The good and bad of disruption in online broking

Marketech CEO, Travis Clark

In my opinion, there is good disruption – where we end up with something better all round, like Netflix (more content and better options at a lower price), one that continues to positively grow the industry.

Then there is bad disruption, where the short-term outcome seems fantastic for the consumer, but is then, ultimately…much worse.

In this scenario, the disrupter initially takes a large market share, probably whilst losing money, then they use that market share improperly, to the longer-term detriment of the consumer of the product. They don’t fix or create anything better, they just convince people, using what seems like new technology, that a cheaper price and a better looking interface is somehow better in every way than all the very important things you actually needed.

The low, low (usually commercially unmatchable) prices means that new products either start carving off important features to compete purely on price, or new companies don’t build a better product in the first place as they can’t get the funding to compete.

Then, when a certain amount of monopoly power is attained, they either increase the price, or start looking for novel ways of bringing the profit margin back in – refer to the Robinhood experience in the US, or the sneaky new fee structures of Uber.

The result: you’re stuck with a bunch of generally sub-standard products that end up costing as much as the old good ones did – just in different ways. And less new competitors who could have innovated better products.

The ‘race to the bottom’ in online brokers

Often there are complaints that the bigger online brokers such as Commsec (et al) charge too much for brokerage, but remember, to buy shares in a company from a full-service stockbroker used to cost 2% a trade. It still costs around 5% to buy a house, so buying part of a company was already much cheaper. Commsec is around 0.1% – 0.12% now, which is not really that expensive to start with.

To exist as a company that lets you buy and sell shares, that company has to comply with financial services legislation, manage money laundering risks, invest in continuous tech development, bring in compliance, legal and marketing teams, and provide client services that grows as they grow.

Then, there is the cost of the data you need to know what and how to trade in the first place. Live pricing from the ASX costs up to $20 plus GST per person per month. Then, they have to send your trades to a trading and settlement partner, who have further costs levied by the ASX for every trade.

You get the idea, there is a lot more than raw transaction costs to cover.

So even a product stripped down to a buy/sell button can’t totally avoid these costs. And that money that its costing them has to eventually come from somewhere. The best way to reduce those costs for live pricing is to limit access to that live pricing, which should not be a legal workaround for the Australian stockmarket – who prides itself and enforces fair dissemination of current information to all market users in many other ways.

So which platform should you use, if not the cheapest one?

I’m not saying don’t use the cheapest one.

What I’m saying is that you can’t expect $3 brokerage to be everything for everyone. Either they will try and upsell you to products with margin, such as US trading, where the margin can be around 0.7% on the cash you move to and from USD, or it will not have live ASX pricing – so you’ll potentially lose money when trading, just to save literally $2 a trade. Or there’ll be some other cost. That cost could be hard to measure immediately, as in the example of Facebook where society has been irreparably damaged by ‘likes’ and widespread but questionable ‘truths’.

Others have done the low, low price by pooling your shares into one account and/or not paying you interest on your cash and/or trying to upsell you to a fee-paying super fund. Some have even used share trading to upsell you to high risk/ higher margin products such as CFDs.

Although there is a place for a low-rent low-feature product, marketing of all financial products should be aligned with the suitable end-user; not imply that a product is suitable for all investors. Certainly not used to upsell you to riskier situations.  

So your platform choice will really depend on the type of investor you are, or want to become. In my opinion:

The FIRE investor, or the long-term blue-chip holder who doesn’t trade much, and doesn’t trade specs:

It probably doesn’t really matter what you use, but it is better to have your own HIN. You probably want a bank account that pays interest, and a slightly higher brokerage cost shouldn’t matter to you as much. You’re probably at one of the big 4 and that trust may be hard to overcome but you will find strong alternates out there.

The ASX_Bets gambler rolling $1000 trades:

You’re probably the perfect target for the lowest absolute transaction cost merchants. It’s cheap, you don’t seem to care about informed decisions or risk and you just want cheap brokerage.

The avid market follower.

Likely spends a lot on brokerage, rely heavily on high level charts and needs up-to-the-millisecond data that is available on mobile and PC. You need more of everything, not the cheapest most chopped-down platform features. You probably already know that it doesn’t make sense to save money on a financial product if you are compromising quality or data. It is for this group of investors we are making the ‘Formula One’ of trading platforms.

This is the bottom?

At $3 a trade, the Australian market surely cannot go much lower. But without knowing the final product offering I don’t feel that this is good disruption, this is the sort of disruption that ends up with worse outcomes for everyone, with less choice, less features and more people investing in the highest risk investment class there is. Probably even more legislation…after the markets fall away.

This is money you’re investing and when it comes to the sharemarket you need more – and safer – of everything, not less. We would contend, and are driven by, the believe that technology in financial services should be a race to ‘better’, not just a race to the bottom.