US online brokerages provide a window into feature development that Canadian DIY investors can only look at with some serious cross-border envy. Learn about how trends at big and small online brokerages in the US are shaping the DIY investor experience on both sides of the border.
Stock markets in Canada were closed for Victoria Day, but that did little to dampen activity and enthusiasm for DIY investors looking stateside (or further afield) for trading opportunities. And they’re not alone. On the unofficial start to summer, we decided to peek across the (still-closed) border with the US to catch up on important trends and developments in the US online investing space.
In this America-focused Weekly Roundup, we look at interesting developments among the biggest and smallest online brokerages in the US, and how each is shaping what DIY investors can expect from their online investing experience. First, we focus on the biggest player in the space, Schwab, and what some recent data released by them suggests about DIY investing enthusiasm. Next, we turn the spotlight onto another online investing player, tastytrade, who has demonstrated just how far enthusiasm and community can take an online trading brand. As always, we cap things off with some interesting DIY investor conversation to ease back into the shortened week (here in Canada).
When it comes to online brokerages, there’s big, there’s bigger, then there’s Charles Schwab. Given its gargantuan size and diverse business activities, it’s almost a misnomer to characterize one of the original discount brokerages as such in 2021.
With banking activities, managed wealth, and a host of other financial services that go beyond online stock trading, online trading makes up a small fraction of where Schwab makes their money these days. Even so, given the number of accounts and reputation in the US online brokerage market, Schwab is undoubtedly an influential force with retail investors.
Just how big is Schwab?
Their recently reported trading metrics from April listed total client assets as $7.34 trillion (USD), an increase of 4% from March and 94% from April 2020 (not a typo). At these levels, spreadsheet columns have to be widened to accommodate the number of digits in a cell to properly total things up. So, if there’s one measure to indicate that you’ve made it in the world, it might just be that.
One of the reasons that they continue to grow at such an extraordinary clip was also reported in Schwab’s latest performance report.
In April, Schwab opened 609,000 new online brokerage accounts (also not a typo), which is over three times what they opened in the same period last year (201,000 new accounts). By comparison, Interactive Brokers, another popular publicly traded US online brokerage, opened about 34,200 net new accounts in April – not an apples-to-apples comparison, but it does provide a reasonable approximation of the scale of difference between the two online brokerages.
While the snapshot of data is mind blowing on its own, when put into context across time, the account opening data at online brokerages like Schwab and Interactive Brokers reveal a possible trend forming: a peak in the surge of DIY investor interest.
Of specific importance is comparing the drops in new account openings at Schwab and Interactive Brokers as an indicator that the “fast money” active traders have stepped away from the online trading space in larger numbers than less active investors have. Thus, Interactive Brokers and firms that cater to active traders will have seen a stronger pullback than firms that cater to “average” DIY investors.
Consider the following: compared to March, the number of new accounts opened at Schwab in April was actually down 28%. By comparison, Interactive Brokers saw a drop of 43% in net new accounts on a month-over-month basis. At both brokerages, new account openings have declined double digits for the past two months, and in the case of Interactive Brokers, the declines in new account openings started in February.
What this data signals is that US online brokerages are seeing elevated account openings relative to last year but a rapidly declining rate of new account openings from retail investors in 2021. In short: the flood of DIY investors appears to have crested.
Due to COVID-19, 2020 and 2021 have been strange years to say the least. Even though a lot has already been written about the elevated interest in investing online, industry analysts have understood that a drop off was bound to occur at some point. The profile of that drop off, however, is starting to become more clear and that has implications for online brokerages during the transition back to a more normal economy.
With May just around the corner, the volume of new accounts will be an important indicator to watch to see if the contraction in account growth is accelerating or decelerating.
Regardless of the direction of new account sign ups, the data on total accounts opened at online brokerages reveals an unmistakable feature: there are lots of new investors who decided to open up online investing and trading accounts in 2021 – a fact that is all the more impressive considering the surge in interest in online investing by investors last year at about the same time.
The question confronting online brokerages such as Schwab and Interactive Brokers is: will these new investors will stick around?
Some important clues to answering that question came from the spring business update presented by Schwab in late April this year.
One important data point (hooray, more data) is that 70% of clients new to Schwab’s retail trading business in the first quarter of 2021 were under the age of 40. Demographically, this sets the stage for long-term retention if the client experience and value proposition are in place to properly cater to this group of investors.
