days a week, having over 100 shows, and a growing global audience (the stat shared about audience cited over 100 million hours of views) reaching 190 countries.

Ultimately, the winning set of ingredients for programming on tastytrade came down to having an authentic interaction between traders and the not-yet-trader staff captured in real time.

Having Sosnoff and co-host walk the talk about their trade ideas and strategies, engage in random banter, and do so in a down-to-earth fashion tapped into the DIY investor culture in a way that traditional news media or traditional approaches to financial content never quite got right. Before podcasting exploded, Sosnoff sought a radio-show feel to the tastytrade core programming, and as a result of a lot of trial and error, the end result was understanding how best to deliver the message through various media.

Although shows are planned and professionally produced, they don’t feel overly scripted. There is visible diversity and a tangible enthusiasm for either learning about trading, or teaching trading, or just talking about trading (or the things that traders would inevitably talk about in the news). In short, Sosnoff and the tastytrade team nailed the culture of trading, because many of those planning or participating in shows have been a part of that world for so long.

This is not unlike the approach of Thomas Peterffy during his tenure as CEO of Interactive Brokers. Like Peterffy, Sosnoff understands the mindset of traders, and to his credit surrounded himself with a team that has created a very loyal and vocal community of traders/viewers (aka tastynation).

For online brokerages in Canada – and likely the world over at this point – there is an inescapable reality about the business: order execution is not enough. What tastytrade and tastyworks clearly demonstrate is that self-directed investors need both education in the form of navigating strategies and principles related to investing, as well as trading ideas. And, as any patient spouse or family member of an avid DIY investor will attest to, self-directed investors also need what other humans need, connection and community. And, tastytrade offers the latter in large measure.

Instead of analyst reports and the traditional news feed of financial data, tastytrade has shown that taking a human-centred approach makes financial content more accessible. And they’re not alone. Robinhood understood this with their purchase of the podcast Market Snacks (now Robinhood Snacks), a financial content show that provides updates on popular market stories and publicly traded companies. Regular (i.e. daily) content with personality that audiences can develop relationships with build and drive loyalty. It compels people to tune in, and in turn, feel more comfortable and even confident in taking on trading ideas they hear being discussed.

Despite the regulatory hurdles in Canada that constrain how much in-house content can be created at an online brokerage, tastytrade and other online brokerages in the US have shown that the formula for success and client delight is enhanced with compelling and delightful content.

As of right now, there is no clear DIY investor content leader among Canadian online brokerages. However, sometime in the not-too-distant future that may change. Tastytrade and tastyworks have publicly telegraphed their intent to come to Canada, and when they do, it will be a challenge for any online broker here to compete against that human-centred content machine.

It’s already clear that certain online brokerages are trying to generate “investing” content. Simply creating content and having it available on different channels, however, is a brute-force way to get attention on content. While it might “work” in the short term, it is highly transactional and not at all a part of what human investors ultimately seek – which is community and connection.

Although coming to Canada is not mentioned directly in the documentary, where tastytrade plans to go next is equally fascinating.

Now part of a much larger global brand, if tastytrade can retain and direct much of what has contributed to their success to date, the technologically immersive experience of online investing previewed in the video reiterates just how much trading culture and community is at the heart of the growth strategy. Ironically, or perhaps expertly, tastytrade has demonstrated the ability to grow exponentially bigger by focusing on creating the feeling of being small.

From the Forums

Gearing Up for Leverage

Making decisions to trade using margin or leverage is not something to be taken lightly. Looking to the wisdom of crowds, one young investor taps into the online investing opinions of reddit for perspective on whether or not leverage is worth doing with a secured line of credit. Read what redditors had to say here.

Minding Your Own Business

Trading online as an individual is one thing, but getting a corporate account to trade online with can be surprisingly personal. One online investor turned to other investors for guidance on whether the assurances sought by one online brokerage for a corporate trading account were, in fact, appropriate. Find out more here.

Into the Close

That’s a wrap on the long-weekend edition of the Roundup. With so much of the focus of this Roundup on the US, there is another important and sombre milestone in the US taking place this week: the one year anniversary of the murder of George Floyd. There has been a lot of heavy-hearted news over the past year, however, one thing that is clear is that we can all play a part in eradicating racial injustice and discrimination. If you’ve found your way to this part of the Roundup, take a few moments to reflect on or read about racial injustice. There’s also a simple but powerful film on the topic below.

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Discount Brokerage Weekly Roundup – May 17, 2021

With the weather starting to warm up, flowers aren’t the only thing springing up at every turn. This month, it seems like DIY investing data continues to bloom, offering some very colourful perspectives on the current online trading landscape.

In this edition of the Roundup, we dig into yet another treasure trove of online brokerage and DIY investor data and find out why measuring the similarities between online brokers is challenging. Also, we’ve got reactions by DIY investors to interesting survey results and more in the forum chatter.

Reviewing Online Brokerage Pricing: Latest Rankings Challenge Perceptions of Low-Cost Online Trading

Another week, another big online investing data report to talk about.

