Tag: Interactive Brokers

Interactive Brokers

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – November 25, 2019

Black Friday is just around the corner and with just about everyone looking for a bargain, it will be a fine balance to keep things profitable in the face of so many deals. For DIY investors, the good news is that deals keep rolling in and even for online brokerages, there seems to be some interest in making an important purchase.

In this edition of the Roundup, we dive into the latest deal from a bank-owned online brokerage that highlights just how competitive things are getting heading into the end of the year. Of course, the competitive landscape here in Canada pales in comparison to the US where another mega-story is unfolding between the largest players on the online brokerage field. After a decent helping of news, we’ve got just the right amount of extra topping with chatter from Twitter and the investor forums to dig into.

Scotia iTRADE Latest Offers Come Out Swinging

With November quickly drawing to a close, the one thing that Canadian discount brokerages are seeing more of (other than requests to drop their commission prices to zero) is investors hunting for places to open up online trading accounts – in particular TFSAs and RRSPs.

This past week we took note of yet another online brokerage who is jumping back into the deals hot tub. Scotia iTRADE, one of Canada’s big 5 bank-owned online brokerages, stepped forward with a promotion that combines a lowered standard commission price of $6.99 with either a cash back or commission-free trade option.

Building on the momentum from their campaign in the summer featuring a number of social media influencers, it appears that the mass market version of that offer has substantially more tiers and as such, Scotia iTRADE is marketing to multiple investors with this offer.

Scotia iTRADE’s latest promotion consists of 8 deposit tiers, starting with a remarkably low entry point of $5,000 and going all the way up to $1M+. In doing so, Scotia iTRADE has positioned its offer against two of its bank-owned competitors that also have cash back offers, namely CIBC Investor’s Edge and BMO InvestorLine. The table below, which we first wrote about earlier this month, shows an updated view of exactly where the different tiers for Scotia iTRADE’s latest promotion stack up against its peers.

For non-referral offers, Scotia iTRADE actually has the best cash back promotion going for deposits ranging from $5,000 to $24,999. Specifically, it has cash back offerings of $25 and $50 (respectively) as well as a combined drop of commission prices (albeit temporarily until June 2020) to $6.99 per trade. This puts the commission price for Scotia iTRADE’s promotional period very close to the standard pricing for CIBC Investor’s Edge, at $6.95. Scotia iTRADE’s platform and associated features, commission-free ETF selection, and experience in technology could overall, arguably, make it of greater value than the difference of $0.04 per trade (at least over the short term).

For deposits ranging from $25,000 to $249,999, Scotia iTRADE’s cash back offering is on par with CIBC Investor’s Edge. The differentiating factors, therefore, make it debatable as to which bank-owned discount brokerage offers the better value.

For active investors, or those investors that favour ETFs, the decision will likely tilt towards Scotia iTRADE and for more price sensitive investors, CIBC Investor’s Edge might win out because of their commission pricing (and the fact that $6.95 is their standard price, not a promotional one).

Where things start to get interesting is at the higher tier of deposits – specifically deposits greater than $250,000.

Alongside Scotia iTRADE the only other Canadian online brokerage with a cash back promotion for DIY investors at this deposit tier is BMO InvestorLine – another bank-owned online brokerage. For that reason, it is impressive to see that Scotia iTRADE is offering 88% more in cash back for deposits at $250,000 and 25% more for deposits at $500,000. Clearly Scotia iTRADE is trying to send a message to BMO InvestorLine that it is going to fight aggressively for clients at these deposit levels. Because BMO InvestorLine’s deposit tiers don’t include a direct offer at $1M, it means that Scotia iTRADE’s offer of $1,500 is almost 88% greater than the $800 a client would receive from going to InvestorLine.

At these high deposit levels ($1M+), it may seem trivial to be talking about the relatively small amount of cash back offered relative to the deposit itself, however when it comes to competing offers from bank-owned online brokerages, getting almost twice the level of cash back (and access to commission-free ETFs and lower per-trade commission pricing for a limited time), the value proposition is too hard to simply ignore.

Of course, there’s a whole other category that the latest Scotia iTRADE promotion also competes against, which is commission-free trades. In this category of promotion, there are three other primary competitors, Desjardins Online Brokerage, Questrade and RBC Direct Investing.

When it comes to something like a commission-free trade offer, however, there are a few more moving parts for investors to calculate to determine the true value. For example, what the standard commission pricing is and how long the free trades are “good for” are two important factors DIY investors should consider when evaluating a commission-free deal.

Another element that some investors find important is to distinguish between commission-free credits and commission-free rebates. In the case of the former, investors are not charged at the point the trade is made (or if they are, the trade commission is refunded immediately) and in the case of the latter, the commissions for the trade are charged to the client but are be reimbursed at a later date so long as the stipulations of the commission-free trade offer are adhered to for the promotional period.

The multiple moving parts, and the tangibility of cash back mean that commission-free trades are typically less appealing than their cash back counterparts.

In the case of commission-free trade offers, however, Scotia iTRADE is definitely offering up more commission-free trades than other Canadian discount brokerages for deposits over $25,000. Beneath that threshold, however, there is a lot more competition for Scotia iTRADE.

The primary competitor – RBC Direct Investing – is offering up 25 commission-free trades which are good to use for up to a year for a minimum deposit of $5,000. At that same deposit tier, Scotia iTRADE’s commission-free trade option ponies up 10 commission-free trades which are valid for 90 days. For deposits less than $5,000, Questrade has full share of the promotions field, with several commission-free trade offers in play, the best of which offers up 60 days to take advantage of the commission-free status.

Drilling down into the latest offer from Scotia iTRADE shows that the competition between bank-owned online brokerages in Canada is heating up. The end game for the Canadian discount brokerage space is about scale – and for DIY investors who have assets to invest, there is clearly room to negotiate. With iTRADE now in the mix, most of Canada’s bank-owned brokerages are “in market” with compelling offers for at least some segments of investors. This ups the ante and the pressure on any remaining brokerages without ANY offers to step in quickly.

As in the stock market, timing is everything. While there are benefits to seeing what everyone else is doing with respect to pricing, any brokerage waiting too long is going to risk being out in the cold when it comes to attracting clients and assets while investing is top of mind.

Market Hints at Schwab Acquiring TD Ameritrade

If it seems like the US online brokerage market has been in the news and been a topic of conversation in the Weekly Roundup since October, that is because it has. The tsunami of news about online brokerage commissions in the US going to zero took on even more life this past week, with chatter that the largest online brokerage, Schwab, looking to take over rival TD Ameritrade for a projected sum of $26 billion (USD).

Suffice to say that this combination of brokerages was not among the top of the list of forecasted scenarios. There was much more hype and focus on E*Trade as a takeover target than Ameritrade. Even so, contemplating a merger between two of the biggest online brokerages in the US paints a distinctly bipolar picture for the industry as a whole. The winners – both Schwab and Ameritrade – can be seen by the rise in the stock price upon the market learning of this potential deal. The clear losers, at least according to the market, E*Trade and Interactive Brokers.

It might be safe to say that Interactive Brokers didn’t see this magnitude of impact erupting when they chose to launch their commission-free trading platform, IBKR Lite, which is seen as being the tipping point that led the online brokerage industry as a whole in the US to decide to go to zero-commission pricing.

Among the pivotal questions – will this deal go through? And assuming it does, what does that then mean for rivals like Interactive Brokers and E*Trade? What about the new entrants? The Robinhoods of the world will be left competing against a brokerage the size and scale of the combined entity that might be Schwab and Ameritrade (aka Schwameritrade?).

If there are any clues as to what this means for other brokerages, it might be derived from Schwab’s reporting of their account growth since going commission-free. Schwab reportedly gained 142,000 new client accounts and blew the doors off their previous new account growth numbers (and likely that of their competitors). Clearly the calculus on commission-free trading accounts has paid off for Schwab.

Despite the still-fluid state of the US online brokerage landscape, Canadian market observers are trying to get a proxy on whether or not what is happening in the US will play out in the same way here in Canada.

It’s all just speculation at this point, but the lessons learned from the US online brokerage space points to there likely being little to no appetite for Canadian online brokerages to rush to zero. The benefit of letting the US online brokerage market go first is that players here can take a “wait and see” approach as to how online investing can be profitable with lower commission revenues in place.

Secondly, if it wasn’t clear before, it is now abundantly clear that scale matters when it comes to online investing and wealth management more broadly.

The only remaining independent (i.e. non-bank or non-big financial partner owned) online brokerage in Canada is Questrade. Its scale and technology stack – in particular its trading platform, make it an interesting possible fit for a very small number of bank-owned brokerages who are lagging behind the biggest player, TD Direct Investing, in terms of platform and user experience. Nonetheless, when it comes to choices for massive growth in the Canadian online brokerage provider space, there aren’t many places where it is possible; unless providers exit the space or merge (or are acquired).

The possible merger between Schwab and TD Ameritrade will still have to face a great deal of scrutiny from market and anti-trust regulators. The test of whether this will ultimately have beneficial or harmful effect for the marketplace is still an open question considering how much of the market of wealth management these two firms would influence or control. Even so, there are definite hints of further consolidation to come in the US and perhaps one day here in the Canadian online brokerage space.

In a world where lower commissions are a reality, there has to be greater scale or volume to keep things profitable otherwise the notion of a lower price making investing more accessible will actually have the opposite effect. Heading into Black Friday it seems that when it comes to low commission prices, investors should be careful of what they wish for.

Discount Brokerage Tweets of the Week

From the Forums

Keeping it Real

A Redditor questions the appeal of real estate investments over index funds. Fellow forum users provide insight, discussing the pros and cons of real estate as an investment.

Won is the Luckiest Number?

A DIY investor seeks advice for creating his own portfolio and wonders if a one-and-done, or all-in-one, ETF can help him save on fees and get better returns. Forum users weigh in with the advantages of these types of investments in this post.

 

Into the Close

That’s a wrap on another edition of the Roundup. Shopping is clearly in the air, with strong retail sales in Canada tied to economic strength, Tesla rolling out a new Cybertruck – the new Musk-have toy for Christmas, and Black Friday coming around the corner. DIY investors love a good bargain, so this week, more than most, it pays to do your homework. Happy hunting!

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – November 18, 2019

After what’s seemed like an epic storm of information and discount brokerage news, there finally appears to be an eye of calm. Even in the midst of the calm, however, there are still swirls of activity that point to even more turbulence in the future.

