Three Charts That Show The Shift From Prospering Online Brokerages To Retail Daytrader Mayhem

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by Tyler Durden
Sunday, Jul 19, 2020 - 05:15 PM

The "Robinhood effect" is not only real, but is now flourishing thanks to the government handing out free money and unemployed "traders" sitting at home all day passing the world's worst penny stocks (and Tesla) back and forth to one another with various cryptocurrencies, engaging in a version of "pass the hot potato" that is guaranteed to end in misery for all parties involved.

But while Covid is catalyzing the change at a faster rate than ever, it was Robinhood's introduction to app-based trading and no commissions that shook up the industry and opened the floodgates to these new traders.

In addition to an influx of new traders, it has also shaken up the model for online brokerages, who have had to match Robinhood's "no commission" policy to retain their clients, leading to M&A from within the industry. They are doing this by selling their order flow, which means worse fills and slower service for clients while brokerage houses scramble to make up for the revenue they are losing from commissions. 

It's also why first-time traders are stunned to learn that their online broker routinely crashes during high volatility points in the market: the brokers are too busy pawning off their order flow and trying to maintain a near-impossible business model without trading commissions to actually spend money upgrading their infrastructure and bandwidth for volatility "aberrations". 

This shift in the industry was captured beautifully in a series of Tweets from Bloomberg's Morgan Barna, CFA last week. 

First, she shows how trading volume has spiked significantly in Q1 and Q2 of 2020, obviously attributable to the Covid lockdown and the introduction of new "traders" who have followed the herd, led by Barstool Sports' Dave Portnoy, into the market.

Next, she shows how Schwab has seen its revenue per trade collapse over the last 5 years, as the brokerage has tried to keep pace (or in some cases lead the charge) for lower commissions to help bring in new clients. 

For all intents and purposes, commissions no longer seem to exist for stock trades and have been almost totally priced out of the industry.

Finally, she shows that interest in creating accounts continues to rise. Among the surprises we've seen during the Covid lockdown has been the fact that Americans are actually saving money and paying off credit cards, instead of spending it, with the economy melting down and the government wiring them free checks.

They are also putting this money into brokerage accounts, as you can see below:

This is, of course, enabled by the Fed, behind the scenes, doing everything it can to make sure that the NASDAQ continues to hit new highs despite what has been an unprecedented economic collapse in the country.

When the average American logs on to Twitter and sees the President (or worse, Larry Kudlow) bragging about the market despite tens of millions of people unemployed, we don't blame them from meandering toward the honeypot that our country's public markets have become.

Unfortunately, what comes up must come down - and the new retail traders being lured into the market with promises of neverending all time highs and commission free trades - will likely be the first blood shed when the Fed's ponzi scheme is inevitably exposed for what it truly is and comes crumbling down.