This past week, fees at Canadian online brokerages were under the microscope, as Canadian financial services research firm Surviscor published a significant analysis of the fee structures at 15 Canadian online brokers and found some surprising – and at times controversial – results.

If there’s been any recurring theme to the coverage of the reports we’ve analyzed over the past few weeks, it’s that context matters. In particular, while it is tempting to focus on the headline results, it is often crucial to understand the methodology underpinning a study to properly understand the outcomes.

In the case of this latest analysis by Surviscor, this is especially true, because question at the heart of this study is “Who is Canada’s lowest cost online brokerage?” As any long-time reader of the Weekly Roundup will know, however, the answer is usually “it depends.”

So, before diving into the results, we’ll start by looking at the methodology and process information provided about this study which will better enable readers to understand how the results were ultimately arrived at.

Method Matters

One of the most interesting features of the Surviscor online brokerage fee analysis is sheer number of different factors that it considers. Like anything, however, the devil is in the details.

At a high level, the following six cost categories were measured:

  1. Equity trades
  2. Options trading commissions
  3. ETF commissions
  4. Data costs
  5. Account interest rates
  6. General account fees
Stock commissions

When it comes to equity trades, over 12,600 simulated equity orders were analyzed. Specifically, 6,300 buy and sell orders for Canadian and US equities, respectively, were measured. The prices and volumes of securities varied and ECN fees were applied where applicable.

Options commissions

Treated as a sub-category, options commissions on a total of 340 option orders, split into 170 Canadian and US buy and sell orders (of various price and contract levels), were measured.

ETF commissions

Over 350 ETF orders consisting of over 175 Canadian and US buy and sell orders were analyzed, each order consisting of 700 shares per order.

Data costs

Market data fees were examined in this category, and consist of the fees charged by firms to provide real-time quotes, streaming quotes, trading dashboards, and “enhanced” research and tools.

Account interest

This category measured debit and credit interest for both non-registered and registered accounts in Canadian and US accounts.

General account fees

Fees included and measured in this category refer to inactivity fees, non-registered and registered account annual fees, charges to transfer assets, confirmation fees, closure fees, and account investigation fees.

Another important methodological point to understand is that profiles of traders/investors were broken into the following five categories based on the number of trades made per month:

  1. 0-4 trades
  2. 5-9 trades
  3. 10-33 trades
  4. 34-49 trades
  5. 50+ trades

Results & Analysis

The table below shows the rankings of all the Canadian online brokerages measured as part of this study.

RankOnline BrokerageScore
1National Bank Direct Brokerage93%
2*Wealthsimple Trade86%
3Desjardins Online Brokerage83%
4HSBC InvestDirect77%
5CIBC Investor’s Edge76%
6Qtrade Investor (now Qtrade Direct Investing)61%
T-7RBC Direct Investing54%
T-7Scotia iTRADE54%
T-7Laurentian Bank Discount Brokerage54%
T-10TD Direct Investing53%
T-10BMO InvestorLine53%
12Virtual Brokers50%
13Questrade45%
14Canaccord Genuity Direct42%
15Interactive Brokers22%

The online brokerage that took the top spot in this edition of the online broker cost ranking was as much of a surprise as two of the bottom three rankings.

Starting from the top of the podium, National Bank Direct Brokerage came out on top in this study with the highest score of 93%.

Although it was not entirely clear based on the methodology what the percentage refers to exactly, on a relative basis it is clear that this bank-owned online brokerage managed to outrank its competitors because of lower standard commission pricing (which impacts equities and commissions trading), as well as the fact that it offers commission-free ETF buying and selling when at least 100 ETF units are either bought or sold.

Taking second place with 86% was a name that many newer investors and much of the popular press on online investing has characterized as the lowest cost online brokerage: Wealthsimple Trade. There was a heavily telegraphed caveat to the results of this study (the elephant-sized asterisk) when it came to Wealthsimple Trade, which, for several reasons to be covered below, makes them a very controversial pick for second place overall in this ranking.

In third place was Desjardins Online Brokerage – the direct rival to National Bank Direct Brokerage – who scored 83%. Desjardins Online Brokerage was the winner of this ranking last year, and depending on whether or not to include Wealthsimple Trade’s limitations, this online broker might have ended up in second place overall.

Aside from Wealthsimple Trade, what is noteworthy about two of the top three online brokerages in the fees ranking is that they are both heavily focused on the Quebec market. Not that many Canadian online investors outside of that province are likely to know about these two providers.

The fact that both of these brands compete aggressively with one another means that there is pricing available for active traders at each of these firms that is unheard of at other online brokerages across Canada. Desjardins Online Brokerage, for example, charges $0.75 per trade if more than 30 trades per month are made. By comparison, National Bank Direct Brokerage charges $0.95 per trade for clients who make 100 trades per quarter.