In this edition of the Roundup, the future is in focus with a couple of unfolding trends making news this past week. Up first is a story about the convergence of tech and finance and how the landscape of personal financial management is set to transform yet again. Next, we look at another online brokerage in the US contemplating a move into – wait for it – sports betting. As always, we’ve got a great selection of comments and commentary from DIY investors on Twitter and in the investor forums.

Checking for Competition

With the dust settling on the online brokerage melee in the US, it’s becoming increasingly clear that the line between technology company and financial services firm is getting very blurry. One of the recurring themes we’ve noted in the online brokerage space is that order execution alone isn’t going to be the primary driver for revenues or sustainability, rather, the road forward is going to rely on diversification.

The recent wave of commission fee drops in the US among the biggest online brokerages, also masked the fact that many other smaller players also stepped forward into commission-free stock trading world, most notably, the payment processor Square, which is run by the CEO of Twitter.

In addition to commission-free stock trading, Square is also launching fractional share trading (something that Schwab also announced it would be opening up to its customers) and with that announcement, the moat around the world of stock trading appears to have been effectively breached.

Why that matters is because the barrier to leap from providing one type of financial solution (e.g. transaction processing) to another is entirely surmountable with the right mix of technology and resource. Which brings us to the big announcement this past week that is surely making waves among financial services providers.

This past week, there were multiple news stories citing that Google is apparently going to launch into the world of providing checking accounts (in conjunction with Capital One) starting in 2020. While this is not the first of the major technology names to jump into the financial services realm (Apple did so with their consumer credit card in partnership with Goldman Sachs and Amazon has discussed launching checking accounts as well), Google is a formidable competitor in the space.

Clearly, as currency and money become increasingly digitized, the tech giants have a natural advantage to harness their expertise and move into the world of finance.  As the commission fee wars in the US have readily shown, being an intermediary is becoming a highly challenging role to play without the scale and technology to keep pace. In the case of Google entering the world of personal finance with a checking account, they have both the scale and the resources to rattle a few cages.

Of course, just because Google moves into a space, doesn’t necessarily guarantee it’s success (Google Hangouts anyone?) however it should be sufficiently concerning to the financial services world as a whole to see a large technology company move into something so ubiquitous as a checking account. On the (very big) assumption that Google is able to succeed, it is not hard to envision them moving into other corners of personal financial wealth management that could benefit from greater automation or integration with other technology.

In Canada, there was another big story brewing (not related to Don Cherry) that saw an online brokerage here make the initial moves to launch into banking too.

Questrade, the poster child for the “non-bank-owned” online brokerage is, ironically, now reportedly working on setting up their own banking arm. This past week, there was a reference to a news story of Questrade applying to federal banking regulators to launch a Schedule 1 bank, known as Quest Bank (in English) and Banque Quest (in French).

There is no firm timeline published at the moment, however, the first steps in creating their own banking division are underway. And, while there is already chatter on the investor forums about this possible development and what it will take for Questrade to successfully compete against its larger and better known rivals, there are significant hurdles still to clear for it to gain traction.

Like Google, or Amazon, or Facebook, Questrade is banking on having an installed user base that they can cross market to. The playbook is a familiar one for clients of E*Trade Financial or Interactive Brokers or even Robinhood, where there is some element of a traditional banking feature that is now available to DIY investors via their online brokerage.

Stepping back, it’s also evident that an online brokerage banking is not an original concept, given that banks also do online brokerage. So, in what is essentially a race to the middle – the prized combination of being great at financial service and great at technology – is what firms on either end of the fin-tech spectrum have to get right.

To be fair, banks are not taking the onslaught of competition from technology firms lying down. Groups like “RBC Ventures” demonstrate how financial giants are leaning into the innovation ecosystem by acquiring and incubating promising technology firms. While Google has a substantial head start on creating a portfolio of helpful “apps” to keep users inside of their own network, RBC Ventures appears to be attempting to build an impressive portfolio of everyday useful apps or services that could be offered to the general public and pass along perks to RBC customers.

In fact, RBC was reportedly aiming to win 500,000 banking clients from the RBC Venture program within five years.

Undoubtedly the winds of change are starting to blow in the financial services space yet again. Another big tech player wading into finance and a Canadian online brokerage wading into banking means that distinguishing service providers is going to be increasingly difficult. For DIY investors, the challenge will be untangling who offers the best set of features at the best price. Tied into that assessment is who will make finance the most accessible and easiest to manage on their platform.

Gambling on Betting

It’s sometimes fascinating how worlds collide. The world of wealth management, historically, was one in which continuity, certainty and conservatism were the hallmarks of success. Gambling, casinos and sports betting were almost antithetical to the world of investing.

Fast forward to 2019, and the other side of a crypto-bubble; a commission fee battle and relentless automation mean that the world of wealth management is willing to entertain “creative” approaches to generating new interest and revenue.

This past week there was an interesting story that crossed our radar about one of the largest online brokerages in the US, TD Ameritrade, exploring a venture into sports betting. If this sounds a) unbelievable and b) similar to what Interactive Brokers has done, both of the above are true.

Although nothing has been confirmed in terms of a specific offering, Chief Information Officer of TD Ameritrade, Vijay Sankaran,  has confirmed that they are exploring the possibility of entering the realm of sports betting. Few details were provided and though this is very much in the exploratory stage, the fact that a second major online brokerage in the US is looking to tap into the sports betting world might signal an emerging trend.

Quote from Business Insider article

In July of this year, Interactive Brokers announced the launch of their simulated sports betting program which lets participants play with virtual money to try to pick a winning portfolio. The upside for participants in this program: up to $1000 in commission credits towards an Interactive Brokers trading account. Interactive Brokers has positioned the interactive and simulated sports betting platform as a learning tool and a way to generate new leads for the online broker. The rationale is that those who are successful at betting on sports would likely be competent investors or traders.

While sports betting may not appeal to the vast majority of investors, the investment by at least one major online brokerage in a whole platform and now the exploration of a second online brokerage in the space is a decent indicator that brokerages are open to finding new sources of revenue, even if they have to roll the dice (pun intended) with who they reach out to.

Discount Brokerage Tweets of the Week

From the Forums

Too Soon?  

A Redditor in their mid-20s is looking to invest for the first time and is considering a TFSA. Fellow forum users provide advice, recommending adequate research and risk assessment.

An Uncommon Family Heirloom

After discovering preferred shares in their family’s portfolio, a Redditor asked for information on how they work. Forum users engage in a discussion about what preferred shares are and how one should move forward with them.

Into the Close

That’s a wrap on another week of activity. With Christmas just over a month away, it looks like there’s only a few more weeks left for major developments for discount brokerages to announce. We’ve got our ear to the ground for the remainder of November and December as we still expect some more exciting developments to unfold before the year is done. Until then, good luck staying focused on the news that matters.

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – November 4, 2019

They say when it (November) rains, it (November) pours. It’s fitting for the start of the second-last month to reference the turbulent weather that many DIY investors encountered at the outset of the new month, and a fitting nod to the Guns & Roses song, since nothing lasts forever, especially these days for online brokerages where the winds of change are picking up.

In this edition of the Roundup, we review the latest action taking place in the deals and promotions section, and highlight potential game changers for online investors looking for free trades. Next, we review another emerging trend in the Canadian discount brokerage space that puts portfolio performance and risk in the spotlight. And, speaking of spotlight, we shine a “Lite” on the early results of the commission-free trading shift in the US, with the release of trading metrics at one online brokerage. As usual, we’ve served up a healthy selection of investor comments from Twitter and the investor forums.

Deal-vering Change

The start of a new month typically brings with it some interesting activity in the deals and promotions section and this month is no exception.

Promotional offers for Canadian DIY investors did see some turnover as the new month began with an offer from Scotia iTRADE expiring, as well as the summer promotion from BMO InvestorLine giving way to a new offer that runs through to early January. Nonetheless, savings are in the forecast for investors with the end of the year in sight and industry competition at an all time high.

In terms of turnover, after having been extended from the middle of October through to the end of the month, the latest offer from Scotia iTRADE signalled that something interesting is happening behind the scenes at this bank-owned online brokerage. These past two months have seen some creative approaches to pricing and offers emerge.

In particular, in September, the parent of Scotia iTRADE, Scotiabank, rolled out a banking package that also kicked in 10 commission-free trades for the first year an account holder has the account, and five commission-free trades per year thereafter. Also that month, they launched an offer of $50 cash back and discounted commissions – again something novel for both that brokerage and unusual for the online brokerage space – which suggests that efforts are ramping up to win and keep customers. It remains to be seen how offers from the parent bank co-exist, complement, or compete with offers from Scotia iTRADE, but it does raise an interesting prospect as to whether deals and promotions, as we have traditionally known them, are about to evolve into something new.

On the topic of change, this month’s deals suggest that BMO InvestorLine is hoping that their latest offer brings in DIY investors who’ve got lots of change to spare.

The latest cash back promotion launched by BMO InvestorLine is a tiered cash back promotion with the highest top-tier offer we’ve seen yet – $5,000 cash back for a deposit of $5M or more. Both the minimum deposit tier and the accompanying cash back bonus are new highs among online brokerages in Canada. Of course, the entry point to qualify for the current offer is also relatively high – at a minimum deposit of $250,000. All told, BMO InvestorLine is looking specifically to appeal to investors with higher balances and assets rather than something aimed towards younger or entry-level portfolio sizes.

For DIY investors, the combination of the ramp up to RRSP season, the looming end of year deadline, and the recent collapse of commission prices in the US point to a perfect storm of incentive offers set to launch from this point through to March. Although it’s tricky to predict the weather, the forecast for DIY investors heading into 2020 will bring with it a high ridge of downward pressure on prices and a flurry of savings.

Qtrade Investor Powers Up on Performance Analytics

In the battle for DIY investors in Canada, the discount brokerages can see the writing on the wall with respect to commission prices falling.

Slowly but surely, as online brokerages tinker with pricing, they are also working on improving the client experience to address important wealth management needs. This past week, Qtrade Investor announced the integration of a new set of risk management tools for investors called Portfolio Score.

The analytics tool for investors, which is developed by financial technology firm Wealthscope, provides assessments to DIY investors that explain the performance and risk features. For example, clients can now assess their portfolio against domestic and global market benchmarks which helps to showcase how well (or poorly) their portfolio is performing relative to a diverse set of indices. Winning strategies will typically outperform the market so depending on the approach investors are taking with managing their own financial destinies via online trading, this tool will spell out the performance being generated.

