How To Support Retail Investors In A Brokerage Industry That Often Exploits Them

The global brokerage industry tends to be driven by greed. For hundreds of years, a relatively small number of people have made significant money, often at the expense of the "little guy" in the form of retail traders. All too often, if the opportunity exists to make billions of dollars, decision-makers aren't willing to compromise the largest possible profit in favor of providing fair conditions to retail traders if that means "only" making hundreds of millions or tens of millions. It's very much a dog-eat-dog world. We believe this trend will continue until something or someone forces these companies to do differently. Alternatively, companies could choose to make conditions fair and transparent for retail traders. 

While greed is global, many people don't realize how severe the problem is in the brokerage industry, outside the United States and Canada. In the U.S, for instance, the Securities Act of 1933 broadly protects retail investors and traders. Whether buying or selling assets, the retail investor in the U.S. can rest assured they are exchanging those assets at the best available bid or ask exchange prices at any time.

You might think that would also be the case outside the U.S. and Canada. For example, the United Kingdom and Germany have very advanced economies. Shouldn't they be protecting retail investors and traders to the same extent? Unfortunately, these basic investor protections don't exist even in many other first-world countries. Globally, along with high fees and other unethical business practices, trading and investing platforms can manipulate bid and ask prices that retail traders have to execute their trades at, expanding the disadvantage against them right from the outset.

The above is both a provider and customer issue. Many of the platforms essentially encourage trading as a way to make millions of dollars, such as by promoting gambling competitions to determine who can make the most money through trading, which sends the wrong message to traders and skews their thought process. The onus is still on retail investors to act responsibly, trade with caution, and do their homework on how the global retail trading industry essentially cheats them. But companies that put out self-serving narratives, leading traders with greed, or promoting trading as a way to make tons of money are effectively setting their clients up for failure while making as much money from them as possible through fees, commissions, and manipulated prices.

'Churn-and-burn' mentality

The lack of regard for retail traders and investors can manifest in a "churn-and-burn" mentality, as players in the global brokerage industry often apply a traditional customer acquisition model. This model entails acquiring as many users as possible, with little regard for retaining them. These players in the industry understand that users will eventually lose a significant amount or all of their trading capital ('burn') and stop trading ('churn').

So if an investing platform acquires a new customer at, for example, a $1,000 cost of acquisition, anything the person spends or loses above that amount will represent a net-positive customer lifetime value. And since most of the platforms that target retail traders are also manipulating spreads and charging fees, the more trades the users execute on these platforms, the quicker they lose their money.

If customers lose all the money they allocated to trading and give up, the platforms then move on to acquiring new customers, likely churning and burning them, while making little effort to offer good products or ethical service. This approach has unfortunately been endemic for many years.

Striving to be better

It isn't easy to set a good example and look out for retail investors in an industry with little self-policing, and greed often rules the day. But our company believes it's up to us to provide an alternative, at the very least, for retail traders.

That starts with putting the user first. Our product roadmap and business growth initiatives aren't driven by the potential means to maximize profits at the expense of our users, but by focusing on doing what is right. Slowly but surely, adopting our mindset will become essential to the global brokerage industry. People are starting to notice and understand that these platforms are stacking the odds against their users. People speak to one another, especially among users, and as the word spreads, more people become cognizant of these blatantly unfair practices. The conclusion is to seek better alternatives. 

What would accelerate this user-focused trend is an increase in platforms concentrating less on maximizing profits. However, some companies have inherent cost structures that make it difficult to do this. If it is possible to do so, some companies can focus on a more fair and transparent approach, entailing two key aspects:

• Provide all retail investors and traders with conditions such as executing their trades at real-time exchange spot prices with zero fees or commissions.
• Integrate transparency into their business model.

As retail investors increasingly gravitate toward platforms offering fair trading conditions and transparency, even the worst offenders in the industry will have to adapt their practices to avoid losing further market share. Some platforms may not be able to survive at all, considering that their cost structures are typically built upon the profits generated from these unfair practices.

Alternatively, countries could revamp their regulations to align with the U.S. and Canadian standards. This would also serve to level the playing field for retail investors. The problem is that multi-billion-dollar global players would likely exert all their influence to lobby against any such changes. Despite this, we can always hope that some regions will enact fair regulations in the future.

Changing the world

Historically speaking, companies that have changed the world have almost always focused on designing a product to solve an existing problem. Apple, for example, is now an extremely profitable company. We know Steve Jobs didn't sit around a table with his executive team and say, "OK, how can we make the most money?" He stressed the desire to create stellar products that would solve problems. By doing that, the profits naturally followed.

The above mindset has been distinctly lacking in the traditional brokerage industry. One must understand the problems plaguing the industry and brokerage customers first, then tackle them individually by focusing on developing the best products for users. If more platforms embrace this approach, we believe they can create a better and fairer environment for retail traders while still enjoying strong profitability.