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Discount Brokerage Weekly Roundup – February 8, 2021

February is now well underway. In case you might have missed it, a forty-something quarterback managed to nab yet another Super Bowl win, and for the moment, it appears that the forty-something-plus crowd on Wall Street managed to squeeze out a win over the younger investors – at least for now. History is in the making all around.

In this edition of the Roundup, we dive into the deals and promotions activities that Canadian online brokerages are up to. From there we analyze the fallout from the meme stocks push and contemplate what it should make Canadian online brokerages think about as we head out of this historic turn of events. As always, there’s thoughtful commentary from the investor forums and a selection of interesting tweets.

Forecast for Deals & Promotions: Mostly Sunny for February

The month before the official start of spring is a good news/bad news moment. Yes, better weather is around the corner, but no, it’s not here yet.

Fortunately for DIY investors, the forecast heading into the deadline for RSP contributions is filled with some bright patches, most notably that the Canadian online brokerage deals section is brimming with activity. If there is a dark cloud lingering over deals activity this year, it’s that several online brokerages have opted to stay on the sidelines rather than post an offer during RSP season for DIY investors.

In more “normal” times, not having a deal during RSP season would be unlikely. With the sustained interest by DIY investors in opening new accounts – especially given the recent run in “meme stocks” – many online brokerages are struggling to keep up with the level of demand and, thus, pacing themselves when it comes to bringing on new customers. It appears that there can be too much of a good thing after all.

For online investors looking to open an online brokerage account, February is the last month to be able to take advantage of the selection of offers. Most of the promotions in the cash-back or commission-free trade categories end at the beginning of March.

The current offers in the most enticing category for investors show that competition between the big five bank-owned online brokerages is fierce, with all of these discount brokerages putting forward competitive cash-back offers. Joining the bank-owned online brokerages in this category are Qtrade Investor and Questrade.

Curiously, mid-tier and newer online brokerages do not currently have a cash-back or commission-free trading offer, a signal that these providers might either be more strained by the substantial interest in investors coming to market or be pursuing a different strategy to attract new clients.

While deals and promotions are an effective strategy to attract DIY investors, another interesting way in which Canadian online brokers attempt to connect with new clients is via advertising – specifically on the world’s biggest search engine, Google.

As part of our proprietary research, we’ve reviewed recent search engine marketing tactics of Canadian online brokerages and found some fascinating results. One of the important findings is that there are fierce battles taking place between a small number of online brokerages on Google.

For example, it appears that Wealthsimple Trade is spending advertising directly on names such as Interactive Brokers, Qtrade Investor, Questrade, and TD Direct Investing. Alternatively, Interactive Brokers is advertising directly on Questrade, Wealthsimple Trade, and Virtual Brokers. It is especially interesting considering Wealthsimple Trade and Interactive Brokers couldn’t be more different in terms of user experience and intent.

Interactive Brokers is built, intentionally, for active traders. In contrast, when Wealthsimple Trade launched, it was built deliberately to support some trading, but active trading – and day trading in particular – was explicitly viewed as undesirable and something they stated they could intervene on if the trading activity would be deemed “inappropriate.”  

It is therefore interesting to line up the sentiment expressed in the messaging of Wealthsimple Trade’s help page on day trading with their advertising targeting investors interested in Interactive Brokers and Questrade.

With just three weeks to go until the RRSP deadline, Canadian online brokerages are likely to ramp up their efforts to win over investors, and the most likely place this will happen is with heightened “promotion” via online advertising – and yes, even during the Super Bowl.

In the February edition of the deals and promotions section, the big five Canadian bank-owned online brokerages are well represented, along with Questrade and Qtrade Investor. Of the online brokerages not on the current list of promotions, however, it appears that two popular names, Interactive Brokers and Wealthsimple Trade, are instead fiercely battling it out with one another on Google search advertising and likely other channels, such as Facebooks, as well.

That two very different brands are battling it out directly with each other is telling of the competitive dynamics in the current online brokerage market in Canada. It does raise the question, however, of when that competition will materialize into something more value-added to a client than a convenient link on Google.

GameStop(ped) Out

Oh, what a difference a fortnight makes in the stock market of 2021.