Another interesting feature about the Wealthscope Portfolio Score tool that will appeal to DIY investor clients at Qtrade Investor is that it analyzes portfolios using a “checkup” evaluation.  Included in the list of items being assessed are: downside protection, performance, diversification, income, and fees.

Earlier in 2019, Virtual Brokers also announced it had partnered with Wealthscope to offer clients portfolio analysis and analytics, bringing the number of Canadian online brokerages using the Wealthscope system to two.

For its part, TD Direct Investing has also offered up financial planning and portfolio analytics via their own partnership with Hydrogen Technology Corp. TD Direct Investing’s “GoalAssist” was rolled out in March 2019 with the objective to help support DIY investors in understanding the factors and behaviours required to achieve their wealth planning goals.

While Canadian discount brokerages are, almost by definition, not allowed to provide financial advice, there is clearly a market for providing DIY investors with the kinds of tools and support they need in order to successfully plan and navigate the world of investing on their own. The role that technologies are starting to be able to play in providing statistical analyses of goals or portfolio composition provide an important piece of information that DIY investors can use to plan their trading or investing strategies more rationally.

Clearly, with three highly visible online brokerages bolstering their suite of features with portfolio risk and performance analytics, there may be yet another trend forming for 2020 as other online brokerages look to replicate and do the same. Ironically, providing investors with in-depth benchmarks could itself become a benchmark feature savvy investors come to look for.

As Financial Literacy Month kicks off, these kinds of tools are very much aligned not only with enabling investors to see the power of aggregated data in managing their portfolio risk exposure, but it appears these platforms will also help to support investors learning about sound portfolio management principles.

While cooler heads are something most Canadians try to avoid having in winter, when it comes to investing online – especially DIY investing online – hot heads are dangerous liabilities. With the new slate of portfolio analytics tools coming to market, there’s finally an easier way to digest and act upon complex information in a calm and orderly fashion.

Early Numbers on IBKR Lite

With the rollover to a new month, Interactive Brokers released its monthly trading metrics. Aside from the usual stats provided by the US-based online brokerage, this month’s metrics featured a new “bullet point” that reported on the progress of the commission-free trading platform IBKR Lite.

The early numbers reported by Interactive Brokers show that IBKR Lite clients executed an average of one thousand US Reg-NMS orders per day. Unlike the standard metric for trading that gets reported, Daily Average Revenue Trades (DARTs), commission-free trading doesn’t generate revenue (at least from trading commissions), so it was interesting to see what the numbers were but also how they were being reported.

Given the short timeframe in which the IBKR Lite platform has been operational, it was interesting to see the reporting of the figures showcase the volume of an average of one thousand orders per day. To put that into perspective, Interactive Brokers clients overall generated 797 thousand trades per day, so the volume of activity in IBKR Lite is almost inconsequentially small by comparison to the standard IBKR platform.

Another interesting number to highlight from the metrics release was the growth in accounts at Interactive Brokers. The month over month increase was 1% which, considering the move to commission-free trading, reflects that the introduction of this feature was met with a more muted response by investors than it was with competitors.

Upon the release of the IBKR Lite platform in October, other online brokerages in the US quickly lowered their commission rates to zero – perhaps in an effort to prevent a flood of customers from leaving to go to a lower commission competitor. Clearly, it seems to have worked, at least for the time being.

Interactive Brokers has never been shy about its focus on catering to active investors and traders. The recent moves into providing more products that mainstream investors could find appealing is still just a small portion of their business. International expansion also factors heavily into the Interactive Brokers growth plans.

In another interesting move, after Schwab announced in September that it is closing its offices in Singapore at the end of 2019, Interactive Brokers appears to be stepping into Singapore in January 2020.

Over the next several weeks and months, analysts and industry observers will be looking closely at how the zero-commission trading fees will impact metrics like client acquisition and turnover (churn). In particular, we will be monitoring the growth (or contraction) rates to see if there is any suggestion that zero-commission trading moved the needle on online investing accessibility or if the market of DIY investors still maintained its steady state pace of ebbs and flows with respect to joining an online brokerage.

Discount Brokerage Tweets of the Week

From the Forums

Shoring up an Exit Plan

After having left a full service broker, a new DIY Investor on this forum seeks help figuring out the logistics of investing as they make plans to leave the country. Forum users offer incredibly in-depth advice on how to approach DIY investing and weigh in on the possible home country bias in their investment strategy.

Switches in Stitches

A Redditor switched RESPs to Questrade in hopes of saving on fees, but encountered a lot of turbulence in the process. Fellow forum users share their experiences with transferring accounts and commiserate about the bumpy ride in switching online brokerages.

Into the Close

That’s a wrap on another series of updates. There are still lots of interesting developments taking place daily so it feels a bit like the ground is continuously shifting.  On the plus side, DIY investors are going to be in for a fun stretch into the end of the year.

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – October 28, 2019

Halloween is just around the corner, and for the online brokerage industry, it appears that they’re poised to deliver lots of treats and perhaps even a few tricks for DIY investors this year. Of course, this year’s scary prospect for Canadian discount brokerages might be vanishing profits, but as the US online brokerages are showing, even when commissions disappear, profits don’t have to.

In this edition of the Roundup, we continue our coverage of the fallout of falling commission prices, with a closer look at the conference call from TD Ameritrade and what hints it provided for the US and Canadian online brokerage industry. From there, we take a peek into what the folks in Sherwood forest are up to now that their vision of a zero-commission world is here, and they have to compete in it. As always, we’ll cap things off with chatter from investors on Twitter and in the investor forums.

More Commission Price Fallout: The TD Ameritrade Conference Call

It’s hard to pick a bigger story for this month or year than the fall of commission prices for stock trading in the US. This past week provided additional colour to the unfolding saga of the new reality for online investors and online brokerages in the US, as TD Ameritrade reported earnings and held their investor conference call.

With several earnings announcements and conference calls already having taken place (for Interactive Brokers and E*TRADE), it was interesting to see where the analysts who were on the call focused their questions and what could be gleaned from the responses of outgoing CEO Tim Hockey and CFO Steve Boyle.

There were a number of interesting, if not surprising, observations about this call, with implications for the US online brokerage market in general, and perhaps hints of things to come for Canadian online brokerages too.

One of the first standout items about this conference call was that the analyst questions appeared to take the new commission-free reality in stride. Unlike the clearly disoriented moments in early October when the pricing cuts were announced, there was clearly a more rational tone struck that seemed to suggest: “commission-free trading is here to stay, now what?”

Perhaps the clearest recurring question that came up on the conference call was that of mergers & acquisitions – with the subtext being the acquisition of E*TRADE.

A total of six questions referenced directly or indirectly the prospect of an acquisition being more likely now that commissions have gone to zero. While there was no definitive response on the part of Ameritrade regarding possible acquisitions (or being acquired), there was a clear acknowledgement that TD Ameritrade’s timing for the acquisition of Scottrade couldn’t have been better because it contributed scale. Nonetheless, reading between the lines on that response, it is clear that scale is going to be a critical pillar to the success of TD Ameritrade going forward.

In terms of the path forward, TD Ameritrade is looking for both growth and for increased efficiency. In terms of growth, areas such as stock lending appeared to have boosted earnings coming into this call (bets against cannabis and Beyond Meat helped that), however, in the longer term, they are looking to other lines of business and to other markets overseas to boost assets and revenues.

Outside of growth, there were also remarks and comments made with respect to cutting costs. It is abundantly clear from Schwab and E*TRADE that the path forward to sustainability in the zero-commission world is going to require efficiency, or as they like to call it, “streamlining.”

What stood out as an interesting move is the sentiment expressed by Boyle that Ameritrade is going to be “focusing on what is our core competency where we can grow, not trying to be all things to all people.” Subtle shade aside to the online brokerages moving into more traditional financial services, the notable context here is that Ameritrade is going to ramp up efforts to acquire and service high net worth individuals and potentially look to realign how they deliver services to account holders that may not take advantage of the full feature set. Specifically, Boyle stated “we do have a number of customers who have relatively small revenue with us. And we think it – there are a number of ways where we’re providing value that people will be willing to pay for.”

What is apparent from the ability of TD Ameritrade to pivot their pricing so quickly to zero was that this eventuality is something they had prepared for for quite some time. In fact, the “strategic resiliency project,” as it was called, was set in motion in 2017 so there was plenty of runway for Ameritrade to adjust to the new reality.

Hockey was surprisingly upbeat about the zero-commission move. His confidence rested on the premise that Ameritrade has an award-winning (and perhaps best of breed) platform that passive and active investors alike will take to, as well as deep bench of value-added features that other online brokerages have not invested in to the same degree. The net result: with commission price no longer a barrier, Ameritrade has one of the strongest competitive advantages in terms of customer experience of all the major US online brokerages and that will attract customers away from other brokerages. Anecdotally, according to Hockey, this is already happening.

For Canadian discount brokerages, the emerging playbook for the zero-commission reality is starting to become clearer thanks to the experiences of brokerages south of the border. While it is still likely to be some time before commission prices hit zero in Canada, it is clear that the path to financial sustainability for discount brokerages rests in creating a best-in-class service and technology experience, as well as offering access to other financial services. As such, it is no longer a race to the bottom per se as much as it is a race to the middle.

The balance of technology, pricing, and experience mean that investors looking to manage their wealth, not just trade the stock market, will think holistically about who the right online brokerage is for them. Conversely, the zero-commission rate also appears to be providing a chance for online brokerages to rethink who the right customers are for them.

Sherwood Like Cash

The ground is clearly shifting beneath the online brokerage industry in both the US and here in Canada. Even though the headlines this month have been dominated by the drop in commission fees by the major online brokerages, there have nonetheless been important stories and developments that deserve a little more time in the spotlight.

Now on the defensive, the online brokerage that was the catalyst in “democratizing” pricing for online investors, Robinhood, announced this month the re-launch of their cash management program.robinhood cash mgmt

One of the more potent arrows in its quiver, the cash management feature offers Robinhood clients the ability to earn high interest (2.05% at the time of publishing) on uninvested cash balances as well as access to a (great looking) debit card.

Just under a year ago, Robinhood attempted to launch this feature by labelling it as a checking/savings feature, and in doing so, earned the extreme ire of the US financial regulators. Nonetheless, after some time in the penalty box, Robinhood posted to their blog that their shiny new feature is “coming soon” – an interesting move in the midst of the zero-commission melee, as the report got eclipsed by bigger news stories about the industry.

Even so, Robinhood, like Interactive Brokers, has picked up on the idea that offering high-ish interest on uninvested cash balances is likely to not only keep existing customers happy but appeal to prospective customers.

