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Discount Brokerage Weekly Roundup – May 4, 2020

Here we are at the beginning of a new month. If the old adages are to be believed, then May is where we can look forward to flowers, and when investors would typically sell and look to return in the fall. Of course, those would be in normal times, and with many of us still parked at home, the rule book for this May is going to be anything but typical.

In this edition of the Roundup, we continue to digest the numbers on the popularity of online investing being shared and what those numbers help to explain about the current state of online brokerages in Canada. From there we examine the current state of the deals and promotions being offered at the beginning of a new month and speculate on what the “new normal” is shaping up to look like for deals from discount brokerages. As always, there’s a healthy serving of commentary also included from DIY investors on Twitter and in the forums.

Waves of Interest

The big story in the online brokerage space these past two months has been heavily focussed on numbers. Notably, the numbers of DIY investors – be they active traders or first-time investors – who have been jumping into the stock market, in spite of the sharp declines in stock prices and unprecedented volatility.

With the start of a new month, Interactive Brokers has once again released their trading activity metrics, which offer a unique window into the behaviour of investors and the business conditions of online brokerages.

The metrics published by Interactive Brokers show that there were 46 thousand net new accounts opened, an increase of 15% over the prior month and an incredible 461% increase over the same period last year. In fact, there were more online brokerage accounts opened at Interactive Brokers in April than there were in the last six months of 2019 combined.

Digging further into the numbers published in their press release, it is also possible to see magnitude and direction of activity by investors across April and March. For example, there were 7.2 million buy orders compared to 5.64 million sell orders. To put these numbers into context, these are about 2 – 2.5 times higher than the 2019 average in each category.

The growth in new accounts and the surge in trading behaviour provided by Interactive Brokers’ figures puts what’s been happening here in the Canadian discount brokerage space into sharper focus.

Although different in absolute numbers, on a relative basis the flood of new accounts and trading volume implies that Canadian online brokerages had a VERY good past two months in terms of revenue generation and asset gathering. Unlike their counterparts in the US, Canadian discount brokers haven’t dropped their commission rates to zero, so total revenue gained should be substantial.

Indeed, messages from DIY investors on social media about delays in getting new accounts opened, as well as messages on the websites of Canadian online brokerages communicating delays due to higher-than-normal volumes, once again validate the idea that the sheer volume of interest has overwhelmed many service channels.

Out of curiosity about the delays experienced by clients when attempting to reach an online brokerage by phone, we looked at the open job postings for client service reps for the online brokerage arms of a few of Canada’s largest bank-owned brokerages. The surprising finding in this quick scan was that there were only two of the big five banks with active postings for their wealth management (i.e. online brokerage) divisions. Of further interest, at one of these brokerages, the training program is an intensive full-time commitment of 20 weeks. What this implies is that if Canadian online brokerages that are experiencing severe delays in responding to clients haven’t already done so, hiring into the role of client service is going to be a challenge (especially if everyone does it at once), and the turnaround time for a fix is not going to be short.

As has been reported in Roundups in the past few weeks, these unprecedented times in the stock markets and economies have, almost counterintuitively, resulted in a watershed moment for account openings and trading volume.

Canadian online brokerages, despite their higher commission structures, are facing a huge surge in account openings and a revenue windfall from active trading. It remains to be seen which online brokerage in Canada can successfully deliver consistently positive client service at scale and, more importantly, seems interested in prioritizing doing so. A quick scan of the open job postings at Canada’s largest banks shows that, at this point, hiring more customer service agents to assist specifically with the online brokerage segments of their business isn’t a priority.

While deploying more people to assist with growth is one strategy, the numbers from Interactive Brokers – which counterintuitivelyis arguably the online brokerage most committed to automation – have shown that having a highly scalable business structure pays for itself. Their ongoing investment has enabled Interactive Brokers to accommodate and process new accounts at a rate much faster than online brokerages with less automation to their system.

Whether Canadian online brokerages are, at the moment, content to grow at their own pace or are simply unchallenged to do so more quickly, one thing is clear: the longer it takes DIY investors to open accounts when markets present opportunities, the more likely DIY investors will send their assets and trades to an online broker that can execute on this quickly.

Deal-ayed Gratis-fication

Normally, the start of a new month would be the opportune time to recap the deals and promotions being offered by Canadian discount brokerages. These are not normal times, however. With the start of a new month, the deals and promotions being offered by Canadian discount brokerages are largely the same as they were during April.

The current deals-and-promotions landscape for cash-back or commission-free trade offers is dominated by two firms: Questrade and BMO InvestorLine, with the latter being the only big Canadian-bank-owned brokerage to be running a cash-back promotion offer.

The most popular category remains the baseline transfer promotion, which provides reimbursement of transfer-out fees that most online brokerages charge when moving accounts to another provider.

With demand being as strong as it is, and Canadian online brokerages struggling to keep up with processing new account sign-ups, there has clearly been a shift away from most Canadian discount brokerages offering deals or promotions to incentivize DIY investors to sign up for an account. Interestingly, it seems that awareness-based marketing campaigns are being run at the moment, with advertising by TD Direct Investing, Scotia iTRADE and Qtrade Investor showing up on social media feeds.

The takeaway appears to be that while online brokerages are “open for business,” it is not business as usual. At this point, the speed with which an account can be opened and opportunities seized upon takes precedence over the incentives that determine where an online investor turns to – at least for many investors. Translation: FOMO is firmly in control. Of course, commentary by both (and only) Questrade and BMO InvestorLine about the successful rates of account opening may simply be coincidental to their marketing efforts through the big drop and bounce.

As for what happens next from here, it is likely that larger online brokerages enjoy the benefit (and challenge) of being large and don’t have to provide incentives unless they are really interested in capturing market share. For smaller online brokerages, it is clear that this ought to be a time for leaning into the attention that more DIY investors are paying to the space. With online brokerages deferring their promotions, at least for the time being, once things “normalize” from an investing standpoint, it seems like offers could become hyper-competitive. There are still many unknowns on the promotions front, but looking at the big picture, the competition for new customers for financial services and online investing is going to be a lot tougher than it was heading into the COVID-19 pandemic.

Discount Brokerage Tweets of the Week

From the Forums

Oh, Canada

A Redditor asks, “Why should I continue to invest in the Canadian market?” in this forum post. Fellow users rally around the benefits of hedging investments by putting money in the Canadian and US markets and warn the poster to be wary of recency bias.

Speculation Nation

In this post, a user invites the forum to speculate which companies may go bankrupt as a result of the turbulent markets.

Into the Close

For better or worse, stock markets are always forward looking. This week, however, there may not be a lot to look forward to except heightened uncertainty. The math on unemployment figures in Canada and the US is terrible, and as far as plans to “restart” entire economies, it will be anything but smooth. Markets, for now, seem to have digested a lot of very bad news and are priced on the expectations that things will be resolved in some sort of orderly fashion. This week will certainly test that thesis.

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