The strongest statement regarding the outcome of the increased interest by newer investors is seen in the slide shown above. Schwab expects retaining clients, and their assets, even if trading activity levels decrease as markets stabilize.
It is this forecast that spells out one the most important strengths of having the kind of scale that Schwab does. With that kind of size, even small percentage improvements in revenue generating activities can tremendously impact the bottom line.
For example, two trends on the above slide show that retail trades per account have more than tripled from December 2019 to March 2021, and that margin balances as a percentage of total client assets have also increased from 0.7% in Q4 2019 to 1.0% in Q1 2021.
A recent promotional email received from Interactive Brokers helps to illustrate why margin loans trending up at Schwab is so important: the margin loan rates at Schwab are substantially higher than at Interactive Brokers.
Thus, the interesting (no pun intended) picture emerging is that for the new investors who joined Schwab and who are going to be more actively trading, an almost 5x cost differential in margin lending rates is going to matter at some point. In case you’re curious, the margin lending rate at Robinhood is 2.5% at the time of publication, which underscores just how fiercely competitive Interactive Brokers is when it comes to features that typically appeal to active traders.
The challenge for Schwab, and really any online brokerage that wants to generate revenues in a zero-commission model, is to charge more for other features, like margin interest, to offset the forgone revenue from trading commission.
For Canadian online brokerages, margin interest rates are a feature that appeal to active investors or investors with larger assets who don’t trade as frequently but who use margin. Both these segments represent high value clients to an online brokerage, so rather than dropping commission rates to zero, savvy online brokerages in Canada may provide attractive margin rates in order to win new clients (or retain existing ones).
The US online brokerage market is fiercely competitive in many respects, however, because they have largely moved to a “zero-commission” world there are other aspects of their business, such as margin rates, that mainstream online brokerages have been slower to compete on. Here in Canada, where zero-dollar commission trading is not really prevalent, margin rates seem like an interesting area to watch.
As was mentioned last week in our coverage of Surviscor’s analysis of pricing among Canadian online brokerages, there is no such thing as a “free lunch,” and as a result, DIY investors can expect to pay the price for commission-free trades in other parts of the online trading experience.
The key takeaway from the latest set of data indicators at Schwab are that there is now a large cohort of online investors who have opened up online investing accounts, who will likely be in need of a very different kind of investing experience going forward than what spurred them to be interested to begin with. If the “fast money” has exited, and markets have less volatility, active traders are going to be hard pressed to find compelling trading opportunities – which is a need almost all brokerages will have an interest in trying to address regardless of size.
This past week, the online financial media powerhouse tastytrade celebrated an impressive milestone: their 10 year anniversary. As part of that accomplishment, they released a very interesting documentary that profiled how the tastytrade brand was conceived, launched, and has grown over the past decade.
The documentary is fascinating content on a number of levels. From the background of how the company came to be named after a popular Philadelphia-area snack, to the palpable enthusiasm for doing something different in finance, the video captures the journey of the tastytrade brand through their first 10 years and ends with an intriguing view of trading in the future.
What is most compelling about this documentary, however, is that it showcases how a powerhouse online investing brand can develop by focusing first on delivering engaging, people-centred content.
It helps to understand that one of the founders behind tastytrade is Tom Sosnoff, the founder of the ultra-popular options trading platform Thinkorswim. Thinkorswim was eventually acquired by Ameritrade (which was then acquired by TD, and the resulting entity, TD Ameritrade, was eventually acquired by Schwab). Thus, the roots of tastytrade’s success in talking in-depth about trading options trace back to Sosnoff’s pioneering work with the Thinkorswim platform.
In the documentary, Sosnoff’s journey from Thinkorswim to tastystrade helps to explain a lot about how the core team that started tastytrade came together, and more importantly, the fact that the focus behind tastytrade was to build financial content in a way that was as much entertaining as it was useful.
Really interesting financial content, it seems, is in very limited supply. And as a result, the business model for tastytrade appeared to be to create an audience of individuals who are interested in and educated about options trading, and that would ultimately set the stage for the online brokerage arm, tastyworks, to translate that viewership into clientele.
As with many great entrepreneurial endeavours, the founders of tastytrade didn’t envision exactly where the business would get to. The billion-dollar acquisition of tastytrade in January of this year, however, validated the premise that building an engaging platform to help investors navigate the world of investing – including something as complex as options trading – would be of real value.