Another new feature announcement from Robinhood also launched last week, which is the roll out of stop-limit orders for options trading. Interestingly, despite zero-commission trades for equities being implemented at other online brokerages in the US, options trading commissions – specifically per contract prices – are still in place. At Robinhood, however, options trading (including the per contract fee) is still $0.

The launch of this new feature is likely one part the result of client request and another part strategic news item to point out that there are still features to Robinhood that provide economic benefits to active investors. That said, options trading is both more complex and obscure to many DIY investors than stock trading is.

The data and platform requirements are equally more sophisticated, as are the competitors (e.g. Tastyworks) so Robinhood definitely has its work cut out to be able to effectively draw DIY investors into options trading if they don’t already do it, or to attract options traders into their platform and away from the bells and whistles that other platforms already offer.

In spite of the new features, it is clear the path forward for Robinhood is going to be significantly tougher to compete in. By all measures, the stand-alone online brokerage is officially a thing of the past, and where they were once entirely focused on stock trading, they are now going to have to be able to execute well in options trading, cryptocurrency trading, and broader personal financial services. With other financial service providers launching commission-free trades, including Square announcing the end of 2019 as when they’ll roll it out, we’re really excited to see what innovations drive interest and investors to particular brokerages and investments next.

Discount Brokerage Tweets of the Week

From the Forums

Safety is no Accident

A self-proclaimed “couch potato investor” on Reddit contemplates switching from Questrade to TD Direct Investing due to concerns over Questrade’s security guarantee. Forum users weigh in on their favourite discount brokerages and the role they have to play in security precautions.

The Fund-amentals

A Redditor who has newly signed up to Desjardins for their group RRSP at work asks for guidance in which fund to pick. Commenters on this post explain RRSPs and offer advice on assessing one’s risk aversion.

Into the Close

That’s it for another week of discount brokerage activities. There continue to be lots of smaller developments that we’re tracking as the news about zero-commission trading continues to settle down. The next big wave of earnings is also washing over the market, so in addition to the sugar high from all the candy consumed this week, there’s also going to be lots of data to digest. Hooray for spreadsheets!

 

 

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – October 21, 2019

On the eve of election night in Canada, citizens are tasked with making an investment of their own in the party or candidate that they believe is in their best interest. Another voting machine, the stock market, provides price as a proxy for expectations. Fascinatingly enough, the recent activity in US and Canadian online brokerage is providing a glimpse of where DIY investing is heading next.

In this edition of the Roundup, we dive into the latest earnings announcements from US online brokerages in the wake of the recent commission-fee cuts and read the tea leaves as to what’s brewing for the industry and investors alike in this new pricing reality. Speaking of trends, it looks like combos are the menu item of choice in the bank-owned online brokerage battle here in Canada – our second story spills the tea on what’s about to be trending for DIY investors. As always, there’s plenty of chatter from investors to dish out in the Twitter posts and in the investor forums.

Forecast for Online Brokerages: Cloudy with a Chance of Upside

As every experienced trader knows, sentiment and expectations drive pricing. Prices in the stock market, however, are dynamic and constantly changing which, by extension, means that so too are expectations.

The recent and rapid implosion of prices of US online brokerage stocks was anything but rational. While the market is an efficient pricing mechanism, during times of heightened emotion or uncertainty there’s a natural mispricing moment, and since the big price drop earlier in the month, we’ve witnessed the recalibration of expectations and calculations restore some sense of calm to a rattled industry.

This past week, the earnings announcements and management guidance for three of the big four names in the US online brokerage space were released. And, without giving away any spoilers, it appears expectations are shifting from pessimism to cautious optimism.

Since early October, the stock prices for publicly listed online brokerages AMTD, EFTC and SCHW have rallied an average of 15.3%. Interestingly, the online brokerage that touched off the avalanche in pricing drops, Interactive Brokers, is down about 4% over the same period of time.

What’s behind the change in sentiment? Fortunately, the question is somewhat answerable thanks to earnings conference calls held last week for E*TRADE Financial and Interactive Brokers.

The timing of earnings releases and subsequent investor conference calls so close to drop in commission pricing means that predictably, the “plunge” is almost all of what analysts covering these online brokerages wanted to discuss on the conference calls.

Despite the best efforts to pry additional information out of company management, there wasn’t a lot of brand-new market moving information that was revealed. More than anything, there was a lot of soothing of nerves and spin on what the significant loss of revenue from trading commissions would mean going forward.

At E*TRADE, for example, the CEO Mike Pizzi framed the loss of $300 million per year of commission revenue as an opportunity to win back clients to a best-of-breed trading platform. Indeed, that appears to be a pillar of the new narrative and the competitive reality.

Without trading commission costs, active traders will undoubtedly be seeking out the best online investing experience – including the best trading platform, decision support, and feature set. In that way, established brands like E*TRADE and Interactive Brokers (and Schwab and Ameritrade) have a significant leg up on the newcomer Robinhood for the most lucrative account holders (active traders) who need advanced tools and convenience.

Despite the many evasive dips and weaves of management to the analyst questions about what happens next, there were still a few interesting takeaways revealed by tuning into these calls.

The first, and arguably most significant for Canadian online brokerages, is that Interactive Brokers sees a business case for bringing commission-free trading here to Canada. In a question from analyst Will Nance from Goldman Sachs during the Interactive Brokers earnings conference call, it was asked whether or not IBKR Lite would be expanded to other locations around the world served by Interactive Brokers. Chairman and now former CEO of Interactive Brokers, Thomas Peterffy, stated that unlike the US, there weren’t that many equities markets internationally that could support robust payment for order flow. One exception: Canada.

Another important and recurring question that arose was the prospect of consolidation in the US online brokerage space and whether E*TRADE would be a candidate to be acquired.

Asked on both the E*TRADE conference call and on the Interactive Brokers one, it was interesting that there appears to be a renewed chatter about this online brokerage in particular. While nothing was affirmed in the call with E*TRADE, the door wasn’t closed on the topic either.

For additional context, E*TRADE had communicated achieving a target earning per share (EPS) of $7 by 2023 and in this earnings announcement call, that timeline was pushed back by a year to 2024. The current EPS forecast is ~$4 so even if the P/E ratio (9.88) manages to stay the same by 2024, the share price by that point could hit $70 (closing price on Friday was $40.85).

Normally, a downward revision or delay in EPS of that nature would prompt a sell off, however based on the drop in price prior to this earnings release, it’s evident the market believes it was oversold and hence the stock rallied. Moreover, it’s a vote of confidence in management that the market believed that hitting that target is achievable.

Suffice to say, the fact the door was left open to an acquisition suggests that if the price is right, management would consider a sale, and there’s even a target price on what that might be. When asked by an analyst if Interactive Brokers would consider buying E*TRADE, Peterffy rejected the prospect – however, it would be hard to imagine that even if they were kicking the tires on an acquisition, that they would disclose as much in a conference call.

Another very interesting takeaway from the investor conference calls was that even though there might not be commissions on equities trades any more, commissions on options trades are likely to stay buoyant for quite some time. The complexity of options strategies and trading almost necessitate having the right platform in place, and so this somewhat technical requirement could serve to ringfence trading commissions for these types of securities.

All told, the story going forward for the US online brokerage industry is still highly fluid.

There were a slew of new feature announcements (which will be covered in a subsequent Roundup) most notably the ability for investors to trade fractional shares (something Schwab and Ameritrade announced last week).

The reality is that there is no exact playbook to navigate a fundamentally different world than the one that has been in place for the past three decades. That said, it is fascinating to see just how adept each online brokerage is at evolving to the new reality of zero commissions for equity trades.

There are undoubtedly other levers and fees that can be used to grow revenues, as well as diversification away from just order execution – a preferred path it seems for Schwab and E*TRADE. There’s also a lot of cost cutting that is slated to take place. E*TRADE announced a number of initiatives in its conference call. Curiously, Interactive Brokers reported a 15% year over year increase in their total headcount, a signal that in spite of everything, they appear to be building out their overhead and team resources, not shrinking it the way that Schwab recently announced they would.

We’re eagerly awaiting what TD Ameritrade will have to say about the journey forward in their conference call, however, we suspect it will be some variation of what as already been said by E*TRADE, Schwab, and Interactive Brokers. There is a strong platform and client experience appeal to TD Ameritrade, so they certainly have a leg to stand on in that department. Add to that another very strong trading platform experience and new entrants are going to have a tough time competing. Ironically, zero commissions might accelerate the onboarding of clients to TD Ameritrade at the expense of other “low cost” online brokerages.

It does beg the question as to what’s next for Robinhood – the zero cost online brokerage that essentially helped to catalyze the industry race to zero commissions. In a way, they appear to be victims of their own success, and the other online brokerages appear to be forcing the hand of Robinhood to compete on feature sets and value drivers beyond just commission price.

Just because commission prices have fallen to the ground, it doesn’t mean that the incumbent online brokerages won’t be hitting that same ground running.

Packaged Delivery

For any fast food aficionados, there’s nothing unfamiliar about the combo being a better deal than the single item. Turns out that DIY investors hungry for a deal at Canada’s bank-owned brokerages might just be in luck. Earlier this month, National Bank Direct Brokerage launched their newest pricing offer which also happened to come with perks (like lower commission pricing) for anyone who was also a National Bank client.

Another bank-owned brokerage also seems to be looking to offer a compelling online investing side-order to its banking clients. Scotiabank, parent to Scotia iTRADE, is offering up clients who sign up to the recently launched Ultimate Package 10 commission-free trades in the first year, and five commission-free trades every year that the account is open.

This new offer is likely going to generate some waves with DIY investors and potentially open a new front in the online brokerage battle.

In terms of the offer itself, the threshold for this banking package requires a minimum balance of $5,000 to be maintained in the bank account. However, there are a number of daily banking features and perks to keep things worthwhile. To boot, there is a cash incentive of up to $350 that would make this offer even more compelling relative to other onboarding offers from the online brokerage side of many big bank-owned brokerages. Finally, there is the ongoing commission fee waiver for five trades per year which is likely to appeal to the very passive investor. Combined with Scotia iTRADE’s selection of commission-free ETFs, there’s a lot on the table for the right profile of investor who has enough to surpass the inactivity fee threshold ($10,000). For investors under the age of 26, however, this is an especially interesting choice because those inactivity fees are waived for younger investors.

When it comes to the future of online trading in Canada, it appears that bank-owned brokerages are relying on their biggest asset – the banking relationship – to entice DIY investors to stay put.