Looking at the top five ranked firms in this latest study, it shows that having a low standard commission price significantly improves the ranking position. Again, excluding Wealthsimple Trade, four of the top five online brokerages in this latest ranking have a standard commission rate that ranges from $6.88 to $6.95 per trade. Also worth noting is that the only big-five bank-owned online brokerage to appear in the top five is CIBC Investor’s Edge, however, both National Bank Direct Brokerage and HSBC InvestDirect (which placed fourth overall) are bank-owned online brokerages.

Thus, one of the biggest findings that this study helps put into focus is that value-conscious online investors can find competitive pricing and convenience with banking products, all in one online brokerage.

Another interesting set of results emerged with the three online brokerages tied for seventh place and two that tied for tenth. The scores for online brokerages that ranked seventh were 54%, while the scores for tenth place were 53% – a razor thin margin. While it seems strange to be focusing on this middle-of-the-pack group, four of Canada’s biggest five banks have an online brokerage that appeared in either seventh or tenth place when it came to fees. Perhaps the most shocking or surprising finding is that relative unknown Laurentian Bank Discount Brokerage was tied with RBC Direct Investing and Scotia iTRADE, and it managed to do better from a cost perspective than TD Direct Investing and BMO InvestorLine.

That so many of the biggest bank-owned online brokerages in Canada performed so closely to one another is a signal that when it comes to fees, these brokerages are virtually indistinguishable. This result likely reinforces the perception that there is no real difference when it comes to commission or trading price for big-bank-owned online brokerages. The differentiators will come in features or service elements.

While the bottom ranked online brokerages typically don’t get much attention in online brokerage reviews, this time seems different. Specifically, three big names often associated with low cost of trading online managed to make up three of the bottom four spots. Virtual Brokers, Questrade and Interactive Brokers, ranked 12, 13 and 15, respectively.

One feature that each of these three online brokerages have in common when it comes to pricing is that they have a variable component to how they charge for trading stocks. Virtual Brokers and Questrade, for example, charge $0.01 per share with a minimum trade cost and maximum trade cost. Similarly, Interactive Brokers charges $0.01 per share with the maximum charge being 0.5% of the trade value.  

Arguably, aside from the variable pricing, there are also ECN fees which factor into the total commission cost for trading with Virtual Brokers, Questrade, and Interactive Brokers. So depending on the type of order placed (e.g. limit order versus market order), the cost of executing a trade can be far higher than just the commission price.

Method Determines Measures

Why it was so important to start this exploration of the Surviscor report by highlighting the methodology is because the way in which certain components were measured influenced the overall ranking outcome.

One example that stands out is with respect to ETFs. Recall that according to the ETF component of the cost evaluation, 700 “shares,” or units, was used as the standard buy or sell amount. It is difficult to say what the “average” or even the weighted average number of ETF units would be during a typical transaction. However, for many investors, that could represent a significant dollar purchase.

Consider, for example, the cost for purchasing 700 units of one of the most popular ETFs among Canadian online investors – VBAL. The last price for this ETF was $29.15 so an order to buy 700 units would cost $20,405 before commissions.

This transaction would be commission-free at National Bank Direct Brokerage, Wealthsimple Trade, Questrade, and Virtual Brokers. If, however, the number of units purchased was lower, say 50 units, then the commissions for the transaction (buy and sell) would see Wealthsimple Trade come out on top with zero commissions, followed by Virtual Brokers and Questrade, while the transaction at National Bank Direct Brokerage would cost $13.90 ($6.95 for each of the buy and the sell).

That picture changes dramatically, however, if the transaction was for a US-listed ETF. For an ETF like VTI, which had a closing price (at the time of publication) of $215.54 US, 700 units before commission would cost $150,878 US. The commission prices for National Bank Direct Brokerage, Questrade. and Virtual Brokers would be zero. However, at Wealthsimple Trade the foreign exchange fee would be 1.5% times the corporate foreign exchange rate (which at the time of publication was $1.21070). In this example, that means the rate of $1.2289 would apply, which means that instead of costing $182,668 CAD, the forex conversion cost would work out to $185,408 CAD, and would mean a difference in cost of $2,740.

It is for that dramatic difference in potential cost to consumers that, as part of this cost analysis, Wealthsimple Trade comes with a very substantial asterisk. Certainly, there are some situations, such as trading Canadian securities, where Wealthsimple Trade could come out ahead in terms of cost relative to other Canadian discount brokerages. However, any substantial transactions taking place for US-listed securities would be significantly more expensive.

Given that Wealthsimple Trade also has restrictions on the securities and markets that DIY investors can trade on, whereas many other online brokerages do not, it becomes harder to rank Wealthsimple Trade on an apples-to-apples basis.

It is unclear how Wealthsimple Trade was graded for the US-listed securities that would have been traded (700 shares/units of US ETFs and which US stocks) as part of the testing framework, as well as how Wealthsimple Trade was graded for options trading and margin lending (which are not currently offered by Wealthsimple Trade).