Just over two weeks ago, Elon Musk wasn’t just talking about launching rockets into space, he was also weighing in on the meteoric rise of “GameStonks.” Same with Mark Cuban, AOC, and so many more people who normally give commenting on the stock market a pass. What has been happening in the stock markets over these past few weeks, however, has been almost impossible to ignore.

The sheer weight of the interest in the “meme stock” phenom was fuelled by a combination of FOMO and a strange quirk of market physics. Since the surge in the stock price of GameStop (ticker symbol GME) and subsequent restrictions on trading it by online brokerages, there have been countless commentaries on exactly what happened and what underpinned the stunning move up and back down in the price.

To be totally transparent, this section is going to add one more commentary to the pile; however, we’re going to sidestep most of what has already been said about short squeezes, Reddit threads, and a cabal of powerful financiers and instead focus on some very important elements that look at the consequences and lessons learned for online brokerages as a result of this recent anomaly.

One of the first things worth stating, especially from our perch here in Canada, is that so much of this story is driven by what happened in the US stock markets. For Canadian DIY investors and Canadian online brokerages, however, the opportunity to make fast money was still just as tempting. What ultimately ended up getting in the way for Canadian investors were the numerous friction points, such as commissions for trades, lack of fractional trading, or time required to fund a new account, to name just a few. Which, all told, probably saved some heartache for some investors.

Nevertheless, in the cast of stock market characters surrounding the great short squeeze of 2021, perhaps the most interesting question that stands out is why, of all the online brokerages in the US that restricted trading in GameStop (and other stocks), did Robinhood find itself cast as the villain?

Data gathered from a variety of sources indicate that other online brokerages in the US restricted buying in GME shares, including Interactive Brokers, Webull, and E-Trade. TD Ameritrade (and Schwab) raised margin requirements. Even so, media mentions and social media conversations (and memes) have overwhelmingly been dominated by Robinhood and the fact that they instituted a temporary restriction on purchasing certain stocks.

One possible reason why Robinhood has been singled out is that it became somewhat of a rising star across 2020, attracting more accounts in the early portion of the year than most of its competitors combined. And, although most of its US online brokerage competitors offer zero-commission trading now as well, Robinhood is often associated with making trading more accessible – or, in their words, “democratizing” finance. For years, Robinhood has positioned itself as “anti-Wall Street” and cultivated the narrative of Robinhood as the champion of the small investor in a way that incumbent online brokerages did not. Scandal definitely makes for good TV, and in a world where entertainment options are limited, seeing a rising star have a fall from grace sounds like the plot of another enticing movie about stock markets.

When the carefully curated identity of Robinhood is juxtaposed against the expectations of retail investors that Robinhood is an online brokerage “for the people,” it is understandable that when those same people were not allowed to trade what they wanted to trade when they wanted to trade it, they believed that something was afoul. After all, retail investors believe – and are led by a number of sources to believe – that markets are free from interference by outside forces or entities.

And, while the broader market of investors was willing to give Robinhood a pass on payment for order flow in order to get commission-free trades, the optics of relationships between Robinhood and the very institutions that meme stock proponents sought to profit from (e.g. Melvin Capital and Citadel) cast Robinhood as pro-establishment, essentially violating their brand promise.

Perhaps the greatest insight into this situation can be illustrated in the descriptions of “what happened” by the current head of Robinhood, Vlad Tenev, and the founder and former CEO of Interactive Brokers, Thomas Peterffy.

In the immediate aftermath of the decision to restrict trading in GME, it didn’t help matters that the CEO of Robinhood could not articulate clearly why certain shares were frozen. That lack of clear explanation in the heat of a volatile market meant that retail investors were forced to jump to their own conclusions.

By contrast, it is worth noting a Bloomberg interview with Peterffy in which he clearly alludes to something that goes beyond a freeze on the trading of volatile stocks. Specifically, Peterffy positions as “illegal” the fact that individuals were piling into a name (like GME) to perpetuate and accelerate a short squeeze.

Putting the continuity of the business first and catering to clearing and settlement requirements are prudent activities, and it seems reasonable for people to assert that Robinhood and Interactive Brokers, as companies, would need to stay in business.

That said, younger investors or investors who sought to drive systemic change via “sticking it to the shorts” found themselves on the wrong end of a lock on buying, and the short squeeze that was taking shape ended up fizzling out.

Robinhood has made no secret of their intentional pursuit of younger investors. What seems to be clear, however, is that these “younger investors” have a very different view of wealth creation and investing (trading) than “boomers” do.