This is almost certainly the next front in an ongoing battle for DIY investor assets, one that non-bank owned brokerages such as Questrade, Virtual Brokers or Qtrade Investor will have to figure out how to counter.

One likely scenario is for the non-bank owned brokerages to start providing high interest on uninvested cash – something that has clearly been shown to work for Interactive Brokers. As has been the case in the US online brokerage market, the major online brokerages have increasingly started to deploy “bank-like” solutions such as bill payment capability and even credit cards to enable a “one-stop shop” experience for personal finance management.

With more zero-commission fees on the horizon for the Canadian discount brokerage space, this latest combo experiment may buy brokerages some much needed time before having to drop their commission rates to zero. More importantly, combo offers like this keep customers from casting their gaze over the fence.

Interestingly, unlike a race to the bottom, this appears to be the next step in a bidding war for loyalty.

The unintended consequence to the bank-owned brokerages, however, is that they will have to get all points of the service experience right – from banking through to wealth management – because going forward, those fortunes, like those of their clients, are going to be tied closer together than they have ever been before.

Discount Brokerage Tweets of the Week

From the Forums

Clean Break

Breaking up is never easy, so in this forum post on the Financial Wisdom Forum, a user seeks advice on the process of leaving their full service broker for a discount brokerage account at NBDB.

Fee-dom

In search of investment options without fees that add up over time, a Redditor asks for discount brokerage options and advice for a first-time investor in this forum post.

Into the Close

With online brokerages and the ongoing fee-asco now in the spotlight, the focus on the industry is almost unprecedented. We are definitely in uncharted territory as to what will ultimately shake out as a direction for the industry, and that uncertainty is going to definitely translate into lots of questions from consumers.

Turns out that in addition to putting an X on a ballot this week, DIY investors are going to need to remember to tune into the blue X to stay on top of what’s going on. We’re thrilled to see where this next chapter takes us and are starting to get the feeling we’re going to be needed now more than even we could have imagined. Here’s to whatever comes next.

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – October 7, 2019

You have to hand it to October. For whatever reason, this is the month of the calendar year where there happens to be more volatility than usual in stock markets. It even featured prominently in the Back to Future franchise as the date in which travelling through time would be achieved. Although time travel in a DeLorean may not be here, it seems like for Canadian DIY investors, the future of online trading is.

In this week’s Roundup, the commission rate carnage in the US takes centre stage. With all major online brokerages in the US dropping trading commission rates to zero, it was an historic time to be witnessing this seismic shift in this industry. Speaking of history, our follow up story is about a Canadian bank-owned brokerage who marked their 30-year anniversary as an online broker with a timely video on how much has changed. Of course, staying on top of the comments on social media and in the forums is standard fare, and these close off this edition of the Roundup.

US Online Brokerage Commissions Rocked

There are big deals, and then there are the kinds of weeks like the one the online brokerage industry in the US had. In what could genuinely be characterized as the most explosive (or implosive) week in online brokerage history, investors, media, and online brokerages alike all watched in jaw-dropping awe as commission prices for trading online collapsed to zero. Everywhere.

Within one week of the already low-cost online brokerage Interactive Brokers announcing that they would introduce zero-commission trading as part of IBKR Lite, the entire suite of online brokerage players in the US followed. Starting on October 1st with Charles Schwab, then TD Ameritrade, and finally E*TRADE on October 2nd, billions of dollars in commission revenues were vapourized, along with market caps for the publicly traded US online brokers.

With the moves catching many in the investment world (surprisingly) by surprise, stock prices for the US online brokerages were hit hard. Charles Schwab dropped by 9%, TD Ameritrade was decimated to the tune of 25%, and E*TRADE fell by 16%. The blow back even hit Canadian bank TD for a drop of 2%, which owns 42% of TD Ameritrade.

There is certainly lots to unpack, and likely still many more stories to emerge from what just happened. One thing that does stand out, however, is just how fast the industry as a whole followed the lead of Interactive Brokers.

As we mentioned in last week’s Roundup, the “Z Day” playbook had likely already been written, with many online brokerages in the US aware of what could or would need to happen if one of the major competitors took commission rates to zero. For that reason, although it was painful to do so, the industry was prepared to respond quickly in the event the nuclear option was triggered.

As part of the fallout, the question many Canadian investors are asking (if not outright demanding an answer to) is when online brokerages in Canada will move to full zero-commission trading.

When the online brokerages in the US finally hit the big red button, Schwab was offering standard commissions at $4.95 and both TD Ameritrade and E*TRADE were at $6.95 (all dollar amounts in USD).

For an apples to apples comparison, the “standard” commission rates for Canadian online brokerages range from $4.88 at HSBC InvestDirect to $9.99 (at Scotia iTRADE and TD Direct Investing). Other online brokerages offer variable pricing of $0.01/share with minimums of $1 (Interactive Brokers), $1.99 (Virtual Brokers), and Questrade ($4.95) so depending on the order size, it may be cheaper to execute certain trades there than by paying a fixed fee. And, as we reported last week in the Roundup, National Bank Direct Brokerage will soon be launching their active trader pricing at $0.95. Flat fee pricing for active traders at Virtual Brokers is $3.99, and $4.99 at Scotia iTRADE.

The key takeaway is that the point of no return has likely already been passed for Canadian online brokerages’ commission pricing. For some quick context, Schwab’s $4.95 USD converts roughly into $6.59 CAD.

So, it seems that Canadian online brokerages are going to be counting on the “inertia” effect of Canadian DIY investors as long as they can, hoping that investors don’t want to go through the “hassle” of switching online brokerages if the perceived benefit is not really worth it.

It is worth pointing out that the majority of the word “meh” is comprised of “eh” and that might be appropriate to characterize what the response would be here if Canadian online brokerages took down their pricing to the near zero level. As such, it is likely that Canadian online brokers have much more time than their US counterparts to bring commission rates down. And that time buys flexibility.

One of the important differences between the Canadian and US online brokerage marketplaces is that the level of competition is nowhere nearly as intense. So, while the impact of publicly traded online brokerages taking their commission rates to zero makes headline news and moves markets in the US, there are no publicly traded online brokerages here in Canada to make the same kind of splash.

If zero is not the right number, then what is? Would it really be worth it for passive investors to switch online brokerages if the commissions they paid per trade were $3 or $2 or just $1?

For example, it might not be inconceivable that a Canadian online brokerage attempts to try the gym membership strategy of charging a monthly fee whereby traders can make as many trades as they want (subject to some very well thought out terms and conditions).

Alternatively, Canadian online brokerages could take their rates down to a “toonie” or a “loonie,” and the rates could seem inconsequential. A round trip using a cash fare on the TTC (Toronto’s transit system) costs $6.50 (as of the writing of this post) so a round trip for a stock trade that came in at less than that (without the risk of similar delays hopefully!) would be easy marketing fodder.

Perhaps the biggest ace up the sleeves of bank-owned online brokerages in Canada would be the bundling of banking relationships to achieve the best commission rates. National Bank Direct Brokerage’s latest pricing move is a perfect example of this approach where clients of National Bank get a break on commission pricing at NBDB. A much larger online brokerage competitor could, however, afford to take pricing even lower than the $6.95 watermark. For the non-bank-owned (or non-credit union-owned) brokerages, this latest pricing cut is a bellwether to move faster to cut rates and figure out other value drivers. Dragging their heels is not an option any more.

There will undoubtedly be lots to continue to watch unfold as the US industry tries to adjust to a new commission rate environment while still trying to remain profitable. One of the main forecasts for what will happen next is that industry consolidation will take place.

Sustainability in the online brokerage space lies in scale, which for now will be achieved through acquisition, so it won’t be surprising to see E*TRADE surface again an as acquisition story. Potentially, however, so could Robinhood. It has been structuring itself for an IPO and has been operating as a zero-commission broker from day one, so it not only has the infrastructure and critical mass of key client segment baked in, but it also has founders and their backers looking for a liquidity event. Add to that the terrible climate for tech IPOs in the US at the moment, and it seems like paying a premium for a Robinhood now would likely leapfrog an acquisition of E*TRADE. Like other brokerages, E*TRADE’s forecasts are going to be revised downwards, which means they’re also likely to be acquired at somewhat of a discount if they do get acquired at all.

For Canadian online brokerages, it is likely that the battle for DIY investors will further its split into either passive investors or active ones. With lower commission fees will likely come more trading, and more active traders need better tools – like trading platforms, and data, to time their entries and exits. With zero commissions, frequent trading is likely to see a resurgence, so those novice “day traders” on the sidelines will undoubtedly be enticed to step back in.

On balance, it seems that online brokerages who can offer a better trading experience are going to likely earn higher praise than those who simply offer lower pricing. Any broker who offers both a great trading platform and lower price for commission (*ahem Interactive Brokers*) will be a natural contender for Canadian DIY investors going forward. Throw in the convenience of managing banking, credit cards, line of credit or a mortgage, and you’ve got a trifecta for DIY investors.

The only question now is how long Canadian DIY investors will have to wait before someone claims the mantle of being the first to offer all three in this brave new commission-free world.

RBC Direct Investing Celebrates 30 Years as an Online Brokerage in Canada

The universe can be somewhat poetic in its timing. Amidst the backdrop of all of the activity in the online brokerage space in the US, this past week RBC Direct Investing officially celebrated the incredible milestone of 30 years as an online brokerage for Canadians.

To mark the occasion, the team from RBC Direct Investing opened the market at the Toronto Stock Exchange and produced a video commemorating the journey from 1989 to 2019.

It will undoubtedly be an exciting year for all the online brokerages, but in particular for bank-owned online brokerages like RBC Direct Investing for the remainder of 2019 and 2020.

No stranger to jumping ahead of their bank-owned brokerage peers in lowering commission prices, RBC Direct Investing was the first of the big bank-owned online brokerages to lower their commission rates down to $9.95 a trade in 2014. Like their peers, it’s clearly a question of when, rather than if, commission prices will drop again and by how much.

We’re keen to see whether RBC Direct Investing will once again set the pricing pace among the bigger brokerages and especially given the spotlight being shone on zero-commission rates in the US (and further afield in Europe and Australia). Given the volatility in the space right now, we’re curious where the next 30 (days) takes Canadian DIY investors.

Discount Brokerage Tweets of the Week

From the Forums

Unluck-eh

While applying for a permanent residency, a Redditor who’s new to Canada is having trouble opening a TFSA and has asked the DIY investor community for their advice. Read the full discussion here.