Without knowing which securities were used in the test and which order types, it is harder to pinpoint why Wealthsimple Trade ranked as highly as it did, despite limitations for currency conversion and trading certain securities that other online brokerages would have no issues with. Similarly, this could potentially have an impact on other online brokerages such as Questrade or Virtual Brokers, where buying ETFs is commission-free, or for Qtrade Direct Investing and Scotia iTRADE, where there are certain ETFs which are completely commission-free to trade.

Takeaway

With so much data being analyzed, it is no small feat to be able to organize and score all of Canada’s online brokerages even on something as quantifiable as cost.

Surviscor’s latest evaluation of online brokerage costs reveal the challenge of trying to deconstruct a lot of intentional differentiation effort on the part of Canadian online brokerages. If it is not easy for the professionals to do it, it is certainly a lot harder for DIY investors to run these kinds of deep analysis exercises to find the cheapest (or best value) online brokerage.

There are other variables, such as age of the investor, or what ticker symbols or the amounts of stock/securities being transacted, that can influence what kinds of costs a DIY investor pays for commissions or account fees.

One of the most interesting consequences of Surviscor’s latest analysis, however, is that the low pricing structures of online brokerages such as National Bank Direct Brokerage, Desjardins Online Brokerage, and HSBC InvestDirect are going to pique the curiosity of more and more investors.

Despite having a major focus on the Quebec market of DIY investors, based on the exposure this latest evaluation is getting online, National Bank Direct Brokerage will benefit from the attention. By implication, the bigger bank-owned online brokerages and traditionally viewed “low cost” providers will have to adjust course to compete even more aggressively with brokerages who are able to provide the convenience and confidence of a bank with a price point that, as yet, cannot be beaten by most online brokerages.

From the Forums

Price of Fame

Continuing on the theme of low cost online brokerages, reddit was abuzz discussing the findings of the latest Surviscor report. Check out posts here and here for users commenting on National Bank Direct Brokerage’s latest win and what DIY investors think about commission pricing at Canada’s online brokerages.

Flipping the Switch

Moving between RRSP providers can be nerve wracking. In this post, one redditor looks for community guidance in choosing between two very popular online brokerages.

Into the Close

That’s a wrap on another data-filled episode of the Roundup. Admittedly it was hard not to drop a doge reference into the whole article so what better way to channel “long” energy than by signing off on a meme-filled ending ahead of the long weekend! Be safe!

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Discount Brokerage Weekly Roundup – April 5, 2021

Despite the short week last week, markets didn’t mind and leaped ever higher. While patient investors were rewarded, not everyone was so hoppy, it seemed.

In this edition of the Weekly Roundup, we jump into the latest deals and promotions activity spotted at Canadian discount brokerages in April, and the trends that seem to be emerging from the latest offerings. Next, we take a look at why some investors are not so keen on markets grinding upwards and what that could mean for Canadian online brokerages through the rest of the year. Tweets will be off for a few weeks, but we’ll wrap up with interesting discussions taking place on investor forums.

Online Brokerage Deals Spring Into Action

There’s good news for DIY investors on the hunt for a deal when opening an online trading account. April brings with it more than just rain and signs of spring, as another Canadian online brokerage has also decided to step into the deals and promotions pool, bringing the post-RSP season count of new deals to two.

It might seem unusual to make a big deal out of just two online brokerages doing anything, however, it’s not just any two online brokers. While it’s too soon to call something a trend outright, there are some interesting parallels that make a case for a possible pattern emerging.

To start off the month, HSBC InvestDirect launched a new commission-free trading offer that features 60 commission-free North American equity or ETF trades which are good for use for up to 60 days. The offer, which launched at the beginning of April, runs through the end of June and is available to both new and existing clients.

Midway through last month, National Bank Direct Brokerage also launched a massive commission-free trading promo, ponying up 100 commission-free trades which were good for use for up to one year.

With a competing commission-free trading offer already on the market that is both larger and longer in duration, why might Canadian DIY investors consider HSBC InvestDirect’s promotion?

One of the reasons that HSBC InvestDirect’s new offer might appeal to new clients is because HSBC InvestDirect has the lowest standard commission rates for a Canadian bank-owned online brokerage, at $6.88 per trade. It might seem like a few pennies per transaction when compared to National Bank Direct Brokerage’s or CIBC Investor’s Edge standard commission of $6.95 per trade. However, investors who are ultra-price sensitive and who want to have the convenience that a bank-owned online brokerage affords, as well as the potential security of one provider for their personal financial and wealth management needs, can find all of these with HSBC InvestDirect.

Another key reason why investors might lean towards HSBC InvestDirect is because this online brokerage is fairly unique among most Canadian online brokerages in that it enables trading on international stock exchanges, something that is of increasing appeal. It is why in the fine print of the new offer by HSBC InvestDirect, trading is restricted to North American equities and ETFs. No other online brokerage makes it a point to stipulate that commission-free trades apply only to these geographies.

