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.

Traders Without Borders, Part 4: Japan

This week on Traders Without Borders, we’re jumping further east to Japan, one of the hottest and most unique markets for retail investors. Japan’s economy experienced a bubble during the mid 1980s and ended in a decade of declines after it burst in 1991. Since then, retail investors have gradually returned to the market, but their investment strategy remains shaped by the “Lost Decade” of economic turmoil. Here are the unique characteristics that define the Japanese retail investing market today.

Forex First

Japan Forex VolumesJapan’s forex market dwarfs its equities market, generating around 400 million trades each month from retail traders. In fact, while Japan’s population represents under 2% of the world population, Japanese traders generate approximately 30% of global retail forex trades. The country’s entrepreneurial spirit has inspired many stay-at-home mothers to trade forex on the fly. While women constitute only 5% of British and American forex traders, they represent a whopping 25% of Japanese forex traders.

Proceed with Caution

 

Japanese investors keep a huge amount of their portfolios in cash: about 53%. For comparison, Americans hold just around 10% cash in their portfolios. For Japanese investors, who are accustomed to market turmoil, cash represents solid downside protection.

Japan Portfolio CompareWith solid cash reserves in their portfolios, Japanese traders are more patient than their international counterparts. A majority of Japanese investors would not re-evaluate their investments if they experienced a 20% decline, compared to just over one third of Asian investors as a whole.

After years of investing in a contracting economy, few Japanese investors are on the lookout for short-term gains. Rather, they invest for the long haul and stay resilient during market swings.

Stocks: Stick to Domestic

As part of their efforts to encourage individual investing, the Japanese government created the Nippon Individual Savings Account (NISA), which is expected to pull 1.3 Trillion Yen into the stock market for the next five years. The NISA account is similar to the American IRA; it allows investors to buy up to 1 million Yen a year in stocks, ETFs, trusts, and real estate with a five-year tax exemption on any gains or dividends.

unnamed.jpgThe result has been a higher allocation of household financial assets into risk-class assets. Because of the tax-advantaged internal market, Japanese stocks are more attractive than their foreign counterparts. Today, only 41% of Japanese investors are focused on international markets, versus 73% of investors globally.

Like other international exchanges, Tokyo’s JPX has enacted serious regulations to protect retail investors and regain their trust. As Japanese investors allocate more of their cash savings to their NISA accounts, we see opportunity in the Japanese market for mobile-focused solutions for retail investors.

Traders Without Borders, Part 3: Singapore

This Week on Traders Without Borders, we’re taking a close look at the retail market in Singapore, the closest contender to Hong Kong for Asia’s global financial capital and the home of SGX, the Singapore Exchange. Singapore may have been hard hit in the 2008 crisis, but the market holds many lessons in attracting young, mobile savvy and engaged investors to other developed markets. These are the unique characteristics of Singapore’s retail market today.

Optimistic & Tech-Obsessed Investors

With new regulations in place, Singapore’s retail investors are some of the world’s most optimistic. In a study from CFA Institute, 90% of Singaporean investors believe they have a fair opportunity to profit by investing, compared to only 70% in the United States.

Singapore optimistic

Source: CFA Institute

Singaporeans are also the most social investors in the world, with 26% reporting that they consider their social networks most trustworthy for investment advice. When choosing a financial institution, Singaporeans are some of the world’s most tech-obsessed, with 81% of investors using their smartphones to trade. 50% of Singaporeans say that access to the latest technology is more important than having a person to help navigate their investment strategy. In the United States, only 27% of investors believe this, most of whom are younger millennial investors.

Outward-Facing

SGX Trade Volumes

Source: SGX

Most of Singapore’s retail investors look overseas for opportunity, since the city-state has a small domestic market and a population of only 6 million. In the past, Singaporeans have flocked to Chinese companies, but they have shifted their preference towards US-based investments since 2015. Together, overseas investments represent almost half of the share volume traded on SGX daily.