Another very interesting facet of the documentary is the way in which the tastytrade “secret sauce” came together.
Perhaps it was the comfort level with risk that naturally accompanies a lifelong trader, but the idea to staff a financial content company with comedians to deliver financial information is anything but traditional. In fact, what is genuinely interesting to witness over the journey of the past ten years, is the constant level of experimentation with different types of shows and formats that inevitably has led tastytrade to where it is today – being able to generate live programming seven days a week, having over 100 shows, and a growing global audience (the stat shared about audience cited over 100 million hours of views) reaching 190 countries.
Ultimately, the winning set of ingredients for programming on tastytrade came down to having an authentic interaction between traders and the not-yet-trader staff captured in real time.
Having Sosnoff and co-host walk the talk about their trade ideas and strategies, engage in random banter, and do so in a down-to-earth fashion tapped into the DIY investor culture in a way that traditional news media or traditional approaches to financial content never quite got right. Before podcasting exploded, Sosnoff sought a radio-show feel to the tastytrade core programming, and as a result of a lot of trial and error, the end result was understanding how best to deliver the message through various media.
Although shows are planned and professionally produced, they don’t feel overly scripted. There is visible diversity and a tangible enthusiasm for either learning about trading, or teaching trading, or just talking about trading (or the things that traders would inevitably talk about in the news). In short, Sosnoff and the tastytrade team nailed the culture of trading, because many of those planning or participating in shows have been a part of that world for so long.
This is not unlike the approach of Thomas Peterffy during his tenure as CEO of Interactive Brokers. Like Peterffy, Sosnoff understands the mindset of traders, and to his credit surrounded himself with a team that has created a very loyal and vocal community of traders/viewers (aka tastynation).
For online brokerages in Canada – and likely the world over at this point – there is an inescapable reality about the business: order execution is not enough. What tastytrade and tastyworks clearly demonstrate is that self-directed investors need both education in the form of navigating strategies and principles related to investing, as well as trading ideas. And, as any patient spouse or family member of an avid DIY investor will attest to, self-directed investors also need what other humans need, connection and community. And, tastytrade offers the latter in large measure.
Instead of analyst reports and the traditional news feed of financial data, tastytrade has shown that taking a human-centred approach makes financial content more accessible. And they’re not alone. Robinhood understood this with their purchase of the podcast Market Snacks (now Robinhood Snacks), a financial content show that provides updates on popular market stories and publicly traded companies. Regular (i.e. daily) content with personality that audiences can develop relationships with build and drive loyalty. It compels people to tune in, and in turn, feel more comfortable and even confident in taking on trading ideas they hear being discussed.
Despite the regulatory hurdles in Canada that constrain how much in-house content can be created at an online brokerage, tastytrade and other online brokerages in the US have shown that the formula for success and client delight is enhanced with compelling and delightful content.
As of right now, there is no clear DIY investor content leader among Canadian online brokerages. However, sometime in the not-too-distant future that may change. Tastytrade and tastyworks have publicly telegraphed their intent to come to Canada, and when they do, it will be a challenge for any online broker here to compete against that human-centred content machine.
It’s already clear that certain online brokerages are trying to generate “investing” content. Simply creating content and having it available on different channels, however, is a brute-force way to get attention on content. While it might “work” in the short term, it is highly transactional and not at all a part of what human investors ultimately seek – which is community and connection.
Although coming to Canada is not mentioned directly in the documentary, where tastytrade plans to go next is equally fascinating.
Now part of a much larger global brand, if tastytrade can retain and direct much of what has contributed to their success to date, the technologically immersive experience of online investing previewed in the video reiterates just how much trading culture and community is at the heart of the growth strategy. Ironically, or perhaps expertly, tastytrade has demonstrated the ability to grow exponentially bigger by focusing on creating the feeling of being small.
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That’s a wrap on the long-weekend edition of the Roundup. With so much of the focus of this Roundup on the US, there is another important and sombre milestone in the US taking place this week: the one year anniversary of the murder of George Floyd. There has been a lot of heavy-hearted news over the past year, however, one thing that is clear is that we can all play a part in eradicating racial injustice and discrimination. If you’ve found your way to this part of the Roundup, take a few moments to reflect on or read about racial injustice. There’s also a simple but powerful film on the topic below.