Here is a fun thing to do if you’re feeling bored at work today.
- Go to Google
- Type in “order execution policy Saxo Bank A/S”
- Find about 5 pages worth of brokers who use (or have used) Saxo’s white labels / as an execution venue
Some of these are kind of random, like Maltese bank MeDirect. Others, like House of Borse or Leverate, are more what you’d expect.
One company that I was surprised to see using Saxo is Plus500. The Israeli broker is using Saxo for its new ‘Invest’ service, which is live in Europe and should be available to UK customers later in the year.
Plus500 is not alone in doing this. Capital.com, Naga, and Trade360, for example, also use Saxo for their equities offering.
There is nothing wrong with this and it probably goes to show that Saxo has a good sales team and/or provides a good set of services. It’s also not unusual for CFD companies to share a particular services provider – you only have to look at how ubiquitous MetaTrader is to see that.
The difference is that with something like MetaTrader, it’s clear how you can make money by paying to use their services. You pay to license the platform, get clients to trade with you, and hopefully turn a profit in the process.
In some cases with companies using Saxo for equities, it’s not clear to me what the plan is to make money.
If you take Capital.com as an example, they apparently charge zero fees on investing, with the exception of maybe a mark up on the spread and FX conversion charges. They offer no tax-efficient accounts, although it’s plausible that could happen in the future.
When you factor in having to pay Saxo for access to equities, it’s not clear how this can be profitable, if at all. If your customers aren’t paying anything then you can’t make money – it’s not very complicated.
Plus500 and Naga are slightly different as they charge commissions for their trades. But again, there are no tax efficient accounts and the amounts being charged are relatively low.
Naga charges $0.99 per trade. Plus500’s rates vary depending on the region. For the US it’s $0.006 per share and in the UK it’s 0.045% of the trade value, with a minimum fee of £2.
Doing a back of the envelope calculation, you can get some idea as to how much money it’s possible to make from this.
The UK’s largest retail stockbroker, Hargreaves Lansdown, reported a little under 4m trades in the first four months of this year.
If we take Plus500’s fee breakdown and assume (generously) that they average £3 in commissions per trade and that HL’s average order numbers continue throughout the year (ie. a total of 12m trades for 2022) that would mean £36m ($45.5m) in revenue.
That’s not nothing but it would only be about 6% of its total revenues for last year ($718.7m). Interestingly, this would be a similar proportion to what IG Group makes – 4% – from its stockbroking business as a proportion of its total revenues.
It’s also worth keeping in mind that this is using the numbers for the largest UK retail stockbroker on the market today, which has 40 years of growth behind it, about £132bn in AUM, and offers tax efficient accounts, so this is arguably the optimal scenario for an aspiring UK stockbroker today to be in.
So if the numbers aren’t great, why are brokers looking to tack on a Saxo-style equities white label to their offering? I think there are a few plausible, and not mutually exclusive, reasons:
- Marketing + cross selling – you can brand yourself more as an investment platform, attract clients with a product they want (equities) and potentially sell them on to more profitable products (CFDs). Bux explicitly made this point in an old pitch deck to investors.
- Circle jerk and no one knows what they’re doing – circle jerk is where people see a thing that’s popular with other people, believe it’s a thing they should do, and then end up doing that thing. No one knows what they’re doing is a surprisingly common phenomenon where people in a company pretend they know what they’re doing but actually don’t. Inspired by the circle jerk, a group of people who don’t know what they’re doing decide adding equities is a good idea, but don’t really think about how they can make money from it, so they end up adding it anyway.
- Genuine long-term business – to be less cynical, all the companies (eg. Plus500, Capital.com) described above are in a very early stage of launching an equities product and obviously they can add complementary products and other revenue streams over time. I don’t think it’s likely to ever be their main business or source of revenue – IG has been doing it for years and, as noted, it’s only 4% of revenues. Still, it could be a decent chunk of total revenue and act as a more sustainable business relative to CFDs and other leveraged derivatives.
Looking to the long-term, I also wonder what will happen to brokers in the equities space given so many are now competing on pricing. If you look at Hargreaves Lansdown’s financials, they actually have similar margins to CFD brokers. It may become harder and harder to maintain that if current trends continue.
So what may happen is:
- More brokers enter the space, prices are lowered and margins compressed. Stockbroking basically becomes a much less profitable business to be in (this happened to parts of the UK telecoms industry in the past couple of decades).
- More brokers realise adding equities isn’t worth the hassle as it’s time intensive to do it well and, if you charge almost nothing, it doesn’t make you much money. Brokers end up not offering it as a service (Markets.com and FXCM already ditched it as far as I can tell, so arguably this is already happening.)
- Some combination of the above, where margins get lower but not too low, and the number of service providers increases but quite a decent proportion of them drop out after a while.
My guess is that it’s more likely to be option two. Adding equities seems to have been driven largely by Robinhood’s success, the massive demand from clients over the pandemic, and – of course – the circle jerk.
But Robinhood’s model of selling order flow doesn’t work well in Europe and it looks as though we’ve seen the end of the recent retail trading boom, so demand is likely to peter out over time. Along with the lower revenues on offer, this may make adding equities less attractive for brokers.
Stuff that happened: