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Discount Brokerage Weekly Roundup – May 18, 2020

To all the Canadian traders who went long on fun this weekend, the latest performance by US and international markets while the Canadian markets were closed is a mixed blessing. With the bounce-back rally in stocks still going and some stocks even notching new highs, it certainly goes to show that demand for equities – perhaps certain equities – is outpacing supply. For online brokerages, interest in stocks and trading bodes well, but the surge in demand also presents its own mixed blessing.

In this shortened edition of the Weekly Roundup, the US online brokerage market continues to be in focus, in part with new information provided not just on the brokerages but also on DIY investors themselves. Dive in for a closer look at the choices DIY investors are making when selecting an online brokerage and what that might mean for Canadian discount brokerages planning upgrades and feature roadmapping. As always, be sure to check out the latest comments from Canadian DIY investors on Twitter and in the investor forums.

Trading Just Got Trendy

A familiar phrase in the stock market is that the trend is your friend (until it ends). One of the trends that regular readers of the Weekly Roundup may have picked up on over the past several weeks is that there has clearly been a shift in the world of DIY investing. This shift has resulted in investors and capital flooding into stock markets, despite the grimmest of circumstances and darkest of economic backdrops. What gives?

The honest answer is that nobody really knows. Yes, there are good theories, but they are just that. What is becoming clear, however, is that the evidence emerging from the US online brokerage market, as well as some peripheral data from the Canadian online brokerage space, points to “younger” investors jumping into the markets to snap up iconic names that have been pummeled by pandemic-related selloffs.

Meanwhile, there is also a narrative about “older” investors either shrugging off the news or trying to get their portfolios to stem the losses by moving assets into “safer” or less volatile positions. The result appears to be a matrix that is defined on one axis by risk tolerance and the other by age. Younger investors with higher risk tolerance (or perhaps who aren’t fully aware of the risks related to investing in “discounted” stocks) are pushing markets and online brokerages higher.

This past week, two interesting articles published on the US online brokerage market appear to validate stories we’ve been tracking for several weeks about the explosion in online brokerage account openings and provide additional insight into online brokerages and the sentiment among DIY investors. And, though this data is based on what is happening in the US, it does provide a proxy for what Canadian online brokerages ought to consider when making decisions about the expectations of investors – new and experienced.

The first article, published on Investopedia by a long-time analyst of the online brokerage industry in the US, Theresa Carey, scanned different US online brokerages and provided quick updates from each. While it was interesting to read about feature releases taking place over the past few weeks and trading data, what was especially interesting to home in on was the qualitative information reported on about younger investors.

Data about Robinhood’s spike in account openings was already reported on in a previous Roundup in late April. Nonetheless, it is worth repeating that the spectacular figure of three million account opens in the first quarter of 2020 cited in an article by CNBC drives home the scale of the interest in trading online as well as the popularity of Robinhood when compared to competing online brokerages.

Additional data about trading volume at Robinhood being almost triple that of Q4 2019 and that 72% of orders were buy orders reveal that not only were investors more active but that the falling prices were an opportunity to buy into hard-hit names as well as tech giants alike.

Another interesting development that didn’t get too much coverage, however, was an announcement by Robinhood that they would be rolling out a new look.

Normally, the announcement of a new look by an online brokerage would not generate a significant level of commentary on social media. But, these are not normal times, and in the case of Robinhood, this is not a “normal” online brokerage.

For background, in addition to being recognized as a leader in low-cost (aka zero-commission) trading, Robinhood is perhaps best known for award-winning design and user experience. As such, changes to design were likely to prompt some kind of response from their more design-sensitive clients. And prompt they did.

Judging from the response to the teaser tweet, it was interesting on several levels to see how much excitement the prospect of a new look generated from Robinhood. In particular, the number of users who took it upon themselves to post a comment on Twitter (rather than lurk or like) reflects a user base that has strong feelings about design choices. Even something as seemingly simple as colour scheme matters to Robinhood users in a way that perhaps investors more accustomed to spartan or utilitarian designs of trading-platform offerings do not care about.

Diving through the comments to the Robinhood tweet is likely to yield tips worth considering when designing for an aesthetically sensitive audience of (likely) younger, potentially active investors (hint hint, Canadian online brokerages).

