Traders Without Borders, Part 5: The United Kingdom

This week, we take a close look at the world’s first financial powerhouse: The United Kingdom. Stock trading is less popular across the pond, but the thriving gambling markets make up the difference in volume. However, as the public wakes up to the dangers of leveraged trading, self-directed stock trading shows signs of a comeback. Here’s the lowdown on retail investing in the UK.

The House Always Wins

dice3.pngIn the United Kingdom, you can gamble against your stockbroker. The British enjoy legally betting on anything from sports to presidential elections, so it’s only natural that they love betting on the financial markets as well. Meet the contract for difference, or CFD. CFDs let investors bet on a stock’s direction and “invest” in a company without actually owning any shares of it. CFDs can be purchased in any GBP amount and are exempt from capital gains taxes. What’s the catch? Most CFDs are highly leveraged, making them a risky way to generate massive gains (or losses) very quickly.

CFDs

You can lose more than your initial deposit when trading CFDs, even if the stock’s price only moves a small amount. In the US, CFDs are considered gambling and are illegal. In the UK, 12 out of the top 18 stockbrokers offer CFDs alongside traditional shares.

You Love Me Like XO

The UK’s discount retail brokers are nicknamed “XO” for execution only, a pretty accurate description of their product offering. Just like most Australian brokers, XO brokers offer few guidance tools and charge higher commissions than their American counterparts: typically around £10-12 per trade.

Screen Shot 2016-05-20 at 11.17.24 AMThese commissions are a vital source of revenue for XO brokers, representing 38% of their total revenue, versus just 20% for American discount brokers. Today, most actively trading Brits prefer the riskier CFD and FX markets. Those who own stocks mostly hold them in non-trading retirement accounts. Fees have dropped over the years, but most XO brokers still don’t have enough order flow to justify £5 commissions. At least not yet.

Back to Basics

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Stay away from CFDs, Michael.

Many high-profile CFD traders are going bankrupt, and British traders are waking up to the dangers of trading CFDs on margin. At the same time, traditional buy-and-hold investors are ditching high-fee advisors in favor of DIY investing. As a result, slow-and-steady XO stock trading is seeing a comeback, especially among high net-worth individuals. In the last five years, XO assets have grown 17% year-over-year, mostly from new accounts with 1-10 million in assets.

CompeerAs the market for share dealing grows and fees continue to drop, XO brokers will need a strong product offering to expand their market share. Luckily, the UK’s FCA has adopted principles-based regulations that allow for rapid innovation without the need to write new laws. Earlier this year, AJ Bell became the first XO broker to offer share trading on Facebook. As the market expands, we see more opportunities for mobile-first products that make trading more accessible to a younger client base.

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