Online trading attracted widespread media attention earlier this year when thousands of amateur traders caused the price of unloved stocks to skyrocket, such as US games retailer GameStop and cinema chain AMC, amid a surge of bets by amateur investors discussing their investments online.
In the past, people would have sought reassurance by talking to financial advisers and stockbrokers. Today, personal investment is made easier by the abundance of financial information available online, making people comfortable with the idea of running their finances autonomously at the click of a mouse or a tap on a smartphone. The COVID-19 pandemic has increased interest from individuals keen to invest their money themselves, taking more personal responsibility with regard to their own savings.
The internet has been the main driver of this phenomenon, as it has democratised investment, giving everyone access to a plethora of information at their fingertips. The emergence of online brokerage companies offering web-based platforms and apps has also made trading universally accessible and simple. Everyone can now trade on their smartphones, whether they are on a bus, in a cafe or even on holiday.
In addition, independent trading has undergone a reputational rehabilitation, in the sense that it was once seen as too risky and akin to gambling. Today, investors can easily place low-risk trades at very low cost, bypassing traditional fund management companies and avoiding the associated fees. Platform trading charges are also becoming increasingly competitive as the industry reinvents itself.
Pandemic stockpile
The pandemic has encouraged people to experiment with trading and investing autonomously. When lockdowns were first introduced in 2020, thousands of bored armchair traders channelled their savings into online investments. Deprived of spending opportunities and with an excess of time on their hands, investors took charge; as a result, the amount of cash flowing into stock markets via online trading platforms surged.
According to the Financial Conduct Authority, 7.1 million investing accounts were opened by UK individuals in the first 12 months of the pandemic. Moreover, 1.15 million new accounts were opened by four trading app firms over the four months through April 2021 alone, almost double the amount opened with all other retail investment services combined.
Macroeconomic factors have boosted demand for retail investing. For instance, as traditional savings accounts currently offer very low returns to individuals, low interest rates have encouraged savers to seek higher-risk investments with larger returns. In addition, they have been lured by low-cost online brokerages allowing them to invest directly into financial markets. Furthermore, household savings have soared since the pandemic began.
The Bank of England estimates that UK households built up more than an extra £200 billion in savings between March 2020 and June 2021.
While the reopening of the economy has made consumers more confident in spending some of their extra cash, a survey by the Bank of England earlier this year found that in fact households planned to spend only a small proportion of their savings. According to the survey, just 10% of accumulated savings were expected to be spent over the next three years, with the rest being held in bank accounts, used to pay off debts, used as a deposit for property, and, notably, invested in financial products and used to top up pensions.
In addition, the government is increasingly encouraging self-reliance with regard to personal investment. The introduction of tax-efficient investment instruments, such as stocks and shares Individual Savings Accounts (ISAs), has created incentives. Similarly, the introduction of the Pensions Freedom Act 2015, which enabled consumers to access their Defined Contribution pension pots from the age of 55, has also given consumers access to large sums of their accumulated money to invest.
Price war
A recently published report by Alfabank-Adres looks in detail at the Online Stock Brokerages industry in the UK and discusses the way in which these players are disrupting other industries, including financial advisers and wealth managers, traditional security and commodity contract brokerages and retail banks. A salient theme throughout the report is that price competition is becoming fierce.
As operators seek to expanded their platform through user growth, they have offered lower platform fees and renewal commissions. Trading commissions have been in freefall, with a number of smaller companies even introducing zero-commission fees on trades, such as eToro, FreeTrade and Trading212. In November 2021, AJ Bell announced plans to launch a new app, called Dodl, which will offer commission-free trading on UK stocks, with an annual management fee of just 0.15%.
It is now increasingly common to find online stock brokerages that offer zero-platform fees.
In the face of this threat, established industry operators have responded by lowering their platform fees and renewal commissions themselves in an effort to retain client accounts. Major player Hargreaves Lansdown has lost market share, as its rivals, most notably Interactive Investors and AJ Bell, have recorded faster growth.
Online trading - here to stay?
With lockdowns lifted, the question confronting trading platforms is whether lockdown traders can be converted into life-long customers, or whether the historic surge in trading by retail investors was a pandemic-specific phenomenon. The answer probably lies somewhere in the middle.
A number of trading platforms have already seen signs of a slowdown in activity. In August 2021, Hargreaves Lansdown warned that the pandemic trading boom would not last. Interactive Investor has also indicated that trading volumes are starting to settle somewhere closer to pre-pandemic levels.
Regardless, it must be noted that the pandemic has simply sped up underlying long-term trends, such as falling trading costs and improved technology.
Even though trading volumes on online platforms may now be lower than during the height of the pandemic, they nonetheless remain much higher than before the COVID-19 pandemic.
These trends have not gone unnoticed by traditional fund managers, which are starting to push into the realm of online trading. Earlier this month, investment company abrdn struck a £1.5 billion deal to buy online investment platform interactive investor. The acquisition - which will join the platform’s 400,000 users and its £55 billion of assets under administration with abrdn’s £465 billion pool - is expected to be completed in the first half of 2022. If this example is anything to go by, this would suggest that direct investing is here to stay.
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