Free trading in shares - a false economy?

An excellent article in the FT about this.

https://www.ft.com/content/8be69c5e-5f6b-11e9-b285-3acd5d43599e

(or Google
Free trading apps — investment freedom or false economy?)

Apparently Revolut and Freetrade allow people to buy and sell shares for free.

But the problem is that the client might not be getting the best prices.




Interactive Investor says 90 per cent of its deals are executed at better prices than the London Stock Exchange quoted price, due to the network of market makers it uses. Market makers, also known as retail service providers (RSPs), are third parties who facilitate deals for brokers.

These companies are willing to buy and sell stocks at all times, in the hope of profiting from the difference between bid and offer price and could offer a broker a better price than they might elsewhere. But the relationship comes at a cost.

Barclays says that just under 92 per cent of deals placed using its RSPs got a better price quoted than the LSE in the first quarter of 2019, improving customer returns by an average £14.69 over that period.

In contrast, several free trading apps execute customers’ deals in bulk, at the end of the day, which cuts their own costs but means customers miss out on the best price. Freetrade executes customers’ deals at the end of the day. However customers can pay £1 to deal instantly.

Hargreaves said: “Bulk trading is very different from our price improvement service, which polls up to 30 different market makers to get the best price for share deals.”

I wonder if the same applies to De Giro?

Brendan

Good question, I would need to check but certainly when using DeGiro the shares on a market order have processed instantly. There is a bid/offer spread but I haven't price matched against the spot price of the stock on the market. Obviously they could charge a larger spread and wait to bulk trade at the end of the day and use the increased spread to cover any settlement risk due to price movement but this is fairly risky.

I have used revolut to convert currency and it has offered the closest to spot rates I have found on offer.

A question I have is why does it cost €10 to buy a stock in the first place.

Andrew365 said:

A question I have is why does it cost €10 to buy a stock in the first place.

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Someone has to pay for the infrastructure, both physical (hardware, software, telecommunication facilities, etc) and people (accountants, lawyers, marketing specialists, compliance staff etc) that connect the user to the exchange and ensure that the transactions are executed in a proper and legal manner

jpd said:

Someone has to pay for the infrastructure, both physical (hardware, software, telecommunication facilities, etc) and people (accountants, lawyers, marketing specialists, compliance staff etc) that connect the user to the exchange and ensure that the transactions are executed in a proper and legal manner

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People seem to think that because the internet is free, the running of the internet is also. I only have a small website, yet I have to pay for the server, site back up and domain. I can't imagine the cost of a big site that people are trading on.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

jpd said:

Someone has to pay for the infrastructure, both physical (hardware, software, telecommunication facilities, etc) and people (accountants, lawyers, marketing specialists, compliance staff etc) that connect the user to the exchange and ensure that the transactions are executed in a proper and legal manner

Click to expand...

Yes I agree but what I meant is does that equate to the €10. I would imagine there are margins that can be squeezed and perhaps as technology improves more efficiencies in the market. In the last 10 years the broker I used in the UK has changed fee structure a few times but it is still roughly the same cost. I imagine the likes of DeGiro are operating on an economy of scale i.e. offering a low fee per stock trade is likely to entice people to trade more vs other brokers who have no real middle ground. It is similar to Fidelity in the US who launched 0% fee ETFs last year on the basis that once the consumer buys the 0% ETF they are now a customer and likely to use other paid services within the Fidelity platform.

The existence of competing brokers should ensure that the hidden hand of the market supplies services at an economic price. It is true that the Irish market is so small that not many companies are interested in providing a service at a price that Irish investors are ready to pay.

I am in the lucky situation that my holdings were established while I was living in Paris and so I am still using my French broker. I have changed my broker a few times over the years as I got a better deal and service from a competitor. I always use large companies and am not worried about holding shares in a material form as I have confidence in the system to protect me and regulate my choice of broker. I have never used a small broker for reasons of security and peace of mind even if this involved an increased charge.