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Discount Brokerage Weekly Roundup – December 14, 2020

’Tis the season for gifts, and it seems like with recent fervour around IPOs, those gifts are coming in the form of jingling market bells. For both DIY investors and online brokerages, the excitement around recent IPOs and the optimism heading into 2021 bode well for the run-up to RSP season.

In this can’t-believe-the-end-of-2020-is-so-close edition of the Roundup, we review the least likely name to have experienced an outage and what that means for online investors in the brave new world of trading online. Next, we highlight one bank-owned online brokerage that has quietly launched a potentially disruptive feature that will challenge the rest of the Canadian online brokerage industry to find a way to follow suit. As always, we’ll toss in a healthy dose of investor commentary courtesy of the forums and Twitter.  

Trader Interrupted: Interactive Brokers Suffers Trading Outage

If there’s one lesson that DIY investors learned the hard way this year, it’s that online brokerage platforms are not bulletproof. Multiple platform outages across the year, sometimes in the same week or day, sometimes (always) at the worst possible moment, have plagued DIY investors and online brokers alike and eroded the confidence of many active online investors in the ability of their online broker to be functional when opportunity knocks.

Nobody is more keenly aware of this than those who actively trade. Active trading is inherently risky, but the risk of technical failures – which is an ever-present risk – is something online investors have had to contend with a lot more this year, it seems, than in any other year before.

One name that has largely stayed out of the outage spotlight this year has been Interactive Brokers. On several occasions leading up to forecasted volatility in the markets, they hardened their systems and reigned in risk exposure to deal with the impending storm. This past week, however, Interactive Brokers clients were greeted with something frightening, as a system failure during the market open essentially sidelined investors for almost half the day’s trading session.

Contextually, it is important to note that unlike most other online brokerages, Interactive Brokers is highly attractive to professional investors as well as retail investors because of the professional-grade nature of their pricing and market access. On average (per their latest investor presentation), they are home to over 980,000 clients and execute more than 1.8 million trades per day.

For this level of active trader, there is lots of money (and risk) on the line, so of all the types of investors, this lot seldom tolerates technical failures. Naturally, some of this group took to Twitter to express their frustration – and did not hold back. For context, we are well versed in Twitter reactions to online brokerages, especially when there are service interruptions. However, the reaction to the outage from the group of Interactive Broker clients on Twitter was swift, unpleasant, and, because of their client base, global.

Aside from the extraordinary fact that Interactive Brokers’ systems went down during the trading day (technically, before the opening bell), what was also interesting about how things played out was the acknowledgement and ownership of the issue by the CEO of Interactive Brokers, Milan Galik. Of the many service interruptions or outages that have taken place here in the Canadian online brokerage space, there hasn’t really been this level of personal acknowledgement before. Suffice it to say it was a big deal.

The lesson for online investors is that regardless of the calibre of online brokerage, the risk of failure due to technical outage is ever-present. The cause for the failure and service interruption was attributed to a failed data storage system from an external (unnamed) vendor. However, the reality is that architecture for modern trading systems continues to get increasingly complex, so it is likely a matter of when rather than if a system will go down. With more moving parts comes the increase in risk of something going wrong. This is a material consideration for active investors, especially those using margin to trade.

This year has been a bumpy one for Interactive Brokers. After the debacle with oil futures going negative in April, along with this outage, which happened on a relatively benign day in the market (can’t imagine what this would have been like on high-volatility day), there will be cause for concern for some investors. Still, industry and retail perspectives would likely both agree that one would be hard-pressed to find an online brokerage platform as invested in technology and automation as Interactive Brokers.

This past week also saw Interactive Brokers present at the Goldman Sachs US Financial Services Conference, and the key takeaway from that session was that Interactive Brokers remains on a healthy growth trajectory.

Clearly, there will be many clients who will remain unhappy about how things unfolded with regards to the outage, but, on balance, there appears to be significant momentum behind Interactive Brokers to continue their push higher in 2021.

RBC Direct Investing Navigating New Territory

For many individuals, 2021 can’t come fast enough. In addition to wanting to leave this wacky year behind us, the sentiment of having something better to look forward to (aka hope) is much more appealing than dwelling on 2020.

When it comes to Canadian online brokerages, the future is a bit of a touchy subject.

