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In the world of retail investing and trading, the last 10 years has seen a model develop in which you have high risk products alongside low risk products. You put these all in one app or platform. You then do huge mass-scale marketing of the low risk product.
If those marketing efforts are successful, you get large numbers of people using your product and as a consequence, a proportion of them will end up using the higher risk products that make you money.
This model was pioneered by Robinhood in the US. They marketed themselves as a commission-free stockbroker but the reality is they are more of an options, crypto, and margin trading broker, as those products are where they make all their money.
As an aside, I unironically believe Wall Street Bets may have been one of the greatest marketing channels for them ever. It was a third party, doing mass scale marketing of their most profitable products, entirely for free – truly a wet dream for any UBO or marketeers reading this.
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Outside the US, Trading 212 and XTB have also seen huge success by using this model. They get vast numbers of clients via mass marketing stockbroking and investment products. Then they make money by converting some of those people into trading clients.
For example, last year XTB made gross revenues of $464.11m from CFDs. It made $7.75m from shares and other ETPs, like ETFs. This means that close to 99% of XTB’s revenues came from CFDs in 2024.
However, about 80% of first client trades were in investment products. This figure is significant as it is a sign of intent and shows where marketing spend is likely going. It is not impossible to imagine someone signing up for CFDs then choosing to first trade stocks, but it seems more likely they’d do the opposite.
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Will this strategy work going forward?
For current and successful providers, it has provided a huge increase in revenues and client numbers but, at a certain point, you have to wonder if the sea has already been trawled through so much that it’s not going to be easy to continue picking up the same volume of clients.
Trading 212 has used the commission-free model in the UK so effectively that I wonder if they will be able to continue onboarding hundreds of thousands of new clients yearly, with the same being true for XTB in Poland.
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New entrants face the same problem but compounded – they are having to compete against well established brands, who have already spent 5 – 10 years absolutely smashing the ‘commission-free broker’ marketing channel.
Imagine trying to market as a commission-free broker against Robinhood or Trade Republic, for example. Not easy. Competition also means CACs for stockbroking have risen too, meaning you are paying more to acquire mass market clients, only a small proportion of whom will make you money.
Time will tell on this but it’s worth noting that both Trading 212 and XTB, although still performing extremely well, have not produced the same level of huge revenue growth over the past two years as they had done previously.
Another facet of this switch is that you have to change your brand in a way that makes it hard to then focus back on trading, which is the product that actually makes you all your money.
For example, it is hard to imagine these companies being able to now market themselves around . In contrast, if you look at a company like Pepperstone, they are still able to focus heavily on trading-focused marketing channels and seem to be doing well on the back of it.
Indeed, some businesses have seen big growth, without adding equities or other products. For example, on a divisional, percentage-growth basis, IG Japan revenues have grown more than any other part of the wider business since 2018.
This is despite the fact that the company has the least developed set of products among the broker’s different divisions – it only has CFDs, knockouts and binaries. The IG Japan story is even more compelling when you consider that Japan is one of the most mature, saturated markets for this industry globally and has restrictions on leverage.
Other companies, like Capital.com, Exness, and Plus500 have also seen good sales growth in that time, despite a continual focus on core trading products. Capital and Plus500 have also done that in mature markets with leverage restrictions. Note that Plus500 does have stocks in Europe but seems to do almost no marketing using them.
There are other factors at play driving this change. One is that European regulations have made mass marketing and monetising CFDs much harder. This is essentially a passive form of marketing. You put everything in one app and let the client find the product, rather than selling it to them directly.
Another factor is that many firms are either public or want to go public. Because valuations of pure play CFD providers are bad, they seem to believe that being seen as a stockbroker or investment platform will help them. Going public also means they cannot target emerging markets in the way firms like Exness have been able to.
The result is that they cannot chase the big growth area for CFDs – emerging markets – and also believe they cannot market themselves as a CFD firm if they want a higher valuation from investors.
Where does all of this leave us? The basic point is that marketing equities and similar, lower risk products has been an effective way to onboard lots of clients and cross sell them CFDs.
One potential outcome is that CFDs in developed markets, due to marketing and leverage restrictions, will be an add-on that you never really look to use in your marketing efforts. Instead you market everything else and get so much volume that some proportion of your client base trades CFDs, which is where you make your money.
But if that strategy is done because of saturation, things may change. Plus there is evidence to suggest – from companies like Plus500 – that not having them is not really the end of the world.
A consequence of that may be a shift in commission-free broker models. Currently you have to think of all the expenses associated with investment products as a marketing expense. If the marketing spend stops working, then you have to figure out a way to monetise the stockbroking business or stop doing it.
You could argue stockbroking will become its own business. The problem is that stockbroking is like being in asset management. You have to build up huge AUM to make it work. For example, Hargreaves Lansdown (HL), the UK’s largest retail stockbroker, had AUM of £142.3bn at the close of its last financial year. It made £659.4m in revenue – or 0.46% of AUM.
Note also that none of the companies like Trading 212 charge account fees or dealing fees, because they want to market themselves as commission free. So even if they had the equivalent AUM, it’s impossible for them to generate the same level of revenue.
Finally, stockbroking for the UK and Europe doesn’t strike me as a high growth area. Firstly, GDP is not growing. Secondly, if you look at the UK, there are already lots of stockbrokers – the market is ‘overbroked’ if anything. Plus we are entering a weird, neo-feudalist world where everyone spends all their money on rent or their massively leveraged mortgage. Who has money to invest?
You may then ask, well what’s next? Where is the growth? I don’t know. Maybe there is none? Maybe you should start doing prop trading or go really big on crypto perpetual futures?
This is not necessarily a bad thing. Banking is also not a high growth industry but that doesn’t mean it’s a bad industry to be in. To the contrary, it’s very profitable and you get paid well.
It also doesn’t mean there won’t be new market entrants. The payback period on CFDs is fast, which means you can always have new players enter the sector. It’s also a high margin business, so it’s good to be a business owner.
The point I’m trying to make is that adding lots of products in one app has been a good way to grow your core CFD business for about a decade now. But as the pool of potential clients shrinks and competition rises, it becomes less effective. Plus focusing on core trading products has still worked for some companies.
As the regulator likes to say past performance is not indicative of future results. Or as we like to say, life comes at ya fast bro. What worked once, won’t necessarily work going forward.