In comparing the commission-free trading offers from HSBC InvestDirect and National Bank Direct Brokerage, both show that the numbers of commission-free trades being offered are relatively high. By comparison, Questrade, one of the online brokerages that has a long-standing promotion for commission-free trades, comes in at a much more modest range (up to 18 commission-free trades), depending on how commission credits are used.

Based on our long-term deals and promotions research, commission-free promotions are less appealing to DIY investors than cash back offers. That said, some investors will find free trades valuable when considering opening an online brokerage account. It might be just the component to help tip an investor in the direction of either one of these non “big five” bank-owned online brokerages.

The fact that the two newest online brokerage promotions to come to market after RSP season are commission-free trading offers points to a possible preference by online brokerages to use this kind of deal to stay on the radars of online investors.

The good news in the near term for DIY investors is that Canadian online brokerages appear to be shifting from taking a passive stance on promotions to taking a more active one. This means there are likely other online brokerages (that aren’t the “big five”) which will consider launching offers in the coming weeks and months.

In terms of timing, launching a new promotional offer at this point in the calendar year might offer some advantages, because the competition for attention isn’t as fierce (and therefore expensive) as it is leading up to RSP season, or into the end of the year.

One of the big milestones in April is the deadline for filing income taxes at the end of the month. We have already observed that Wealthsimple is using products in its ecosystem, Wealthsimple Tax (formerly Simple Tax) and Wealthsimple Trade, to combine these two worlds in a very unique promotional offer. Users of Wealthsimple Tax’s paid feature can be eligible to receive a free stock in their, wait for it, Wealthsimple Trade account. No other online brokerage has this streamlined marketing capability between the world of taxes and the world of investing, despite how tightly intertwined these two worlds actually are (especially this time of year).

For any Canadian online investors who couldn’t, or didn’t need to, capitalize on the offers from online brokerages in the first calendar quarter of this year, the good news is they can now choose from two sizable commission-free trade deals and, if history is any indicator, perhaps a few more as the spring progresses.

For Canadian online brokerages, the fact that another two bank-owned online brokerages stepped into the deals and promotions pool with commission-free trade offers is a signal that this kind of offer is one possible way to stay visible with online investors while keeping costs low at the same time.

Commission-free trades are not as costly as cash back programs to administer, and thus offer greater flexibility. For example, the minimum deposit requirements for cash back promotions tend to be higher than for commission-free trade promotions, which in turn makes it less likely for potential clients to sign on.

The current market climate for online investors is also something worth considering.

Unlike the same point in time last year, there is much greater clarity and certainty available to the stock markets on the direction of the major global economies. Yes, it appears that the return to “normal” will be slow, but already markets have seen a significant drop in volatility and therefore opportunity for rapid wealth growth (or loss).

Thinking longer term, however, this year will be interesting for commission-free trade incentives overall.

In Canada, there is already one online brokerage that offers standard commission-free trading (Wealthsimple Trade), and there was recently news of another commission-free online broker possibly launching towards the end of 2021. There is also the possibility that Tastyworks shows up with an ultra-low standard trading commission structure for Canada this year, too. With so many commission-free providers in the mix, it could prove to be the catalyst for most Canadian online brokerages to have a standard commission-free trade offer if they don’t want to lower their commissions to zero right away.

As always, we’ll simply have to wait and see how the rest of the spring and summer play out as far as promotions. With the launch of these recent deals and the looming uptick in commission-free trading offers, we find it hard to believe that most online brokerages won’t be taking this opportunity to ramp up their marketing efforts, including using incentives, to solidify their own growth goals.   

Have We Reached Peak “YOLO”?

This past week, the S&P 500 closed above 4,000 points for the first time ever, and it seems that some investors have had enough.

With volatility decreasing while indices like the S&P 500 make new highs, the get-rich-quick crowd appears to have hit a wall.

For anyone paying close attention to the world of online investing, especially over the past year, one of the biggest catalysts for investors jumping headfirst into the markets was the massive shock to stock prices that followed initial news of the pandemic lockdowns. With the outside world in chaos, individual investors hunkered down inside. Whether they were working from home or just at home, one of the only places that had any signs of life was the stock market.

Online brokerages in Canada and the US saw this play out firsthand.

It started as a surge in online account openings followed by backlogs in call centre wait times. One other odd thing occurred too – many Canadian online brokerages started to retreat from offering deals and promotions. The reasoning was clear: demand was so strong that they didn’t have to create even more by running incentives. We believe, however, the pendulum of investor interest in trading is about to swing back.

This past week, Interactive Brokers released their monthly operating metrics. However, in those numbers was a stunning figure: a 21% m/m decline in new account opens. This is the second consecutive month of double-digit drops (February saw a 35% m/m decline) and while that might normally be a shocking occurrence, on a year-over-year basis, Interactive Brokers new account opens are up 51%.

These massive drops in new account openings in 2021 are the result of a statistically anomalous period for investors being interested in trading the stock market, and the sharp drops from the highs in January underscore numerically just how strange the push to begin the year has been. The fact that these numbers at Interactive Brokers are dropping, however, suggests the heightened enthusiasm might be waning.

