Disruption in retail FX: Is this the first step toward the end of per-lot and per-transaction commission on margin trading?

Since the b-book execution model which involved instruments being traded with a fixed spread via a closed system that relied on warehousing and internalized pricing via a dealing desk which created its own market fell out of favor with retail traders and brokerages alike, the per-lot commission model has become de rigeur, allowing retail traders […]

Disruption in retail FX

Since the b-book execution model which involved instruments being traded with a fixed spread via a closed system that relied on warehousing and internalized pricing via a dealing desk which created its own market fell out of favor with retail traders and brokerages alike, the per-lot commission model has become de rigeur, allowing retail traders to execute market-price trades and pay a brokerage commission, emulating the institutional sector.

Indeed, many brokerages across the entire retail sector now provide very low variable spreads, instant direct market access and in return, charge a small commission. This is how the customers, IBs, non-bank liquidity providers and brokerages have now become highly advanced in terms of technological prowess in order to refine this model into the bastion of leading edge financial markets systems that it represents today.

Now, North American entrepreneurs and Stamford Institute physics graduates Baiju Bhatt and Vladimir Tenev, who gained tremendous experience building trading systems for large institutional investors and hedge funds (something I can relate to having done this for 18 years of my 25 year career in this industry- ed) have begun to indicate that the end of trading commissions may be nigh.

Three years ago, in the aftermath of the Occupy Wall Street movement, the two scientists founded Robinhood, a commission-free trading application.

According to Bloomberg, Robinhood is now the fastest-growing brokerage, with more than $3 billion in trading volumes. Its almost 1 million customers have saved some $70 million in trading commissions.

Commission-free margin trading is about to be launched

In an interview with Matthew Phillips yesterday, Robinhood’s founders explained that it collects interest on uninvested cash in customer accounts and will roll out margin trading in the next few months. Margin trading will drive the lion’s share of the firm’s revenue, therefore indicating a foray into the electronic trading world that is now dominated by retail FX giants.

Looking at how this could be viewed by certain industry participants, Manoj Narang, founder and former CEO of HFT company Tradeworx explained to Bloomberg “Commissions alone might not be enough to attract young investors.”

“The one thing I am sure of is that the established discount brokers need some fresh competition. Their trade commissions haven’t budged for 15 years. There’s been so much advancement in trading technology and volumes. The big institutional investors have benefited from that and are paying a lot less to trade. But the retail traders, the average folks, have seen no cost savings. And that’s because the large discount brokers got entrenched. I see this as a space worth disrupting” – Manoj Narang, Founder and former CEO, Tradeworx

Day trader Michael Goode explained “It was nice to see someone come in with a fresh idea to compete with the established players. What I was struck by at first was what a nice, clean design they had. Brokers typically put no thought into the design and user experience. I have a bunch of accounts I’ve opened through the years, and even today most of those retail brokerage websites look like they’re straight out of 1996. The act of placing a trade is still way too complicated.”

When asked if many online brokerages prioritize wealthy customers, the Robinhood founders replied “Without question. And it’s a pattern I see more and more. I think it’s the difference between the mindset of the people that built the finance industry vs. the people that built the Internet. Finance is about being short-term greedy, rather than thinking about the markets as a critical part of our society that exist to empower the world, rather than to enrich a few.”

Indeed, attracting the Millenials – those who grew up between 2000 and 2010, is a vital part of research and development among retail brokers, because these will be their future customers.

When looking at how to engage them with a disruptive, modern ethos, Robinhood deems that mobile came first. That had as much to do with the ease of building it as it did with the experience and audience that the company was looking for. The firm wanted it to be simple and tactile, something that gives people the sense that when they open the app, they’re holding their money right in their hand.

“We took advantage of things like swiping up to push your order into the market. The engine is very complex, but we were able to put that under the hood” was their conclusion.

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