2020 will be remembered as the year that redefined the size and habits of online retail investors forever. The online brokerage industry cannot complain about a year that added over 12 million new first-time funded brokerage accounts, launched hundreds of new investing applications, and benefitted from approximately three times more trading volumes. Despite the widespread pain from the pandemic and uncertainty due to the elections, the retail investor came out on top as the Dow Jones and S&P saw record trading volumes.
The year started with a hyped rush from most brokerages to offer commission free equity trading. What is fascinating about these announcements was the massive news coverage around it, when in reality most brokerages had been offering commission free trading for their active traders for a decade. The “Breaking Headlines” felt like rather old news to those in the industry. This focus on commission free trading and the impending unbundling effect that most large brokers are facing led to the consolidation of TD Ameritrade and E*Trade.
The rest of the year was a noisy roller coaster ride filled with news cycles, uncertainty, and huge market swings. The lockdowns forced office-going traders to confine to their trading screens at home. These conditions created the perfect storm for a new breed of hypersensitive investors. Because of this frenzy, it created huge volatility with record trading volumes. The newly created pandemic investor felt a sense of anxious optimism to benefit from the market volatility. While millions of new traders entered the market, existing active traders resorted to advanced instruments like options trading. Retail options trading finally became a mainstream product. Retail share and contract volumes rose by 300%.
The growing demand from traders to gain an edge catapulted many fintech platforms to stardom because they offered solutions that legacy brokers and simple one-click commission-free apps do not. Firms that offer brokerage micro services, as APIs are a huge contributor to the unbundling effect that the brokerage industry is facing. These APIs make launching newer innovative investing and robo-solution easier than ever, as they completely abstract the complexities of compliance, regulation, infrastructure, clearing, and execution.
Given what we already know, here are the top 10 trends we can expect going into 2021:
Sensitive and Reactive Online Investor: The political climate and uncertainties around the vaccine distribution will continue to feed an already sensitive investor. I expect this to continue for the first two quarters of 2021.
Graduating Effect: The young, first-time investor who entered the market after 2015 and the sizeable influx of new traders from 2020 are expected to have a graduating effect in 2021. I expect these traders to look for advanced trading tools, content, signals, and education. This will create opportunities for new startups to fill this void. I expect that brokerage offerings based on free trading will struggle to retain these investors under a free model.
Unbundling: I expect 2021 to be to a continuation of 2020 in terms of the legacy brokerage offerings being replaced by unbundled newer experiences. This will further drive consolidation among traditional brokers.
Commission-Free? Who cares? I expect a fundamental shift in priorities throughout the industry from messaging about "commission-free equity trading" to messaging about "offering investors better tools, data, content, and advanced functionality." The brokerage industry has over 150 known commission-free equity trading offerings. Existing commission-free apps will need to compete on a broader set of capabilities. I expect the current “single play” free apps will have a substantial slowdown in growth and market share.
Options: The adoption of options trading will continue on a large scale.
Fractional: Fractional investing will move from innovation to an essential feature in most platforms.
Trading Volume: I expect trading volume to continue to rise in Q1 and Q2 but taper off a bit during the back half of the year.
Brokerages Going Public: It is natural to expect a few of the popular investing apps to attempt to go public in 2021 on the heels of 2020's growth. The industry should note that 2020 and the Q1/Q2 of 2021 are an exception, and it is unlikely that these firms will grow even at a fraction of their current pace.
New Kind of Robo: The market for low cost or automated ETF investments bundled for convenience at a low annual basis point fee is evaporating. It is becoming impossible for Robo-Advisors to sustain on less than 35 basis points fee due to high CACs and lower LTVs. On the other hand, we will see substantial growth in a new breed of Robo-Advisor platforms that I call the “Purpose Driven” Robo-Advisory. The platforms that are based on social responsibility, gender, region, and second-generation immigrant communities are seeing increased growth. They charge above 50+ basis points, resulting in a profitable business model.
Brokerage Accounts: I expect 2021 to be the year where the focus around the total number of brokerage accounts will taper out, and emphasis on account quality will gain center stage. It is estimated that more than 61 million US traders have more than one brokerage account— and even more noticeable, 90% of traders who trade more than 10 times a month will have an average more than 2.5 brokerage accounts. With the growth of Brokerage APIs, brokerage accounts can now connect to an unlimited number of trading apps, allowing trading outside the walls of a legacy brokerage app or website. Under these circumstances, the metric for the number of brokerage accounts becomes irrelevant.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Other Topics
Options
Dan Raju
Dan Raju is the Chief Executive Officer and Co-Founder of Tradier. Dan has the overall responsibility of Tradier and the company’s strategy and direction.
Read Dan's Bio