Trading with Focus – We’re opting out of the ‘race to the bottom’
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This article is about the worlds obsession with getting the cost of buying shares down to zero. And just to draw a line in the sand…to pick a side…I’m against it.
I mean, by now, you have to have realised that I only write this article to rant about whatever’s annoying me at 7am on the day I am writing it. I don’t mean to, but early mornings I need the caffeine boost to wake me up (as once again I did not go for a jog), but the caffeine grumpies up the blood a little. And writing this gives me a few chuckles before getting on with a very serious day.
I think the thing that makes me grumpy the most is the internet and how we chose to use it as a society. Facebook has become the ageing parody of the thing it was built to disrupt, lots of cat photos and some really face-palming opinions. Online news is now a real-life version of Idiocracy, where the Big Brother house updates are seemingly more important than the *gestures broadly at everything*.
I guess I blame America. I know there are some nice Americans. I know there are some very smart Americans. But, geez, as a collective?! Their version of freedom is horrific. Guns! Pretending to be a first-world country, but with so little healthcare that the ‘most common’ age there has dropped dramatically over the last 10 years – from 50 years old to 29 (or maybe there was just nothing on the TV 30 years ago…).
Some things in the ol’ US of A seem great….like, ummmm…..movies and TV shows (none of which are shown on channels 7, 9 or 10). And, (sarcastically, because I can’t think of much else) I hope we follow in their footsteps by immortalising our political leaders and carve the heads of Kevin Rudd, Tony Abbott and Juuullliiiiiiaaaaargh into the face of Uluru. (No I don’t.)
What’s with their healthcare? And social security? And minimum wages? And general entitlement?
Anyways, as far as my professional career is concerned, the worst thing to have come out of ‘Murica is Robinhood. Its disgraceful to suck (primarily) kids into the higher risk investment class there is. And some of the newer players are trying to replicate it here. Which I have a strong opinion on…
There are certain things that should be cheaper, but there is always a line at which the price should not be the only thing that matters.
I don’t want to pay $10 for a loaf of bread, but I don’t think we should strive for bread to be free. It might involve the farmer not getting paid enough and then they would walk off the land, thereby leaving us all hungry. Does it have less food value than non-free bread and would it make us sick? Is it even bread? Has the government put tracking chips in it..?
On the other hand, I like having virtually-free healthcare. Touch wood I only ever get some mild grazes that require a stitch or two, before peacefully falling asleep in my late 70’s or 80’s for the ‘long dream’ in my own bed – preferably in my own future penthouse overlooking my yacht and jet and helicopter, with my future suite of cars in the garage, next to the future woman that I love at the time.
But if I was in the US, and I broke a bone whilst not covered with private health insurance by the greedy evil corporations that go out of their way to deny claims, then I’d probably end up homeless.
But our healthcare isn’t really ‘free’ is it? We still have to pay for it in different ways, through taxes and whatnot. So we shouldn’t just run around stupidly, breaking bones and getting diseases for fun. And the government has oversight into the raw cost of it, and makes sure that no-one is providing a healthcare service that is unnecessarily dangerous just to cut costs further.
My point is probably that somewhere, somehow, in Australia we got a lot of things about right in comparison to America.
So, Robinhood. Cool name bro. Makes it seem like you and your hipster Silicon Valley mates are somehow on the side of the millennial investor, sticking it to ‘the man’! Yeah, fellow kids, we’re here to help you invest in the market without having the bother of using the financial systems that were developed to protect investors, and then, we’ll sell your order flow to our mates, who will kick us back cash for letting them front run your order. But you can do it on an app! And you can tell people you’re ‘in the sharemarket’. Like that’s enough…
So now there is this supposed ‘race to the bottom’ on brokerage, and everyone’s buzzin’ about how some of the online trading companies are trying to get to zero brokerage.
Well, we’re not playing.
First off, you can’t sell deal flow in Australia. So, that’s a barrier to zero brokerage. Each line has to go through the ASX Best router, to get you the best price on both the ASX and the Chi-X after sweeping through the dark pool. And that aint free, the ASX charge for each trade on the market.
The deal flow is usually being paid to groups in the US as they derive some sort of benefit from the stock exchange for creating volume, so you can shop around for the best kickbacks. Can’t do that here, as the ASX doesn’t have ‘market makers’. CFD providers can get paid for creating CFD volumes from the CFD manufacturer, which is why CFD’s have zero bro, but then they’re more like a bookie at the track betting against you and the market when you use them.
Robinhood would also pool all of your investments into one big holding, like a few here are now popularizing. You have an app that says how many shares you have the ‘beneficial ownership’ of, but you won’t see your name on an individual holding at the share registry, so you’re taking their word.
Pooling investments isn’t as bad as I would have you believe (probably because we have individual HIN’s), but it aint as good or as safe as having your own individual HIN. And lot’s of pooled trusts have failed miserably, losing investors large percentages of their entire trading portfolio in the process.
The government set up the CHESS system in Australia back when people were still having to mail actual share certificates and cheques to their broker. The CHESS system was also supported by legislation to protect the users (because no-one trusted computers back then, not like they do now…). So you get some government protections from potential fraud and bankruptcy of your broker when you have a HIN.
