Stock market trading – faster and cheaper is not necessarily better
BETWEEN 1992 and 1999 US space agency Nasa adopted the mission paradigm of “faster, better, cheaper’’ (FBC) for its unmanned missions. Sceptics pointed out that FBC was too ambitious and that perhaps only two out of the three were achievable – for instance, a mission could be launched faster and cheaper but not necessarily better, or it could be faster and better but not cheaper.
After five failed missions and one cancellation – four of which occurred in 1999 alone – sceptics were proven right and FBC was discontinued.
Coincidentally, in 1999, stockbroking commissions in Singapore started on the path towards full liberalisation in 2003, with the promise that, over time, technological advancements would mean faster and cheaper trade execution, thus leaving retail investors better off.
It also sparked off a race for market share and the entry of several offshore players, including discount brokers. This has now culminated into a race to the bottom – today some 20 years later, FBC in the stock market has led to some houses and platforms to advertise zero commissions while others dangle incentives such as free shares or even cash for signing up.
Customers are offered a plethora of trading options, ranging from plain vanilla equities to exotic products such as contracts for differences, options and inverse exchange-traded funds. In most cases, participation in previously inaccessible markets is also possible.
With such attractions and incentives, it’s often asserted that retail investors have never had it better.
Yet one has to wonder – is faster and cheaper trading of more, possibly complex, products really better for all retail investors? Probably not. Several observers have warned, quite correctly, that there is no such thing as a free lunch, especially in the cut-throat, dog-eat-dog world of the financial services industry.
Retail investors should familiarise themselves with how discount brokers and zero-commission platforms make money, such as through margin charges and settlement fees.
Another method is payment for order flows, a practice which sees the platform route customer trades to preferred market makers in return for rebates, in which case the customer may not actually be paying, or be paid, the best possible prices.
Investors active in the 1980s and 1990s will recall they paid a flat rate of 1 per cent per trade to their stockbrokers, a figure that might appear objectionably astronomical by today’s zero-commission standards.
But in return they received timely, fundamentally-backed research usually written by experienced analysts to support investment recommendations, guidance from their dealers and remisiers on upcoming corporate actions such as rights issues, share consolidations or complicated restructurings, and regular market updates and investment ideas from those same brokers, many of whom had decades in the business.
Today there is every chance that investors, tempted by zero commissions, might end up trading more frequently, which would in a sense run counter to conventional market wisdom that “time in the market is better than timing the market’’.
As many studies have shown, the majority of people who trade regularly end up losing money because it simply adds to their risk and is unlikely to be profitable over time.
Granted, the days of 1 per cent commissions are long gone. Technology has irreversibly altered the investing landscape, and with it, the stockbroking industry. It has also led to smartphone apps replacing dealers and remisiers.
Meanwhile, an entire generation of investors has grown accustomed to paying low to zero commissions and thus being able to trade faster and cheaper than before. However, whether this has left them better off is debatable.