Uncomfortable Questions

A Redditor with a managed portfolio is curious about index funds but worries that the inquiry will offend their financial advisor. DIY investors discuss the situation and the potential profit outlook here.

Into the Close

Staying on the throwback to the 80s, it was 30 years ago in 1989 that the video game Zero Wing was launched, which eventually gave rise to the meme “All your base are belong to us.” Video games, like the online brokerage industry, have changed dramatically since then. What the events of the past week have shown, however, is that the future can show up faster than expected and that those clamouring for commission-free trading (at least in the US) have now received what they wished for. While we now chuckle at how silly the games 30 years ago look compared to today’s, it is also remarkable to think that one day it will be considered equally silly that online brokerages were able to charge as much as they were for trades for so long.

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – September 30, 2019

One of the best parts of summer happens to be ice cream. Of course, just because the season is behind us, it doesn’t mean that we can’t enjoy a good scoop – or in this case, a couple of incredible scoops – of online brokerage news that are sure to put just as big of a smile on the faces of DIY investors as the frozen treat would.

In this edition of the Roundup, we dish out two incredible stories about pricing changes. The first is a game-changing announcement south of the Border that is sure to make waves in the industry here in Canada. And if those waves weren’t enough, we dive into the news that is going to also make a major splash with DIY investors and other discount brokerages here in Canada, as the first big shift in pricing from a bank-owned online brokerage in several years is coming. Not to be glossed over, we’ve also included a healthy portion of treats from Twitter and the DIY investor forums.

Z-Day is Here: Interactive Brokers Offers Unlimited Commission-Free Trades

After the meteoric rise in popularity of US online brokerage Robinhood and their zero-commission trading fee model, the online brokerage industry as a whole knew it would be only a matter of time until they had to decide to follow suit.

When Robinhood was first launched in 2014, it’s fair to say there was a substantial level of skepticism that zero-commission trading would ever take flight, let alone be profitable. Yet, year after year, momentum behind the zero-commission brokerage grew, attracting major investors (such as Sequoia, Google’s venture capital fund Capital G, and others), achieving a USD $7B valuation and earning numerous awards for design and user experience. Beyond just the product or platform, it turns out that Robinhood also appealed heavily to the next generation of online investors: millennials.

Fast forward to last week, and any skepticism about the viability of the business model has been put to rest by a firm that few predicted would become the first of the major online brokerages in the US market to also take trading commissions to zero.

Interactive Brokers, already one of the lowest-cost online brokerages in the US (and internationally), announced last week that they would be rolling out a new option of their online brokerage service known as IBKR Lite which will provide online investors commission-free trading on all US equities and ETFs. The existing service provided by Interactive Brokers (whose ticker symbol is IBKR) will be rebranded to IBKR Pro and will retain the existing pricing and feature set.

At the heart of the new IBKR Lite is how and where an order for an equity or ETF trade gets routed. Rather than go through Interactive Brokers’ proprietary order routing algorithm, known as the IB SmartRouting system, orders for equities placed through IBKR Lite will be sold to market makers (aka high-frequency traders) who will be able to take advantage of minuscule variations in pricing that can then be turned into profits.

Often snubbed by Interactive Brokers’ founder and CEO, Thomas Peterffy, selling client order flow or trading against clients was touted as contrary to the core of Interactive Brokers – who has always sought to offer clients the best execution price for trades.

Interestingly, it was just over a year ago that they opted to become the first company to be listed on IEX, the US stock exchange founded by Brad Katsuyama – of Flash Boys fame – largely because there was strong overlap in organizational values. Just a few days prior to the announcement that Interactive Brokers would be launching IBKR Lite, however, Interactive Brokers announced that they would be delisting from IEX and moving back to NASDAQ, a fascinating turn of events in its own right.

Against the backdrop of the launch of IBKR Lite, something that is almost antithetical to the IEX mission, the continued presence of Interactive Brokers on that exchange seems to now be irreconcilable. Further, with the exit of Interactive Brokers, IEX is also exiting the listings business altogether and will not be seeking at this time to list publicly traded companies on the exchange.

So – why the about-face for Interactive Brokers?

Ever the entrepreneurial organization, Interactive Brokers is agile enough to see what the market is asking for and be able to mobilize to deliver. The past two to three years have seen a number of innovative services added to the Interactive Brokers ecosystem, that have sought to deepen the relationship (and share of wallet) Interactive Brokers has in its clients’ financial lives.

Ultimately, the move to zero commission fees appears to be a ‘why not’ moment at Interactive Brokers – if the market is showing that there are investors who are willing to forsake the best execution price for a trade-in order to save on the commission up front, then Interactive Brokers is simply leaving money on the table by not doing this.

For many years, their primary discount brokerage competitors (for example, TD Ameritrade) have been selling order flow and generating significant revenues from doing so. A snapshot from the FY18 report for TD Ameritrade shown below illustrates the growth in revenue derived from order routing and clearly shows just how lucrative this has been for them. From FY17 to FY18, for example, the revenue from this source grew 43% to USD $458 million.

And, in FY19, revenue from order routing has contributed to 32% (USD $365 million) of the trading revenues earned by Ameritrade.

While the information is publicly available, what appears to be different about the approach Interactive Brokers is taking compared to that of their peers is that they are being very transparent about the fact that users of IBKR Lite are getting commission-free trades because they are giving up (or trading away) best execution price. Even zero-commission trading firm Robinhood isn’t as clear as they could be in stressing this to potential clients.

For other online brokerages who both charge commissions for trades AND make money from routing orders, the new launch by Interactive Brokers is highly problematic.

Competing online brokerages will now be forced to answer the question of the real value of order execution, as well as the value of the other features that define a client experience, whether that be great user experience, an amazing mobile app, education, charting, support, access to research, or some other feature.

While the reaction of stock prices of the online brokerages to the news was generally negative, there are clearly some online brokerages that were more negatively impacted than others. TD Ameritrade, who derived 36% of its revenues in FY18 from trading commissions and order execution, for example, was down 6% on the news while Schwab fell only 2% – a sign that the latter is less reliant on trading commission revenues than the former.

Despite the announcement, the online brokerages in the US have undoubtedly prepared a playbook for this scenario. They may not have known exactly when this “Z-day” would come but in conference calls over the past year, the spectre of zero commission trading has been raised and addressed with the general response being along the lines of “we can handle it”.

Earlier this year, Peterffy hinted at something big happening at Interactive Brokers in the latter stretch of the year. While we thought that the sports betting platform might have been it, clearly the market-disrupting thing Peterffy was referencing was the deployment of this zero-commission option. Evidently, Interactive Brokers has seen the writing on the wall when it comes to mass market appetite for commission fees on trades, and what consumers are willing to trade away for those prized zero-commission rates.

For the moment, the zero-commission fee offering of IBKR Lite is restricted to the US. Canadian discount brokerages, therefore, have a bit more breathing room to figure out their game plan if and when a major player here decides to offer up full commission-free trading here.

Already offered (with some restrictions) here by Wealthsimple Trade, this feels a bit like déjà vu with Robinhood.

Canadian online brokerages are generally slower to innovate than their US counterparts – and the skepticism on the street around Wealthsimple Trade still permeates. For that reason, it is unlikely that a larger online brokerage in Canada is going to move to full zero commission trading until they absolutely have to.

For the foreseeable future, the battleground among Canadian brokerages will clearly be in other value offerings – like account integration, ease of access (and stability!), of platforms (including mobile), and user experience to name a few. Like their US counterparts, Canadian discount brokerages had better be prepared to clearly explain to DIY investors what benefits there are to be paying for trading commissions.

If Canadian brokerages ignore or downplay the accelerating trend towards zero-commissions, however, they will ironically have to pay a hefty inactivity fee for that.

At National Bank Direct Brokerage, It Pays to be Young, Stay Active and Be Connected

Were it not for the news out of the US online brokerage market this past week, the big news story would have been in the Canadian discount brokerage market, when it broke that National Bank Direct Brokerage is getting to shake up their commission pricing and making a very aggressive play to go after young (aka millennial) investors as well as the active trader segment.

In a mention in the French language publication La Presse, National Bank Direct Brokerage’s President Claude-Frédéric Robert was quoted as saying that National Bank Direct Brokerage is getting set to roll out a new pricing program for investors aged 18 to 30, that offers up a generous 10 commission-free trades per year and a decreased commission pricing tier of $4.95 per trade. Added to that, there are no account minimums required or inactivity fees to be charged.

For very active traders – those making more than 100 trades every three months – the news is also great – a jaw-dropping $0.95 pricing for trades.

And finally, individuals who have an account with National Bank will benefit from that relationship by getting standard commission rates of $6.95 per trade instead of $9.95.

So, as referenced above, the trend towards zero commission trading is finding its way to Canadian discount brokerages and has shown up yet again at National Bank Direct Brokerage, which already offers up commission-free ETF trading on all ETFs (with a caveat of a minimum purchase/sale amount required to qualify for the commission-free status).

This latest move by NBDB is a salvo at both their bank-owned online brokerage peers – in particular, Desjardins Online Brokerage – and the low commission leader in Canada, Questrade. Offering up 10 commission-free trades per year is unheard of in the marketplace today, so that alone will generate buzz among the younger investor crowd, who are especially keen on passive investing. And, active traders are sure to be kicking the tires with sub $1 trading commissions.

While services like Wealthsimple Trade offer unlimited commission-free trading, there are still a number of restrictions in place on the kinds of markets (e.g. Canadian Securities Exchange or TSX-Venture listed securities) investors can access as well as that whole forced currency conversion thing to trade US-listed securities. Neither Wealthsimple Trade nor Questrade are bank-owned online brokerages, so there is not the reputational security or the integrated convenience factor of managing multiple financial products in one place (yet).

While we are awaiting more details on the pricing plan, clearly it pays to be a young investor in 2019.

With respect to younger investors, the calculus here is interesting for National Bank Direct Brokerage. Young investors don’t have the kind of investible assets (yet) that make them attractive prospective clients. What is likely the case is that NBDB is hoping to generate enough traction with and provide sufficient incentive to younger investors so that they stick around with NBDB, especially as they start working/earning more and begin inheriting wealth from older generations.

To say this is interesting is really putting it mildly.

The test being played out in real time is whether bank-owned brokerages like NBDB can edge out peer bank-owned firms before they act to match or beat the offer and before newer players figure out how to offer more bank-like services (e.g. higher interest on idle cash).