Other sources point to this online investor pullback being true as well.

According to a recent article analyzing US retail investor behaviour, there has been a staggering drop off of stock buying, to the tune of 60% near the end of March, and estimates of traffic decreases to US online brokerage Robinhood’s website are pegged at 63%.

In Canada, an article from the Globe and Mail describing the allocation of CERB money to online investing also conveys a sentiment of caution, rather than the frenzied “YOLO” trades that were taking place at the end of January or during this point last year in various beaten down travel stocks.

DIY investors simply aren’t jumping into the markets because there isn’t the perception of opportunity that comes with stable markets. That said, the data now suggests that while the big surge may be over, interest in stocks and trading remains elevated as a result of those who did enter the markets during 2020 and 2021.

So, what could this shift in investor interest mean for Canadian online brokerages?

One of the most immediate consequences is that new account openings will likely continue to drop off. Interestingly – perhaps almost counterintuitively – new account openings might be inversely correlated to the volatility of stock markets, which would force a rethink of how online brokerages position themselves for choppy markets.

While volatility has historically been a warning signal to stay away from markets, there is now a cohort of investors who have seen that doing the opposite actually pays off. Going forward, Canadian online brokerages will likely have to be prepared to bolster systems to deal with the increased interest that accompanies volatility.

Another near-term consequence will likely be how online brokerages approach attracting new clients.

The surge in investor interest over the past year exposed gaps among various online brokerages, in terms of being ready to take on new clients. Those online brokerages with online sign-up processes already in place were able to win clients more quickly than those who had not invested in these systems. As such, new clients found the path of least resistance into markets.  

With a pullback in investors wanting to trade, however, we expect there to be heightened deals and promotions activity among Canadian online brokerages, especially at brokerages agile enough to deploy these offers.

Marketing campaigns can take weeks or months of planning, so it is safe to assume that the planning for promotions in November through March of next year will be discussed during the summer. The fact that there will likely be fewer new investors coming to market means that online brokerages will have to factor this into their planning.

Also, as mentioned above, with new entrants to the Canadian online brokerage market on the horizon and fewer new investors, promotions pricing will be a key lever to get and keep attention.

The “new normal” in terms of online investing is already presenting itself. Stock markets tend to be future focused, so it is perhaps no surprise that investor behaviour might serve as a bellwether for other sectors of the economy. Many investors found their way into the markets because of rapid drops in prices of big-name stocks and a hope of getting rich fast. As life returns to “normal” and these larger names see appreciation in prices, there are fewer places for investors to find fast-money opportunities.

If there’s one thing that the “YOLO” investors don’t like, it’s when things get too hard. And, as any veteran of the market could tell you, doing nothing in the markets is a lot harder than it looks.

From the Forums

I Do Declare

Some big news coming out of the Canadian securities regulators prompted a wave of discussion among online traders in this reddit post. Cryptocurrency trading platforms operating in Canada will soon have to be registered as investment dealers with IIROC, the same governing body that oversees online brokerages. Check out the frenzy of discussions as confusion sets in over how this is all going to work, and what investors think of the move towards increased regulation.

Sibling Remedy

Helping family members with financial affairs can be dicey at the best of times. In this post on reddit, one younger sibling steps in to help an older one plan for a retirement that’s not too far away. There were many tips on to help navigate a touchy subject.

Into the Close

That’s a wrap on this edition of the Roundup. Even though it was a short week, there were still lots of egg-citing developments taking shape. Economic numbers continue to point towards the US economy starting to recover, and the new frenzy du jour here in Canada is real estate, where despite a recession and pandemic, housing sales numbers continue to skyrocket. If there was any question as to where the get-rich-quick crowd might have turned to after stocks and crypto have started to become less volatile, this might be a clue.

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Discount Brokerage Weekly Roundup – March 22, 2021

Spring has officially arrived. And while the arrival of the new season didn’t fall on a quadruple witching day, in the online brokerage world it nonetheless lived up to its reputation of bringing change, volatility, and the promise of sunnier days ahead.

In this edition of the Roundup, we look at the latest trading commission price drop from a bank-owned online brokerage and the potential consequences it will have for DIY investors and fellow online brokerage competitors. Next, we jump into some interesting deal activity that’s taken place this month, including the launch of a new offer that might trigger even more promotions to start sprouting this spring. As always, we’ve got chatter from DIY investors courtesy of Twitter and the investor forums.

National Bank Direct Brokerage: Commission Price Drop

The days of the $9.95 standard commission pricing for trades at Canadian online brokerages are numbered. How much lower they go from here and how quickly these changes take effect will depend on who among the larger or more popular players decides to act. A recent commission pricing drop by National Bank Direct Brokerage, however, is likely to add significant cause for other Canadian online brokerages, big and small, to revisit their own commission pricing structures.  

