As commissions plunge, young traders are going for broker

Tim Boreham

Independent Investment Research

Australia might not yet have the zero-cost broking model for local shares popularised by the US platform Robinhood – or not yet anyway - but that hasn’t stopped younger Australians from discovering the delights of share trading.

Call them millennials or Zoomers, they’ve been using their latest lockdown time to good effect. What’s more, they’re not just trading the ‘meme’ stocks plugged by dubious influencers on Reddit or TikTok.

The trends bode well for SelfWealth (SFW), the only listed low-cost broker which works on a flat fee of $9.50 per trade.

The company claims to be the country’s fifth biggest retail broker overall, with a 7 per cent share of a market competed by no fewer than 40 providers.

“We have grown at a fantastic clip in the last 18 months from where we were at the start of the pandemic,” says CEO Cath Whitaker.

On Monday, the company's shares resumed trading after a $10 million placement struck at 39c, a 9 per cent discount. A share purchase plan is expected to raise a further $2 million.

The funds will be used to support an "aggressive" expansion, such as last November's launch of a US platform to trade US shares (just in time to surf the upsurge in trading sparked by the Gamestop short-selling frenzy).

This month the company said it planned to add a cryptocurrency trading platform, after a survey of 3500 of its clients revealed that 30 per cent invested in ‘cryptos’ and a further 38 per cent intended to do so.

Under the zero-fee model that has burgeoned in the US, brokers make their money from fees paid to so called market makers: intermediaries that consolidate the trades and execute them at a slightly lower price than the order stipulates.

It’s a volume-driven margin game.

Australia doesn’t have zero-fee brokers, but competition is certainly ramping up in the low-fee sector.

Whitaker describes the competition as a case of “look left, look right.”

On the left are the Big Four banks’ broking operations – led by the monolithic Commonwealth Securities - and CMC Markets (which is in alliance with the ANZ Bank).

“When I look right it’s the newcomers such as Superhero, Stake, or Raiz and Spaceship with a slightly different offering to ours,” she says.

Superhero, which offers $5 local trades and free US share and ETF trades, has been splurging on prime time advertising. Stake planning to extend its trading offering from the US market to the ASX.

Other strong competitors are the US based eToro and the UK-based IG Markets.

SelfWealth claims to be the only low-cost platform to offer direct legal ownerships with holder identification numbers (HINs) rather than custodial arrangements.

Two custodial intermediaries, BBY and Halifax Investments have failed in the last five years, while Opus Prime famously imploded during the global financial crisis.

The circa 12,000 Halifax clients have only recently told they will get their shares back as a result of the broker’s November 2018 collapse.

“This isn’t a theoretical discussion, this has hurt thousands of Australians,” Whitaker says.

However, Whitaker believes quasi zero-free competitors will emerge for the local market, using a loss-leading strategy based on generating income from foreign exchange fees or other peripherals.

“In the digital world you are paying for the product or you are the product, they are going to make their money somehow,” she says.

Whitaker says investors should be querying how such companies are making their money.

“If something’s too good to be true, perhaps it is,” she says. “We would welcome a conversation with ASIC to ensure the risks are understood by mum and dad investors.”

Young investors are perceived to be overly influenced by dodgy online advice, but Whitaker says they are more assiduous with their research than they are given credit for.

While trendy sectors such as buy now pay later (BNPL) stocks have been popular with the novice traders, so too have iron ore miners.

“The Big Four banks were among the top traded stocks in May,” she says, adding that investors are more wary about the BNPL stocks.

SelfWealth’s June quarterly report showed revenue increasing 22 per cent to $5.11 million, with positive cash flow of $140,000 (just over $1 million for the full 2020-21 year).

Th number of active clients grew 105 per cent to 95,189.

Relative to the March quarter, however, revenue fell 11 per cent and the number of trades declined by 30 per cent.

SelfWealth shares have fallen some 30 per cent over the last 12 months, but they're still almost double their November 2017 listing price of 20c apiece.

While the  company's $80 million market valuation seems modest, management's challenge is to move to profitability.

In underlying terms, the loss for the year to June 2021 is expected to narrow to between $400,000 and $900,000, compared with a $2.9 million deficit in the 2019-20 year.

Minnow actors tread the ASX boards

Meanwhile, SelfWealth’s ASX ‘orphan’ status is about to be challenged by two new entrants, albeit with different product propositions.

Having raised $10 million of IPO funds, OpenMarkets plans to debt later this year.

OpenMarkets is more about business-to-business provision of services to other brokers (including SelfWealth). Behind the scenes, it clears more than $50 billion of trades annually, across 200,000 accounts.

But it’s also has a trading platform Open Trader, a ‘self-directed’ platform for “serious active investors”.

The Perth based Marketech is planning an IPO for its platform, which targets “serious active investors” with add-ons such as live streaming.

The company in June did the rounds for $1.5 million from investors including former Afterpay director (and early investor) Mike Jefferies.

Dare to dream …

Meanwhile the remaining listed full-service brokers are putting on a mixed display, with shares in Bell Financial Group (BFG) lifting 41 per cent over the last year and 180 per cent over the last five years.

Following its acquisition of local rival Hartleys, the Perth based Euroz Hartleys (EZL) said it would pay a final dividend of 13.5 cents, which equates to a handy full-year yield of 8 per cent.

Euroz shares have gained 87 per cent and 155 per cent over one and five years respectively, but the broker relies on buoyant WA mining conditions.

Now known as E&P Financial Group (EP1), Evans Dixon has shed 70 per cent of its value since listing in 2018. In a mediated settlement this month, the group agreed to pay a $7.2 million penalty for not acting in clients’ best interests by directing them to a related US property fund.

Tim Boreham edits The New Criterion


........
Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.