Beyond design and account openings, there was another important insight about younger investors revealed in Carey’s article. E*TRADE conducted a survey among their clients (who had more than $10,000 in their accounts) that found Gen Z and millennial respondents were more concerned with their portfolio performance than with their health. Further, the proportion of individuals checking their portfolios at least daily was 54% for those under 30 compared to 29% for those older than 30.

Although not stated explicitly by E*TRADE, it is a safe bet that younger investors would also be logging in to their accounts via mobile app on their phones rather than on a desktop or tablet, especially when accessing account information multiple times a day.

The implication of these additional data points about the current state of online investing is that mobile experience and technical design choices are going to be critical determining factors for investor satisfaction. That said, while catering to younger investors is key to future growth, there is a significant portion of existing/older clients who will have different preferences, and those also need to be accounted for when it comes to planning the user experience.

Perhaps an important lesson on keeping user accessibility top of mind came from a series of comments on the new Robinhood colour scheme that apparently makes it more challenging for individuals who have red-green colour-blindness to easily read or distinguish data on-screen. This is a particular issue for many stock platforms, considering the standard rendering for gains and losses use those two colours.

As for why younger investors and why now, the “reasons” provided  thus far cite contributing factors such as: more people staying at home, more time, potentially money being saved from dining out, a dearth of opportunities to “gamble” or speculate, as well as the lowering of barriers at online brokerages with zero-commission fees.

Here is our (speculative) take. The influx of “young money” may be part of a recurring trend related to the kinds of opportunities millennial or Gen Z investors wish to invest in. When the cannabis sector was initially legalized (in Canada), a dramatic shift occurred. All of a sudden there was a “new normal” in what was previously an inaccessible or illegal market. In terms of the stock market, it took about three to four years for that story to become mainstream and hit “mania” levels. When the digital currency bitcoin finally hit its stride, it too ushered in the prospect of a “new normal” with respect to the world of finance and the way money can be transacted. The result: a massive rush into cryptocurrencies and blockchain.

Now, with the impact of COVID-19, there are once again huge shifts to the economy taking place in a fairly short amount of time, which is exactly the trade that younger investors are banking on to catalyze wealth creation in a way that older investors may not have the risk appetite or understanding for.

In other words, “new normal” is a signal for tremendous growth in a short amount of time and one that younger or more risk-comfortable investors are keen to capitalize on. And within the past five years there have been at least two of these events. Any feelings of FOMO that have been pent up, and any folks who may have been burned by “speculative” stocks, result in an opportunity to buy into “safer” stocks at a deep discount with the latest stock market sell-off.

While there are likely many reasons that can help account for the surge in interest in investing, the fact this surge exists is undeniable. The consequences of this surge have also yet to be fully understood.

What does it mean to have so many new clients show up so quickly? What characterizes these new clients compared to other existing online investors? What changes will online brokerages need to make to accommodate this new stakeholder group while also delivering on their brand promise to existing, valuable, long-time clients?

For Canadian discount brokerages, in addition to COVID-19 creating a new operating normal, there is undoubtedly another new normal in servicing clients. The key question to online brokerages: will this new trend be viewed as a challenge or an opportunity?

Discount Brokerage Tweets of the Week

From the Forums

Right Place, Right Time

A curious DIY investor asks for words of wisdom from other investors who will be re-entering the stock market in 2020 for long-term holds. A lively discussion ensues, with fellow forum users sharing their long-term investment plans and the logic behind these plans, in this post.

For “Bettor” or For Worse

One DIY investor turns to the forums to ask why bank stocks are not recovering to their pre-Coronavirus crash values as quickly as other stocks. Fellow forum users weigh in and discuss the variable contributors to this matter, including debt levels and loan losses, in this post.

Into the Close

With oil prices continuing to drift higher, COVID lockdowns easing, and the markets continuing to melt upwards, the start of the week has an air of optimism to it. Of course, it being spring, there are also many bears watching the market in awe of the backdrop against which market prices are rising. The voices of fear are getting louder among pundits yet, ironically, quieter with the volatility index, for now. At some point fundamentals may kick in, but for now, hope for a return to a new normal is high demand. Stay safe and have a profitable week!

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