This month, we noted that the standard equity commission pricing at National Bank Direct Brokerage (NBDB) dropped about 30%, from $9.95 down to $6.95 for all clients. Previously, NBDB charged $9.95 per trade to all clients, but for those clients who were also a client of National Bank – the parent brand to NBDB – a discounted price of $6.95 was available. That restriction is no longer in place, and the $6.95 price is available to all.

Why NBDB chose to lower their commission rate to the $6.95 level and why they decided to do so now are a good indication of how the industry as a whole has approached lowering their commission prices, even in the face of a growing competitive presence in Canada of zero-commission trading and increasing expectations (thanks to Robinhood and other US online brokerages) that trading online should be commission-free. Online brokerages in Canada, for the most part, are taking a measured and stepwise approach to lowering commission pricing, taking cues from competitors as a way to estimate the prices for commission rates that can be supported.

One important driver for National Bank Direct Brokerage is likely competition from its longtime local competitor, Desjardins Online Brokerage.

The drop in standard pricing brings National Bank Direct Brokerage in line with Desjardins Online Brokerage, which lowered the standard commission pricing for the “everyday investor” product, Disnat Classic, to $6.95 in early 2020. While there are still pricing gaps between these two Quebec-focused online brokerages at the very active trader pricing segment, the interesting consequence to National Bank Direct Brokerage enabling all clients to have access to the $6.95 pricing is that National Bank is pursuing an expansion strategy across Canada, implying that NBDB would now also set their sights on other markets outside of Quebec.

The takeaway for the online investing space in Canada is that a much more robust bank-owned online brokerage offering is now available to Canadian DIY investors. Unlike the lower-cost non-bank-owned online brokerages, National Bank Direct Brokerage brings with it many of the features and the convenience of a big five bank-owned online broker. This means that someone looking for the lower cost pricing typically available at an independent online broker but the convenience and perceived security of a larger institution will now have a serious look at NBDB as an online broker. And, once they start looking, there will be some interesting things for investors of all activity levels to find.

For young investors, for example, National Bank Direct Brokerage offers 10 commission-free trades per year and an even lower commission pricing of $4.95 per trade, simply for being 30 years old or younger. No other Canadian bank-owned online brokerage (yet) has this double feature set. Also, the threshold of 30 years old is higher than at several competitors, where the definition of “young” typically ends at age 25 or 26.

Very active traders at National Bank Direct Brokerage also have access to deeply competitive pricing, at $0.95 per trade, and an advanced trading platform, Market-Q. While Desjardins Online Brokerage’s active trader brand, Disnat Direct, does have cheaper pricing, at $0.75 per trade, the reality is that at the sub-dollar-per-trade range, the other factors of banking convenience might come into play.

Lowering commission pricing is something that Canadian online brokerages have seen as inevitable. That said, how quickly the commission pricing drops has shown itself to be highly dependent on who is the one setting the pace.

Despite the existence of a zero-commission provider, for example, there haven’t been any other Canadian online brokerages that have felt compelled to drop their standard commission prices to that level. Instead, we have observed that certain products, such as ETFs, have become the entry point into zero-commission trading, with firms such as Qtrade Investor, Questrade, Scotia iTRADE, and most recently with TD Direct Investing’s Goal Assist. In the category of commission-free ETFs, National Bank Direct Brokerage has also been somewhat of a leader among the bank-owned segment of online brokerages. In 2017, they launched completely commission-free ETF trading – both buying and selling, albeit with minimum purchase requirements.

For NBDB to capitalize on this latest pricing shift, the challenge, it seems, will be to overcome the marketing and advertising hurdle created by the likes of Interactive Brokers, Questrade, TD Direct Investing, and Wealthsimple Trade in markets outside of Quebec. Another online brokerage that has significant market awareness with large markets across Canada is Qtrade Investor, courtesy of their multiple wins and strong finishes in the online brokerage rankings of influential financial research sources. Each of these brokerages commands significant awareness, and, as a result, NBDB has their work cut out for them to start becoming part of the mainstream conversation of online brokerages.

That said, with 14 Canadian online brokerages for National Bank Direct Brokerage to compete against, their pricing immediately makes them worthy of a top-five or -six consideration. When competing against bank-owned online brokerages, however, they could potentially move into the top three.

Undoubtedly, TD Direct Investing would be high on the list of bank-owned competitors, followed, potentially, by BMO InvestorLine in terms of active marketing and advertising. Clearly, by lowering their standard commission rates to $6.95 per trade, National Bank Direct Brokerage has just earned themselves a major advantage relative to their peers. The online broker with the biggest risk of being displaced is CIBC Investor’s Edge, which, up until now, had retained the position of offering the lowest standard commission among the big bank-owned online brokerages.

When we first reported the pricing drop by CIBC Investor’s Edge to $6.95 per trade in 2014, the impact among DIY investors was immediate. Our data showed that DIY investors soon came to see CIBC Investor’s Edge as a value-based option for trade execution. Even so, the pricing structure reflected some of the limitations for active trader experience at Investor’s Edge.