Retail-Friendly Regulations

Singapore’s retail investors were devastated in 2008 by the financial crisis, and again in 2013, when a penny-stock crash washed away $8 billion of market value in three days. Since then, SGX has enacted regulations to protect retail investors, in an effort to lure them back with the promise of a level playing field.

Singapore Participation

Source: Investment Trends

First, they introduced a minimum trading price of S$0.20 on all listings. This essentially bans the hyper-volatile micro-cap stocks that caused the 2013 penny stock crisis. Second, they reduced the lot size from 1000 to 100 shares. This reduces barriers to entry, offering small-account investors access to reliable blue-chip stocks that were previously owned by institutional investors only.

Since these changes were initiated, retail participation has taken off, especially with younger generations. Today, 29% of new brokerage accounts come from investors aged 25 and under, compared to just 19% in 2011. 5.2% of Singapore’s population now trades online, giving it one of the highest participation rates worldwide.

A Model for Others

American exchanges need to step up their protections for retail investors, as evidenced this winter by rampant high-frequency trading fraud. Since 2013, Singapore’s exchange has done just that, and participation has skyrocketed. Today, SGX serves as a success-story for retail-friendly regulations that build trust and increase participation. Other developed markets should follow suit.

With strong protections in place and waves of new investors entering the market, it’s clear that Singapore’s retail investing market is poised for growth over the next few years. We see opportunity in building mobile-first solutions for their social, tech-savvy investor population as it continues to grow.

Traders Without Borders, Part 2: Australia

This week on Traders Without Borders, we’re venturing over to the home of the most enthusiastic trading population in the English-speaking world: Australia. While its population is less than 10% of the United States, Australia is one of the hottest markets for retail traders across all asset classes. Here are some of the unique characteristics of Australia’s rapidly growing market for retail investing.

Higher Participation, Less Satisfaction

Screen Shot 2016-05-20 at 11.17.24 AMAustralia’s online trading participation is 3.5%, higher than both the US, at 2.4%, and the UK, at 1.5%. In the past year, Australians have become even more enthusiastic investors, as more are drawn in by the promise of high returns from overseas investments. Additionally, more and more Australians are choosing to self-manage their superannuation accounts, which are similar to American 401k accounts.

Despite the growing popularity of self-directed investing, Australians are less satisfied with their brokers overall, with just 68% satisfaction, vs 79% in the United States. One reason for this: Australians pay about 50% more in commissions than their counterparts in the United States.

Less Service, More Research

iPhone 6 _ 4.7 inch _ Silver 3

SimplyWall.St’s “snowflake” evaluates your stocks.

In the United States, brokers have achieved high customer satisfaction by offering a suite of products for research and trader education. Since the Australian market has historically been much smaller, most Australian brokers offer few or no advisory services. Thus, the average Australian investor uses 7 outside sources for research, and 6 for decision-making, with the most popular sources being websites and mobile apps. One of these websites, SimplyWall.St, saw an opportunity to help investors when it launched in 2014. “The simple fact is that Australians have been paying more for less brokerage, and products like ours help fill the service gap,” said COO Nick Van Den Berg.

Ultra Concentrated

Screen Shot 2016-05-20 at 11.26.06 AMJust like your favorite laundry detergent, the Australian broker market is 3X concentrated. In both the United States and Australia, the top five brokers make up about 85% of the retail market share. However, the Australian market is much less distributed among these five players. Their #1 broker, CommSec, controls around 60% of the market share when you include it’s white-label platform for Westpac, one of Australia’s major banks. The next four major brokers, Nabtrade, CMC, E*Trade, and belldirect, have just 25% of the market share combined.

Screen Shot 2016-05-20 at 11.26.24 AMIn the United States, the largest brokerage firms share the wealth more evenly; while the largest broker still controls a sizable 38% of the market, the next four brokers enjoy almost half of the entire market share. Additionally, note that the sheer size of the United States market means that all of these top five are huge in comparison to the Australian brokers – one reason they have been able to offer superior product suites for so long.