Now, the separation of trust set-ups these days means it doesn’t matter as much if the broker goes broke, the accounts of the broker and the accounts of the clients have to be completely separate. Also, it isn’t assured that a pooled trust is going to fall victim to fraud.
But it is money, and people you don’t know have access to it, and y’all want top of the range internet security and crypto’s (because you don’t trust banks anymore) and yet you’re happy believing that no human ever got greedy and stuck their hand in the till?
If the balance of a trust does not add up to the amount of money or shares that it is supposed to be holding, there is a good chance you’ll end up with a percentage of whatever’s left. And trust failures usually lock up your investments for a very long time, many years in some cases., fighting with lawyers and accountants and other investors…
And it usually happens after a market has weakened significantly, because the people with their fingers in the ‘trust’ pie also have private school fees and excessive mortgages and when the market goes south it just seems (historically speaking) like the desire to maintain their lifestyle through ‘the dip’ offsets their fear of getting caught.
But the pooling of everyone’s shares is cheaper. Like not having seatbelts in a car would make the car cheaper. Or insurance. So, it’ll have to be a big part of the race to zero as they strip out everything that weighs them down.
The ASX live prices are controlled by the ASX. It is their data, so they sell it. They publish the costs for their data on their website, and basically speaking, the cost of supplying live price data to each individual client is up to $20 plus GST per user per month. Just for the price data.
So if brokerage is zero, and you pay zero for the platform, how much up-to-the-millisecond data are you getting? It doesn’t really matter on US shares, as we already know you are probably not getting the latest price, or the ‘best price’ available, or even that someone could have used your order to jump in front of you and then use you to push up the price.
And they charge you a rake everytime you transfer money to USD and back, in some cases that ‘rake’ is as much as the cost of full-service advice based stockbroking! The cost of transferring money to USD was 35x more on one of the most popular platforms than our brokerage rates! Not really zero…then…is it!
So far, here in Oz, the best way to limit the amount of ‘data costs per user’ has been to turn off live data and just give you the delayed prices, but surely that is going to be illegal one day. The second best way, and ‘least worst’ has been to reduce the amount you consume, by making you refresh webpages with individual price points on it, because each individual live price costs 0.5c per view per price. Even we do this on our free version, but I railed against it.
The next, and by far most insidious, is to give you an estimate on the price you will get. And finally there is ‘implied pricing’, where you can look at a CFD for that stock and mirror what the ASX price must be for the CFD provider to be quoting that spread. And can the broker then take the profit on the arbitrage? I don’t know what novel new way they’ll find to keep their data fees low, but whatever it is, they will still have the same ASX fees to cover. If they give you live data…
So another way to quietly scrape an earn from your clients (to offset your ‘zero brokerage obsessions’) is to whack all of your clients money into a pooled bank account, and keep the interest themselves. Yes, it speeds up the account opening process to use another ‘pooled’ account, but when interest rates start to normalize you’ll lose more on interest payments (that you won’t get) than the cost of live data would have been. Shifty.
So, you have an option. Chase zero brokerage and get it jammed to you 6 other ways, or pay a fair fee to reflect the cost of the service you want – and know exactly what you are paying. I mean, does paying zero brokerage really justify trying to trade using old price data, or having your data sold off, or pooling your shares, or missing out on interest?
We charge you $45 for the live streaming data platform each month. And we make our margin on the platform, so everyone is paying the same fair fee for service as everyone else. And then we give you brokerage at either $5 or 0.02%. Yep, 2/10000 is our brokerage rate once you start rolling decent lines of stock. And you get your own individual HIN to give you the best protections available, and your own individual Macquarie CMA to give you full control – and you keep your own interest.
Putting the margin on the platform means we don’t care how much you trade. You’re all equally important, from the person who doesn’t trade to the guy doing millions a day. Our only desire is to make that platform better and better, not cheaper and cheaper.
So we’re opting out of this race. We don’t think there needs to be, nor should there be a race to the bottom. If there was (and if we all played by the rules) Marketech would be winning it and the only way to get your trading any cheaper is to reduce the quality of the product…or cheat a little. Or turn you into the product…
This is money. Your money. And you’re investing it, and managing risk with every decision you make. We don’t think its possible to provide a financial service to help you make money in the riskiest real asset class that there is for any less.
So, maybe for the real traders, who want to stay ahead of race and know the sharemarket is not a day at the races or a gambling app, maybe there will still be demand for quality.
Come and see us when you’re ready.
At Marketech our platform is about technology, providing you the tools and technology to trade. We encourage our high-function trading platform to get you live pricing, live charts, live market depth to ensure you have the tools and trading capability at your fingertips, and on your mobile phone or PC.
You trade your own stock on your individual HIN. It is your cash in your own Macquarie account where you keep the competitive interest you earn.
Our subscribers get access to brokerage starting at $5, and then 0.02 per cent for trades over $25k. If you want to trade the market you need immediate access wherever you are and the seamless Marketech mobile app means you are live anywhere anytime.
Go to www.marketech.com.au to set up a free trial – you will be astounded by the simplicity and tools that this technology gives you. No spin, just low-cost trading and the tools that give you advantage over hype.
This article was developed in collaboration with Marketech Stockbroking Pty Ltd (AFSL 486148), a Stockhead advertiser at the time of publishing. This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.