For millennial and younger investors, NBDB has got it right, insofar as pricing is clearly a pain point. That said, they are in for a tough fight when it comes to user experience on digital platforms, such as mobile, where those prized millennial and younger investors are going to be spending most of their time. The mobile experience for National Bank Direct Brokerage is something that will be crucial to their success perhaps as much as if not more so than the price of commissions.

Whether it’s Netflix, Skip the Dishes, Uber or some other subscription or fee for service offering, paying the money for things isn’t the issue so much as the ease with which the experience takes place is. If it feels hard to do, the price is already too high.

Once the pricing rolls out officially in October, NBDB will be poised to make a splash about it and their bank-owned peers will have to take a serious look at both their ‘millennial engagement’ strategy and active investor offering when it comes to pricing.

It’s never been a better time for younger investors to be DIY investors. With discounted (now free) commissions, waivers of account minimums and inactivity fees, Canadian online brokerages are clearly competing for investors who may not have lots of capital now but with whom important relationships need to be built. One crucial thing for brokerages to keep in mind though is not only what it will take to win the interest of these new investors, but also to keep it.

Discount Brokerage Tweets of the Week

From the Forums

Short Changed by a Long Transfer

Worried about a recently transferred account that seems to be missing funds, a DIY investor on Reddit vents about Questrade. Read the full conversation and the response from the online brokerage here.

Dazed and Confused

Puzzled after a debate that started over a family dinner, one DIY investor asks fellow Redditors to clarify whether an RRSP or a TFSA is the better option for saving and investing. Read the full discussion here.

Into the Close

Snow getting dumped on Calgary in September is sort of crazy, but not out of the realm of possibility. It is, by comparison, a far saner development than what just got dumped on all of the other online brokerages this past week. The avalanche of pricing news that is sure to follow in October and November from the online brokerages in Canada and the US is likely to make the Calgary snowfall in September seem like cupcake frosting. We started with dessert and ended with it too – something tells me this is a particularly sweet time for Canadian DIY investors.

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – September 9, 2019

Sports offer a great metaphor for the highly competitive nature of the stock market. After an epic weekend of football and tennis, there was lots to cheer for (not so much for Raiders fans though). While there are many lessons on the field that apply to the markets, another great feature of sports is the highlight reel.

In this edition of the Roundup, we serve up a series of highlights from what online brokerage activity crossed our radar this past week. Keep reading to learn more about deals updates, a pull back on shorts, healthy performance stats, new features, and upcoming investor education initiatives. As always, we’ll serve up the staple DIY investor conversations on Twitter and the investor forums.

Deal and No Deal at BMO InvestorLine

This past week, BMO InvestorLine saw a couple of interesting developments take shape. First, on the deals and promotions front, the popular bank-owned Canadian online brokerage kicked off their latest offer for the new season.

Similar to their summer promotion, BMO InvestorLine’s latest offer is also a tiered cash-back offering. The latest promo, like the one before it, has tiers that skew towards higher deposit amounts with the maximum tier with a reward being the $2M one. Interestingly, when compared side-by-side, the fall offer makes getting a deal more accessible, since the latest offer has a lower threshold to qualify ($100K minimum deposit vs $500K minimum deposit) for it.

Min Deposit Required Summer Offer Reward Fall Offer Reward
$100K – $100
$250K $500 $225
$500K $1,000 $600
$2M+ $2,500 $2,000

 

Unlike the summer offer, the most recent Fall promotion by BMO InvestorLine requires a minimum deposit that starts at $100K, which likely means that more DIY investors will be able to qualify for this cash back offering. Interestingly, for the other deposit tiers, the amount of the cash back reward was lowered significantly, with the highest cash back offering topping out at $2,000.

A quick scan of the deals board shows that there two big-bank owned online brokerages with cash back offers – BMO InvestorLine and Scotia iTRADE. Interestingly, they appear to be trying to reach very different segments with cash back offers. In the case of the latest offer from Scotia iTRADE, it is possible to qualify for a $50 cash back bonus for a deposit of $2,500. By comparison, BMO InvestorLine’s bonus is $100 for a deposit of $100K, a 40x difference in deposit size from the Scotia offer.

In spite of the scope/size difference in the reward amounts, when it comes to DIY investor interest in online brokerage deals, cash is king. As such, the amounts being offered are still better than nothing.

For more information, be sure to check out the deals & promotions section.

Short Shorts

Another “short” story from BMO InvestorLine surfaced last week and had to do with DIY Investors encountering difficulties with trying to short trade select cannabis securities. In this article in the Financial Post, author Victor Ferreira details the experiences of a few DIY investors who were unable to short sell shares of cannabis companies.

When the availability of shares to short sell, especially from a bank -owned brokerage, starts to dry up, it is often a sign of a very bearish market sentiment.  Very recently, the shine has come off the cannabis sector which means, as an investment, they may be considered “riskier” than other symbols or assets. Compounded with the overall volatility in the market, and its possible that BMO is preparing for the storm to hit.  What will be interesting to monitor is the extent of the restriction, whether it’s been formalized, and whether other financial services will follow suit.

Interactive Brokers Posts Stronger Numbers

This past week, Interactive Brokers announced performance metrics and highlights for the month of August as well as rolled out the ability for individuals to bet on NFL games via the free online sports betting platform.

Starting first with metrics, for this month’s numbers, the biggest highlight appears to be the volume of trades. Clients of Interactive Brokers generated 930K daily average revenue trades, which is a staggering 26% higher than trading volume at the same point last year. As per usual, the streak of account growth continues with the online broker now being home to 600K accounts which is a 17% growth compared to last year.

As we mentioned in this previous roundup, the volatility is generally good for generating trading activity which, in turn, is good for online brokerages. The double-edged sword though, is that, with the uncertainty contributing to jitters in the market, it also happens to be a deterrent to people wanting to invest on their own.

Another interesting development coming out of Interactive Brokers is that they’ve officially added and launched the NFL on their online betting platform. Recall that Interactive Brokers rolled out an official sports betting program in the summer to try and attract individuals who are into sports betting in the hopes that those folks who take it seriously would be a good fit for the IB platform and would want to trade real money.

The ability to bet on games opens up two weeks prior to the event itself, so there is some capability to wager on the outcomes in advance. Also interesting is the “trading” interface that IB has created to explain the “bet”. This betting console contains odds as well as what users can expect to gain if the bet materializes. In this way, it is more about understanding the consequences of the action (investment) than it is to blindly speculate.

Learning About Earning

September is synonymous with back to school. For students of the stock market, however, school happens to always be in session. Nonetheless, there is an uptick this month in the number and caliber of learning events for DIY investors.

Online brokerage events related to investor education are becoming increasingly rare except at larger online brokers, and even then, there is just a small group that deliver educational content on a regular basis. This month, TD Direct Investing and CIBC Investor’s Edge both have compelling information/education events planned and, as mentioned last week, Scotia iTRADE has an interesting education event planned for clients.

In the case of the former, TD Direct Investing has put together a well-structured and comprehensive series of webinars as part of their “Master Class” series. This series includes webinars on investing basics as well as advanced topics and software platform orientation. Even though this has been available for some time, it does stand out from amongst its peers in terms of breadth, structure and accessibility.

CIBC Investor’s Edge is also in the mix with an event of their own. Coming up on September 27th, CIBC economist Avery Shenfeld will be presenting his economic outlook for 2020 and the kinds of things investors will need to be aware of heading into 2020. With the volatility and uncertainty in markets, this is likely to be a highly sought after event.

Discount Brokerage Tweets of the Week

From the Forums

Bubbling Over With Excitement

In a recent interview, Michael Burry dubbed index funds “subprime CDOs” and declared the existence of a “bubble” in passive investing. Investors on Canadian Money Forum are up in arms as they interpret and discuss the statement here.

Ou(TD)oing the Competition

TD e-Series mutual funds have been a long-time favourite for DIY investors, and as changes are being introduced, Redditors are discussing the new possibilities. Read the full discussion here.

Into the Close

Canada appeared to defy expectations on both the job front and on the tennis court. Of course, when it comes to the markets these days, there appears to be even more racket(s) than at the US Open – and probably just as much back and forth. It’s definitely a challenge to be a market spectator these days but just like viewing tennis, it’s important to focus on the long game and enjoy the rallies while they last.

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – August 26, 2019

It seems like more and more discussion is taking place around the “R” word. Of course, with stranger things taking place around the world with respect to interest rates, trade wars, and conflicting accounts from economic indicators, it’s tough to make heads or tails of what’s going on. Despite the pervasive and heightened uncertainty, one thing is clear: there’s a lot of forecasting taking place about what may happen next in the stock markets.

In this edition of the roundup, we pile onto the prognostication bandwagon to forecast what online brokerages and DIY investors can expect heading into the last few months of the year. From what online brokerages have already telegraphed to signals of interesting developments, an intriguing picture is forming of the new landscape for online brokerages. As always, we’ve got a healthy serving of DIY investor chatter from Twitter and the investor forums to close things out.

Interactive Brokers Big Bet Gets Bigger

As far back as April of 2019, Interactive Brokers founder and outgoing CEO, Thomas Peterffy, signalled that Interactive Brokers would officially launch something “big” to catalyze growth to their business. That big bet, as it turned out, was the launch of a simulated sports betting platform (launched in July) designed to attract individuals who were a cut above the traditional gambler. Think Moneyball meets Wall Street.

With September now just a few weeks away, the kickoff to the new season of the NFL will also usher in a tsunami of football chatter around trading desks and water coolers across North America. As it happens, the NFL is slated to be added to the lineup of games that users of the Interactive Brokers sports betting simulator can bet on.

Fantasy football (indeed fantasy sports in general) is a wildly popular endeavour. So, it stands to reason that with the influx of interest in the new season of the NFL combined with a platform that offers up the stats and quant geeks of the football world a chance to flex their bulging bell curves, Interactive Brokers may find its pool of potential new clients after all.

Another big catalyst for online brokerages like Interactive Brokers is the market volatility itself.

When markets become uncertain, that’s typically when efficiency in pricing breaks down and when active traders step back into the mix to find compelling trades. So, despite volatility being generally bad news for many investors, for active traders, the volatility is a sign of opportunity.

Combined with lower interest rates, the ability to access margin means that firms like Interactive Brokers could stand to benefit from increased trading activity (and therefore commission revenue). That said, the last time the markets were signalling an increase in volatility, Interactive Brokers pre-emptively raised margin requirements to protect against the sudden swing in prices, a deft move that saved them from considerable margin loan losses while their peer firms unfortunately did not fare as well.