But as their market expands, new brokers enter the market, and retail investors become increasingly international-facing, the incumbent Australian brokers may experience a shakeup as their customers’ demand more services for lower costs. When this happens, diversifying their product offering will be an important pillar to stay relevant in the market.

Traders Without Borders, Part 1: Hong Kong

We’re excited to introduce the Traders Without Borders series, consisting of bi-monthly analyses of retail investing markets across the world. Drawing from qualitative observations and quantitative data from private and government surveys, we focus on the ways in which international markets differ from that of the United States, and the distinct opportunities they carry for new entrants. First up: Hong Kong.

Unlike most western countries whose exchanges are heavily institutional, stock exchanges in Hong Kong and China are dominated by retail trades, which make up over 80% of their order flow. Most retail investors trade through banks rather than brokerages, and non-equity securities, such as bonds and futures, are not nearly as popular as they are in the US, though ETFs are gaining popularity among more serious traders. Overall, we saw that, when compared to the US market, the retail investing market in Hong Kong benefits from higher participation, a larger proportion of active traders, stronger smartphone penetration, and a cultural appreciation for trading as a form of entertainment.

Anyone can trade

In Hong Kong, people experience fewer barriers to entry when it comes to self-directed stock investing. Many banks encourage their customers to open a trading account alongside their typical checking or savings account, even if they do not explicitly ask for it. As a result, retail participation in capital markets is much higher than many western countries, where banking and investing have historically been delegated to separate institutions.Screen Shot 2016-05-09 at 5.11.05 PM.png

While only 2.4% of the US population has placed an online trade in the past 12 months, an impressive 21% of the Hong Kong population has done so. While the US still has 4 times as many active traders as Hong Kong, its general population is 50 times larger.

More Active

Screen Shot 2016-05-09 at 5.10.45 PMHong Kong investors trade much more frequently than their counterparts in the US. Hong Kong’s retail investor pool contained very few inactive traders, with just 20% of investors abstaining from trading in the past 12 months, compared to around 40% in the US. (HKEx) In a survey by State Street, 73% of investors in Hong Kong trade at least once per month, compared to only 53% in the United States. As a result of more active traders, total average annual trades are higher in Hong Kong at 41 vs 17 in the US.

 

More Mobile

Screen Shot 2016-05-09 at 5.09.36 PMSmartphone penetration is high in Hong Kong, where the two most popular phone models are the iPhone 6 and iPhone 6 Plus. Highly accustomed to financial services and transactions on mobile devices, Hong Kong users have overwhelmingly adopted mobile trading. A survey from Investment Trends found that 80% of online investors use mobile devices for trading purposes. In the US, this number was a bit lower, around 60%, though an additional 12% of US respondents have plans to begin trading from their mobile device in the next year.

More trades, more fun

Though difficult to quantify, cultural attitudes towards trading have a large impact on financial market structures in both the US and Hong Kong. While most US traders see the stock market as a way to achieve their financial goals, investors in Hong Kong are more interested in stock trading as a form of entertainment.

Screen Shot 2016-05-09 at 5.10.56 PMAn interesting result is that high net worth traders in Hong Kong trade more often than their less wealthy counterparts, while the opposite is true in the United States.

For investors who believe that stocks are a form of gambling, then a larger portfolio means more to play with. Conversely, for investors who see the stock market as a vehicle to retirement, a larger portfolio means more is at risk for placing a bad trade.

 

While there is a need for more research on the reasons behind this culturally different approach to investing, it is clear that Hong Kong’s Stock market holds opportunity for new entrants who focus on the high-net worth active trader demographic through mobile-first solutions.

 

Sources:

HKEx Retail Investor Survey, March 2015.

A Snapshot of Investor Households in America, FINRA, 2015.

The Global Online Broking Report, Investment Trends, 2014.

The Self-Directed Investment Market, Celent, July 2010.