Fractional shares: Experts weigh in amid exploding retail trading volumes
Diminishing return in FX trading and US regulatory pressure on single stock CFDs pave the way for US stock offerings with fractional shares.
The trading industry never sleeps. A lot has changed since foreign exchange trading first moved to the internet and new phenomenons have emerged with the mass adoption of technology and recent innovations from fintech firms.
Among them is the introduction of fractional shares trading into the mainstream as the FX industry has gone multi-asset with investors increasingly interested in the stock market.
In short, people used to be required to specify how many shares they wanted to purchase. Fractional shares changed all that. Now, traders take their positions based on the amount of money regardless of the number of shares. Not surprisingly, this method has quickly grown in popularity.
In November of 2019, Interactive Brokers became the first of the major online brokers to offer fractional shares trading. This was three years after DriveWealth first introduced its investing technology and a customizable suite of APIs for brokers to offer an avenue to trade US stocks. In 2021, access to fractional shares trading seems to have become a deal-breaker for many investors who choose their next broker.
Retail trading volumes have nearly doubled since the pandemic, but how much is going through fractional shares offerings?
A comparison between DriveWealth volumes and S&P 500 provides a clearer picture. While the latter has remained relatively stable throughout the year since April 2020, the fractional shares trading offering from DriveWealth boasts a growth pattern.
In 2021, DriveWealth trading volume rose 45% in the first quarter, compared to a 13% rise in volume on the S&P 500 and 50% on NASDAQ. While DriveWealth’s January volume spiked, total volume levels held steady through February and March.
Market trading volume spiked in January due to the GameStop short squeeze, with the tech-heavy NASDAQ experiencing a more extreme spike.
Another case in point is Equiti Group. The firm introduced fractional shares in Q4 2020 – reducing the minimum trade size of US and EU single stocks to one-tenth of a share, complementing its commission free US stock offering.
“Following the introduction of fractional shares, in May 2021, Equiti noted a YoY increase of 1406% in trading volumes on equities, from which launching fractional shares and allowing Equiti to grow its single stocks business would have been a contributing factor”, said George Moore, product analyst at Equiti.
But how important is it that brokers update their offering and add this innovation? We spoke to Roman Nalivayko, Chief Executive Officer of white label trading software TraderEvolution, to better understand the impact of fractionalization within the space.
“We see fractional trading as a new industry standard in the retail space and soon it will become a must-have service. The absence of such an option will create a huge gap between brokerage companies similar to one between phone dealing and electronic trading”, said the executive from TraderEvolution.
“This also opens new possibilities for marketing and services using a fraction of stock as a gift in particular or scheduled automatic buying, etc. As for portfolio management business, this functionality opens access to expensive stocks to a much wider auditory. So now, investors can have top companies in their portfolio regardless of their account size.”
Brokers are undeniably facing a diminishing return in FX trading. In the meantime, single stock CFDs are under regulatory pressure from the USA authorities. This context paves the way for the explosive growth of US stock offerings with fractional shares as we’ve seen with Robinhood and other neobrokers.
Fractional shares also address the needs of younger generations as the industry experiences a change in demographics with the rise of social trading. “How can a 20-year old kid trade the Berkshire Hathaway (BRK.A) stock, worth $432,800.00 today? Now, they do have access to it”, said Joseph O’Mara, CEO at Markets Direct, who showcased the firm’s Gateway Hub at iFX EXPO Dubai last week.
Oksana Remez, Business Development Executive at Finalto, reminded us that fractionalization of trading was how the CFD industry started and how other products, like micro futures, also work.
Still, fractional trading is “quite positive because it will attract retail” and “that’s why we started the DMA and cash crypto offering – because we see there will be a deviation from the OTC market to the DMA market”, said Ms. Remez.
While the attention has mostly gone towards US stocks, fractionalization can in theory be applied to any given asset. There’s where fintech firms enter the picture.
Brokeree, a specialist in MetaTrader solutions, has been requested by a few brokers to develop fractional trading products, especially for Gold symbols, said Anton Sokolov, Marketing Manager at Brokeree. “Interesting trend but it’s difficult to manage sometimes.”
Nothing good comes without a challenge. It wasn’t easy to develop, but fractional shares trading is now mainstream. They are here to stay and certainly can’t be ignored.