Understandably, for competitive reasons or simply to manage expectations, online brokerages have been coy about what they’re working on. From time to time, however, an online brokerage may mention a key feature that has been requested or even talk about something exciting, but those occasions are usually few and far between.

Against that backdrop, the launch of a new content offering from RBC Direct Investing stands in contrast to the historical way of doing things at Canadian online brokerages. Perhaps as a signal of change within the firm, and quite likely something that will (once again) prompt the Canadian online brokerage industry as a whole (in particular the bank-owned online brokerages) to consider matching the tactic, the latest communications move by RBC Direct Investing might be the snowball that starts an avalanche of information from their competitors.

This past November, as part of their Inspired Investor magazine, RBC Direct Investing launched a feature called “Navigators,” which is described as a “monthly go-to for what’s happening at RBC Direct Investing.”

Contained within this feature are updates about new or interesting features at RBC Direct Investing, as well as tips on how to navigate the RBC Direct Investing platform and the most read article from the preceding month’s Inspired Investor series.

The first issue, for example, telegraphed upcoming improvements to site navigation and improved stock screener experiences. In the most recent (also the second) issue, the new stock screener experience was showcased as well as a milestone of achieving full online account opening for RBC Direct Investing accounts – specifically, this feature is now available to non-RBC banking clients, too. Additional enhancements coming soon to the RBC Direct Investing experience were also mentioned and included improvements to the portfolio analyzer and filtering of order statuses on the mobile app.

Normally when incremental features are released, they get very little coverage from online brokerages – however, it is exactly these small enhancements that users often miss and that fill the gaps between major feature releases. Not only do they help to inform the DIY investor community (some of whom are already RBC Direct Investing clients in this case) as to what is going on, but they also serve to demonstrate that change and innovation are happening.

It is not an understatement to say that signs of innovation within the Canadian online brokerage space are difficult to spot, not because they don’t happen but because they are often underreported.

As we stated in the Look Back / Look Ahead series for 2020/2021, we believe that an emerging trend for how online investors will evaluate online brokerages will sway toward those that are always working on enhancements. We certainly don’t live in a static world, and online investing is no exception. When cars can get over-the-air updates, online brokerages ought to be able to continuously be upgrading the user experience. By letting users know which features are in the works, it may improve the odds of a client opting to stay rather than switch or open a new account simply to access a particular feature.

For those reasons, there is likely to be greater incentive and pressure on peer firms to a) innovate and b) discuss the kinds of features they’re working on improving. Of course, it will be crucial to then follow through on those improvements.

Taking a step back, this is clearly what market differentiation looks like. We saw what happened to the online brokerage space in 2014, when RBC Direct Investing opted to lower their commission price to $9.95 per trade: almost all of the other bank-owned brokerages quickly followed suit. Now that RBC Direct Investing has rolled out a way to keep DIY investors apprised of what’s “cooking in the kitchen,” they have thrown down the gauntlet for their competitors to try to do the same. With two issues now released, it is safe to say there are going to be more readers curious to see what RBC Direct Investing is working on next.

The simple question DIY investors will be asking Canadian online brokerages heading into RSP season is what they can expect to get from each one they’re considering. Fortunately for RBC Direct Investing, they have a lot more to talk about than just their pricing, which is not something most of their peers can say.

Discount Brokerage Tweets of the Week

From the Forums

A Match Made in…the Office

In this post, a Redditor asks if they should take part in their employer’s matching program for retirements savings. The problem? A very high Management Expense Ratio (MER). Redditors weigh in on whether receiving this “free” money is still a good idea with the high MER.

#LifeGoals

After landing a dream job at a pre-IPO start-up, a new investor with an incredible salary and low monthly expenses asks for help planning for the future in this post. Hundreds of responses pour in, with tips on everything from avoiding “lifestyle creep” to saving for an emergency fund to making the best use of TFSAs and RRSPs.

Into the Close

In “normal” times, this point in the calendar is when things would slow down, and other than the rush to pick up last-minute presents, there would be room for a little bit of a gear-down. Alas, this is a 2020 December. With hot IPOs hitting the market, and literally nowhere else to go for many of us, it will be a mad dash to the finish. Several stories hit our radar this week that were not covered here, so we’ll try to squeeze them in before the year ends. And, if you haven’t already done so, be sure to check out Look Back / Look Ahead for awesome insights and previews of what’s coming around the corner in 2021.

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