As September nears, we’ll be keeping a close eye on what Interactive Brokers (and other online brokers) will be doing with margin requirements as that may once again prove a definitive canary-in-the-coal-mine.

Stimulus in the Deals & Promotions Section

With the “R” word now making the rounds in major news and business media (as well as the content of several large online brokerages), sentiment among DIY investors towards entering into the markets is undoubtedly going to turn negative.

As it just so happens, September is historically when investing activity picks up again and for many financial services firms (especially online brokerages), this represents the second-last month of the fiscal year. Translation: it’s a great time to boost performance stats for the fiscal year by landing more client accounts.

Financial performance aside, savvy online brokerages understand that in today’s fiercely competitive market for DIY investor assets, it will be important to stand out, especially during the market storm.

One quick way to incentivize investors to pay attention is with a good deal. The seasoned investors will undoubtedly be out looking for compelling deals in the stock market and will also recognize a good offer from an online brokerage if one were to surface. Ironically, central banks won’t be the only ones contemplating how to boost market performance with rate cuts.

Pricing discounts are just one option, however. In the current market climate, one way to soothe the angst of investor uncertainty is with access to good information and market coverage. So, while cash back promotions or commission-free trades are always fan favourites, the ability to stay informed about what’s happening in markets in either real-time or with in-depth coverage would also be value added.

This past week, RBC Direct Investing tackled the thorny subject of trade protectionism in its “Inspired Investor” publication, and TD’s MoneyTalk tried to unpack the possibility of a recession in its most recent episode. Most Canadian online brokerages, however, have been mum on the subject. For those online brokerages who have invested in strong content production programs, now is the time when those investments pay off not only as news sources for their own clients, but also as a mechanism to stand apart from other brokerages (or other content providers) who can’t offer the same degree of insight into market direction.

More Price Disruption Coming

Of course while incentives and promotions are one quick way to get on investors’ radar, the so-called “nuclear option” of getting noticed is to drop commission fees down to zero.

So far, Wealthsimple Trade is the only Canadian online brokerage to offer zero commissions on all trades, with other providers such as Questrade, Virtual Brokers, and National Bank Direct Brokerage offering some kind of commission-free trading on ETFs.

One interesting dark horse that could still shake things up for online brokerages in Canada is Canaccord, whose 2018 acquisition of Jitneytrade could enable them to pursue a maneuver akin to Wealthsimple’s acquisition of the brokerage Canadian ShareOwner Investments Inc., which then enabled Wealthsimple Trade to offer online brokerage services to DIY investors.

In addition to price, there’s also going to have to be a step change in how incumbent Canadian online brokerages connect with clients (and potential clients).

What Wealthsimple’s latest advertising stunt of the tiny stadium in downtown Toronto shows, is that they’re also capable of pushing the envelope for innovation in messaging for wealth management services providers. At the heart of it though is the “perceived value” of what a commission charge gets you. Many large Canadian online brokerages have publicly been called out for struggles with technology stability or scalable customer service access, so the notion that “bigger is better” doesn’t necessarily match consumers comments and reviews online.

The takeaway is that as competition continues to grow for investor assets, so does the likelihood that there will be another major commission pricing announcement from an existing provider. For new entrants into the online brokerage space, unless there’s a quantum leap in trading platform experience, going to zero-commission or using ultra-low commission pricing is likely the path forward.

Regardless of the stock market’s immediate direction and sentiment, Canada’s online brokerages have had to navigate choppy waters before. What is different this time, however, is that there is a strong likelihood that there is a recession on the horizon and considerably more competition to boot. Heading into busier times in the weeks ahead, the advice for Canadian online brokerages is simple: prepare accordingly.

Discount Brokerage Tweets of the Week

From the Forums

Pure and (Wealth)simple

An inexperienced investor collected opinions about Wealthsimple and found out what fellow Redditors like, what types of investments they recommend through this brokerage, and how they use their Wealthsimple accounts. Read the discussion here.

Asset Tripping

Freshly motivated to maximize his returns and concerned about missed opportunities, a Redditor who passively accumulated savings into a TFSA is looking for advice on a more assertive investment strategy.

Into the Close

Savvy investors know that there’s always a bull market somewhere. With headlines the world over fixated on the trade war and uncertainty, sentiment is clearly shifting negative, but with gold perking up and a range of vehicles available to capitalize on volatility, it seems that aside from capital to wade into this storm, it’s going to take the gumption to keep going.

Posted on by — Leave a comment

Discount Brokerage Weekly Roundup – August 19, 2019

One of the marvels of modern physics is that you can experience “zero gravity” right here on Earth by hopping on a flight of what’s affectionately known as the vomit comet. After diving and rallying and causing many investors to toss their cookies, this past week was a reminder that in spite of fundamentals, predictability is what the current market is lacking. Ironically, it seems like some of that uncertainty is also spilling over into the online brokerage space this year too.

In this edition of the roundup, we profile one newsworthy development at a Canadian online brokerage that’s pushing to add more value to the trading experience for DIY investors. From there, we look at yet another announcement of a CEO resignation at a US online brokerage this year, a signal that the whole space is going through a major shakeup. On a more familiar note, we close out the roundup with chats and tweets from DIY investors in the forums and on Twitter.

Questrade Clients to get Benzinga-Powered News

For longtime observers of the Canadian online brokerage space, one of the curious changes to have taken place gradually over the past few years is that the entities that used to call themselves “discount brokers” no longer do. Instead, the term direct brokerage or online brokerage have come to describe the providers that enable DIY investors to trade the market.

The shift in name away from “discount” is one small but important indication that the industry wants to move away from competing against one another in terms of price. After waves of commission drops, and now the launch of a zero-commission provider, Canadian online brokerages are collectively exploring alternatives to dropping commission prices by delivering “better value” for their clients in the form of new features or enhanced technology.

One of the features that smaller online brokerages have a tough time competing against larger bank-owned brokerages on is research and news. Often, the wealth management branches within banks have armies of analysts and writers to draw from, and as such, can supply DIY investors with a “wealth” of in-depth coverage. Further, their size of client pool justifies them being able provide access to larger newswire services that can be tailored to individual stocks within a watchlist or portfolio.

This past week, however, an interesting announcement crossed our radar, stating that financial news provider Benzinga will be providing Questrade clients premium “access to earnings releases, trade ideas, breaking stories and interviews,” as well as “real-time calendars for earnings guidance, analyst ratings, IPOs, splits, dividends, and more.” Clients of Benzinga in the US online brokerage market include TD Ameritrade, E*TRADE, Interactive Brokers and Tradestation, to name a few.

Interestingly, neither Questrade nor Benzinga’s review of Questrade have yet mentioned this feature (as of the time of writing this roundup), however, for DIY investors at Questrade, getting convenient visibility on key developments that drive action in a stock means an improved trading experience. And, in looking at the firms that Benzinga services, this means that Questrade clients will be getting a competitive solution for research data on Canadian equities – a new venture for Benzinga.

Access to news about equities is certainly not a new feature, but in the race to provide additional value without having to lower trading commissions, it becomes a key differentiator between brokerages. DIY investors trying to decide which online brokerage provides the best value will certainly be looking at price first, however, Questrade has always historically competed well in that category. With this new feature of quick-to-market data being part of the investor experience, it’s clear that Questrade is fixed on giving their higher priced competitors a real run for their money.

CEO of E*TRADE Announces Departure

It looks like 2019 is the year of the turnover at US online brokerages. This past week, yet another head of an online brokerage has announced they’ve moved on.

CEO of E*TRADE Financial, Karl Roessner, surprised industry observers by announcing his abrupt departure from the head of this online brokerage after having stepped into the role in 2016. Last month, the head of TD Ameritrade, Tim Hockey, also announced that he would be stepping down as President and CEO and, earlier in 2019, Thomas Peterffy, CEO and founder of Interactive Brokers, announced he too would be stepping down from the popular online brokerage firm he founded over 40 years ago.

Unlike the situation at Interactive Brokers, however, the departure of Roessner was fairly abrupt, and because it fell between earnings announcements, did not have the same reassuring tone of Tim Hockey’s departure from TD Ameritrade.

With pressures to revenue generation mounting at US online brokerages, including at E*TRADE, this cascade of executive departures will bring with it fresh uncertainty against an already challenging backdrop. After all, the CEO has a crucial role to play in steering the organization and with so much change, it will be hard to know who is steering the ship and how the industry as a whole will respond.

For challenger brands like Robinhood and Tasty Trade, or even bigger players like JP Morgan, the momentary transition by incumbent online brokerages undergoing key leadership changes could be an ideal moment to step up their efforts to win over their competitors’ business. Both Robinhood and Tasty Trade are still founder-led organizations, and as such, are driving towards their vision of their respective businesses.

Within the Canadian online brokerage space, there has been (and perennially is) substantial turnover at the leadership level (e.g. President) at many of the bank-owned online brokerages. Interestingly (and potentially unsurprisingly), Questrade stands out as having the longest standing President of the organization among online brokers. Since it was launched in 1999, Questrade has had the same President & CEO, Edward Kholodenko. Within the Canadian market, even though Questrade has been around for almost two decades, only now is it starting to hit its stride with the online brokerage reviews in terms of overall DIY investors experience, perhaps a nod to the notion that founder-led firms typically outperform peers.

What this latest departure highlights is that it is difficult to do transformational work without a long runway. While progress can be achieved (as demonstrated by both Hockey and Roessner) in a relatively short amount of time, the nature of the ambitions and the ability to see big changes through invariably take time and leadership continuity. To add even more uncertainty into the mix, the next class of online brokerage CEOs are going to have to contend with choppy (and potentially falling) markets, as well as a possible recession. Certainly anyone stepping next into the role of an online brokerage CEO is going to have nerves of steel – oh – and be able to get along with their board of directors.

Discount Brokerage Tweets of the Week

From the Forums

Simply De-fee-ted

Concerned over unexpected fees and itching for a change, this weary investor turns to fellow Redditors for advice. Read through for interesting opinions on other investment options in this Reddit thread.

Hello Downticks, My Old Friend

Fluctuations in the market leave a lot of us with sleepless nights and stressful days. A few confident investors weigh in on dealing with the recent volatility in the following Canadian Money Forum thread.

Into the Close

That’s another wild week in the books. One of the telltale signs of disagreement in the markets is volatility, aka uncertainty. While bonds are usually the smarter securities in the room, there seems to be a consistent theme from “experts” that fears of a recession are just overblown. Which simply goes to show, that nobody really knows where things go from here. Such is the dance. Have a great week!