In this case, National Bank Direct Brokerage has pricing for the “passive investor” but also has platforms and pricing for very active investors and young investors. This makes them unique among the “banking” peer group.

Given the propensity of Canadian online brokerages to make smaller moves – especially among the bank-owned online brokerages – we expect that standard commissions might not be the starting point to match the new pricing at National Bank Direct Brokerage. Other places that online brokerages might be able to target to retain clients would be in their definition of “young” investors, which NBDB defines as 30 and under, or with commission-free ETF trading.

National Bank Direct Brokerage’s latest commission pricing move has made them an option that many DIY investors will be hard-pressed to ignore going forward. As a result, it may not be too much longer before the bank-owned online brokerages cannot ignore them either, and yet another wave of commission pricing drops ensues.

So long as the commission-pricing at NBDB stays quiet, the online brokerage industry in Canada won’t have to move quickly. That said, in a day and age of Reddit threads and social media reach, all it might take is one post for that to change.

Deals & Promotions Updates

March is synonymous with spring and with the changes that accompany a new season. While the beginning of the month saw a significant reduction in the number of Canadian online brokerage offers from larger players, we predicted that it would likely not be too much longer before new offers sprouted up again. And, it turns out, we didn’t have to wait that long after all.

This month, we’ve already seen BMO InvestorLine replace an outgoing deal with a new cash-back promotion, and, excitingly, this past week we noted that National Bank Direct Brokerage also launched a new 100-commission-free-transactions offer. More on that in just a moment.

Starting with the BMO InvestorLine cash-back promotion, the new promotion, like its predecessor, is a tiered cash-back offer. The starting deposit tier for the latest offer is higher, however, starting at $25,000, compared to the previous $15,000. Cash-back amounts have also been scaled back significantly at most deposit tiers. Starting tier deposits qualify for a $50 cash-back (compared to $150 the last time), and the highest deposit tier, $1 million and over, still qualifies for a bonus of $2,000.

For National Bank Direct Brokerage, this has been a big month, with newer pricing (see above) and the revival of a 100-commission-free-transactions offer. The new offer provides 100 commission-free trades, which are good for use for up to one year after the account is opened. This new promotion runs until the end of June and is open to new and existing clients so long as the account type is new.  Interestingly, the offer applies to trades of stocks and options (and ETFs), which are sometimes not available during certain commission-free trade promotions.

The (re)launch of a commission-free trade offer from National Bank Direct Brokerage, along with their new pricing offer, might prompt other online brokerages to consider coming to market with an offer this spring as well. Interest in investing and trading remains elevated among DIY investors. However, if the thesis that the catalyst for the surge of interest was individuals working from home or putting stimulus money into investing products, then the reopening of the economy (and sports and travel) could lead to decreased interest or availability of individuals to continue actively trading.

Most Canadian online brokerages elect to take a “wait and see” approach to emerging trends rather than risking taking the position as a leader in innovation. With that in mind, deals and promotions offer a proven method to continuously stay on the radar of investors – especially those who might be lured to leave because of dissatisfaction with pricing or service.

What deals and promotions cannot do is solve for technology or service gaps (even though we have seen compensation in the form of trading commissions help smooth out some service shortcomings). So, it is likely – perhaps even sound business strategy – for those online brokerages who are confident in their ability to deliver strong service and technology to lean into promotional offers at a time when other firms are struggling or lagging. As such, a promotional offer could be seen as a sign of confidence and strength in the service delivery model, and an absence of one – at least in the near term – might have DIY investors asking why certain brokerages are choosing to stay out of the spotlight.

Discount Brokerage Tweets of the Week

From the Forums

My Definition Is This

In this post, an investor who is unsure and nervous about how the Canada Revenue Agency defines day trading asks if it’s okay to sell stocks from a TFSA after owning the stocks for just a few days. The CRA doesn’t provide a clear definition, so Redditors weigh in with their opinions.

New Tuber in Town

A new investor asks in this Reddit post if the Canadian Couch Potato method of investing is still relevant in 2021. An in-depth discussion ensues, touching on ETFs, meme stocks, and more.

Into the Close

That’s a wrap on another week. While markets and investing are the focal point of the Roundup, there’s also a human side to this, and this past week was a dark chapter for the AAPI community. Sadly – and, frankly, unacceptably – the level of hate crimes against women and Asians in particular has increased during the pandemic. It is up to all of us to speak up against racist behaviour wherever possible.  Here are some steps from Stop AAPI Hate that anyone can take to assist a person experiencing a racist attack or hate crime:

  • Take action: Approach the targeted person, introduce yourself, and offer support.
  • Actively listen: Ask before taking any actions, and respect the other person’s wishes. Monitor the situation if needed.
  • Ignore the attacker: Using your discretion, attempt to calm the situation by using your voice, body language, or distractions.
  • Accompany: If the situation escalates, invite the targeted person to join you in leaving the area.
  • Offer emotional support: Help the other person by asking how they’re feeling, and assist them in figuring out what they want to do next.