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If you look back at the last decade, the two really mass-market products in retail trading have been crypto and commission-free stock trading.
The basic logic of commission-free stocks is that you acquire a lot of customers at a lower cost than you would with CFDs or other higher-revenue products, like options if you’re in the US. You then cross-sell a portion of them into those products.
Those customers generate lower revenue on average but because there are so many of them, you end up making more money overall. This is why XTB continues to generate record levels of revenue and profit but also has its lowest levels ever of average revenue per client.
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I would say only three players have really managed to make this model work. Trading 212 has done it in the UK, XTB has done it in Poland, and Robinhood has done it in the US. It’s plausible amana has also made it work in the UAE and other MENA countries but we don’t have much detail about their activities.
eToro is more of an edge-case as they appear to rely more on crypto than commission-free stocks. To top that off, they continue to have semi-frequent loss-making quarters and – as we’ve looked at before – are intent on hiding how they actually make money.
Anyway, this model was in the spotlight again last week as Tradu seems to have thrown in the towel on trying to make it work.
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For those not familiar with the company, Tradu was the new multi-asset brand from FXCM. Last week they switched off CFD trading and, in a statement to clients, said they would migrate them over to the FXCM brand.
We can assume that the reason for that is the company was not making money. Jefferies, which owns the broker, does not have up-to-date filings on its performance. However, the investment bank’s most recent annual report shows the firm as losing $36m in the 12 months to the end of November 2023.
Why did this happen? We can only surmise but my guess is that there are a few factors at play.
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First off, the Tradu brand was always kind of weird. No one knows how to pronounce the name, for example.
More importantly, I get the impression the market for this cross-sell is more subject to ‘winner takes all’ effects than the CFD space. If you look at the UK, for example, no one seems to be able to defeat Trading 212. In Poland it’s XTB. In Germany it’s Trade Republic.
Currently XTB is sinking huge amounts of money into the UK but we are yet to see a real outcome from that. Similarly, Trading 212 is attempting to do the same in Germany. Let’s see what happens there.
Then you have IG also trying to tap into this market but in a weird way where the onboarding funnel is not optimised for cross-selling. To top that off, they also have Freetrade, which only operates in the UK. Again, it will be interesting to see what the outcome is here.
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What this also means is that, if you are a smaller player, you are competing against huge companies who can massively outspend you on marketing. When you add in ‘real’ stockbrokers in these markets, it becomes a very tough game to play.
This points to another factor, which is brand. Although it may feel ‘new’, commission-free is now about a decade old – Trading 212, for example, first launched it in 2017. This means that they have been able to build up huge brand and trust credibility for that product. It also means the level of ‘hype’ about the product is just not there any more in the same way it was around the start of covid.
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To top all this off, having a good product requires massive investment. You need to have your own platform, which will likely cost millions. You need to have higher staff numbers with more specialised skills, like managing custody, transfers, and connections to exchanges. All of this costs a lot of time and money. Even now Trading 212 is being blocked by the FCA from offering SIPPs – a popular pension account – in the UK.
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Finally, I think there is a growing risk here, which is that regulators block the ability to cross-sell. The FCA has already hinted at the fact that it doesn’t like it. Were this to happen then the entire model is RIP.
In contrast, if you took the money invested in this product and put it elsewhere, would the returns actually be greater? For example, Pepperstone underwent its management buyout at about the same time commission-free was becoming a ‘thing’. I would say their brand is now much better as a place to trade, compared to other providers that are focusing heavily on investing.
So if FXCM and eToro had spent their money on being ‘trading’-focused would they have been more successful? It’s obviously impossible to say but it’s something worth cogitating on this morning.