And herein lies the issue for all online brokerages. Currently, there are different audience segments that have very different views on financial services and the roles that online brokerages ought to play when it comes to facilitating participation in the stock market.

Aside from mobile app or website design, another important attribute of younger investors is where they go to learn about investing (Reddit or forums). Also, they seek out highly volatile (high risk, high reward) stocks, for a mix of excitement and wealth creation. When combined with the gamification of user experience and a reduction in commissions, the result is a powder keg that, given the right environment, will explode.

Younger investors also bring with them the beliefs and capacity to call out “injustice” or perceived hypocrisy on very public channels. While older investors did use forums to learn from and engage with one another, and occasionally to voice their discontent, it was rare to find social justice narratives or “greater good” themes driving investor choices. The recent events have shown that social media channels, including Twitter and Reddit, move exponentially faster than anything before and include sections like “tl;dr” to cut through the “boring analysis.”

Unlike their US counterparts, Canadian online brokerages did not suffer as significant a backlash from DIY investors, in part because they did not explicitly prevent buying or trading in the meme stock frenzy. That said, Canadian online brokers were not unscathed either.

Platform outages or delays in executing trades from a number of brokerages – along with popular online broker Wealthsimple Trade taking the unusual step of specifically labelling certain stocks very risky, such as GameStop and BlackBerry – did set off a smaller firestorm here in Canada. In particular, investors were upset that an online brokerage would take the position to designate any stock as “too risky” to trade, especially if it met listings requirements on a supported stock exchange.

It is still too soon to say how things will ultimately pan out for online brokerages as a whole. There are, however, some immediate lessons for the online brokerage industry to take heed of.

Regardless of being either an established name in finance or the latest fintech, financial services at their core are predicated on trust and confidence. Among the “older” generation of retail investors, that trust was established in the form of size and stature. Bigger equalled better. Among the “newer” cohort of investors, it could be argued that faster is better.

What is common to all investors, however, is that reliability matters when choosing an online brokerage, if for no other reason than to know what to expect. Nobody likes uncertainty, especially Canadian DIY investors. The events over the past few weeks have made it clear that newer online brokerages will have a much harder time making up for the fact that they don’t have anything to offer other than the promise of a brighter future. At least the established online brokerage brands have either the reputation of their parent brand or their history in the space to point to as a signal that they are stable.

Another really important takeaway from the events of the past few weeks is that the conversation that takes place online, in particular in forums and on Twitter, cannot be and should not be dismissed. Whether it is regulators or other entities who do this monitoring, the fact that retail investors could take a coordinated action on trading specific stocks is remarkable.

The consequences to the industry were made clear: Ignore the crowd at your peril.

We live in a world where individuals such as Elon Musk can become incredibly influential, and based on their whims and caprices on Twitter or Reddit, there can be massive investor behaviour shifts. The events of the past few weeks highlight that, going forward, the online investing industry will have a massive PR problem.

Even here in Canada, where much of the negative press around the events of the past two weeks focuses on platforms and connectivity, online brokerages are going to have to do better because of the circumstances in the US. More advertising is not going to do it, nor will telephone meetings. The bottom line is that investors now look to Robinhood with a suspicion it has never had to meaningfully contend with before. That’s something for Canadian online brokerages to think about as they race to design new interfaces and experiences to connect with investors.

Discount Brokerage Tweets of the Week

From the Forums

What Goes Up?

In this post, an investor wonders if the recent mania in the stock market perhaps signals the end of an epic bull market, which leads to a lengthy discussion that touches on corrections, crashes, business cycles, and much more.

Preaching to the Converted

The devil is usually in the details, and for DIY investors looking to avoid getting dinged with trading commissions, this post about “the catch” when it comes to using commission-free online brokerage Wealthsimple Trade offers up an important lesson.

Into the Close

With yet another Super Bowl win to add to his record, there’s no denying that Tom Brady has been defying physics in the NFL. Credit where credit is due, though (and no, not a margin call pun), there’s definitely something to be said for putting in the effort and seeing the results. As the shine comes off the short squeeze trade, it will be interesting to see how traders fare without wanting to put in the work. Valentine’s Day is just around the corner, and so too is Lunar New Year, so the good news is that this month is filled with even more reasons to celebrate.

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