Regulation, competitors, and fractionals

I wrote this post for another thread but decided to post it on its own because it’s quite large. It also took a while to gather information and I wanted more people to have an opportunity to get value from my research.


Regarding FT and regulation, in Freetrade secures fractional share trading FCA greenlight, they talk about regulation from the FCA that was required to do fractionals.

In what is possibly a world-first, Freetrade is poised to launch fractional US, UK and European share trading later this summer having received the regulatory go-ahead this week.

As well as building the technology, Freetrade also had to seek permission from the FCA to become a full stack broker with the same kind of permissions as a JP Morgan or Goldman Sachs would have.

In Stock trading app Robinhood gets UK broker license, they say something similar

a Robinhood subsidiary, has been authorised by the Financial Conduct Authority to operate as a broker in the U.K. (with some restrictions) based on the permissions the company sought).

The interesting things here are FT’s “full stack broker” and RH’s “with some restrictions”. The FCA lists the permissions each company has on their website. For example, Robinhood, Freetrade, and Trading 212. If you go to the Permission section and compare them, there is quite a difference.

Let’s compare RH and FT first. Here are their current permissions.

Robinhood

Client Money: Can’t hold client money

Requirements: Unable to carry on any investment services and activities (to which MiFID applies) on a regular basis except reception and transmission of orders in relation to one or more financial instruments

Permissions

  • Arranging (bringing about) deals in investments
  • Arranging safeguarding and administration of assets
  • Making arrangements with a view to transactions in investments

Freetrade

Client Money: Can hold and must protect client money

Requirements: None

Permissions RH Also Has

  • Arranging (bringing about) deals in investments
  • Arranging safeguarding and administration of assets
  • Making arrangements with a view to transactions in investments

Permissions RH Doesn’t Have

  • Causing dematerialised instructions to be sent
  • Dealing in investments as agent
  • Dealing in investments as principal
  • Safeguarding and administration of assets (without arranging)
  • Sending dematerialised instructions

The kinds of financial instruments these two can deal with are basically the same except FT can also deal in Debenture and Government and public security (I don’t remember seeing anything about these yet).

For all of the above permissions, one can Google “fca” followed by the term and get directly to the FCA glossary. I’ve read most of them but I’m not going to pretend to be an expert with all the financial jargon. However, my interpretation is that FT can act directly as a principal, while RH can only act as an agent and needs a principal partner in the UK.

Again, just my guessing, but since RH is launching in the UK with US trading, I assume they don’t have a UK partnership or one they’ve mentioned and are probably waiting to get FT’s level of authorisation in the UK. In the meantime, I think RH UK will act as an agent for RH US to offer trading on US markets.

Also, RH UK can’t hold client money, so it’s all going to be (given to RH US) in USD as we’ve seen announced.

In the AltFi article about FT’s fractional shares, Adam says “The legacy stockbroker infrastructure in Europe doesn’t allow for it” which relates to the comments on FT building the technology to enable fractionals on their Invest platform. So I think FT can do UK/EU fractionals and RH can’t right now without partnering with a neo-broker principal.

Somewhat disappointingly, the article also says

In what is possibly a world-first, Freetrade is poised to launch fractional US, UK and European share trading later this summer having received the regulatory go-ahead this week.

It’s already Winter and the timelines are now US fractionals this year and UK early next year. Hopefully, it doesn’t slip much more.

Let’s looking at T212 since they were mentioned and have been discussed in these forums a bit too. Plus I don’t know a lot about them so it’s interesting for me. In the same format as before:

Trading 212

Client Money: Can hold and must protect client money (same as FT)

Requirements: None (same as FT)

Permissions FT and RH also have

  • Arranging (bringing about) deals in investments
  • Arranging safeguarding and administration of assets
  • Making arrangements with a view to transactions in investments

Permissions FT also has and RH doesn’t

  • Agreeing to carry on a regulated activity ##
  • Dealing in investments as agent
  • Dealing in investments as principal
  • Safeguarding and administration of assets (without arranging)

The ## is that T212’s permission doesn’t list Retail (Investment) customers. I’m not sure of the implication because it’s listed in other permissions.

It looks like T212 and FT’s levels of authorisation are basically the same. The biggest difference is the kinds of financial instruments each can deal with. Trading 212 doesn’t have debt and government/public securities, but has additions like spread betting and CFDs, which FT have said they aren’t interested in offering.

As for T212 and fractional shares, their order execution policy covers them in section 11 and says how they work. I don’t use T212 so I just assume that since their policy has it, they offer it in their product. Maybe someone can confirm if they do?

They seem to aggregate orders until a particular time each day, and then execute the trades inside their own software with the option of using a third-party. Not all shares can be bought as fractionals, it depends on the liquidity and risk (T212 holds the parts not owned by clients).

I’m not sure how FT’s fractionals will work. I’m very interested to find out. I imagine it will be basically exactly the same. Assuming T212 offer fractionals in their product and not just their policy, do they offer them for UK or EU shares or just US shares?

Hopefully with the rollout of Invest by Freetrade starting, FT will close the gap on fractionals and perhaps still be first to offer UK/EU fractionals (if T212 doesn’t). It will be good to see FT take advantage of their permissions more in the future :slight_smile:

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Ok so basically FTs permissions are nothing special. RH status is just so they can offer US shares as they mentioned. Presumably Revolut and RH have the same permissions in investment terms but both will end up matching FT/T212

I imagine FT will do it exactly the same. If someone tried to buy £0.01 of some random share I guess FT wouldn’t be keen to own the rest

T212 doesn’t allow fractionals right now but should this month… will be interesting to see if it includes ETFs immediately or not

Ok so basically FTs permissions are nothing special. RH status is just so they can offer US shares as they mentioned.

FT and T212’s FCA authorisation is basically the same, so the actual product will be what makes the difference (and, for some, the extra financial instruments that T212 has such as CFDs).

Many of FT’s pain points are caused by the third parties they have to integrate with as an agent. For example, money deposited to FT had to then be forwarded to a third party for holding and trade execution. RH UK will have to forward money somewhere since they can’t hold client money. That will most likely be converting to USD and sending to RH US.

For FT, the integration with their partner wasn’t real-time so there were delays in deposits appearing and trades synchronising. Being able to hold money means instant deposits are possible. Being able to arrange and broker trades inside the platform means noting needs to be synchronised. The new Invest platform, which acts as a principal instead of an agent, should solve these.

For RH, if they’re just integrating with their US system, they can probably have a tight integration and still offer fast deposits and trade synchronisation. Even as just an agent.

Presumably Revolut and RH have the same permissions in investment terms but both will end up matching FT/T212

Being the principal gives you way more control and allows for a better product. RH, as an agent in the UK and principal in the US, should offer a good US product. Without the right UK partner, they won’t be able to offer the same level of product in the UK, which may be why they just aren’t offering direct UK trading at launch.

Assuming FT selected the best partner possible, there may not be one that can offer what customers want. Therefore, RH may be waiting until they can get FCA authorisation as a principal in the UK to be able to offer the same level as service.

I imagine FT will do it exactly the same. If someone tried to buy £0.01 of some random share I guess FT wouldn’t be keen to own the rest

I think it certainly will depend on the share and I can imagine they will restrict which ones can be bought as fractionals.

There is also the aggregation, though. If £0.01 represents 1% and they have 50 people wanting 1%, they may be okay with owning 50% (or other numbers). That’d be why T212 are waiting until some time in the day to build up demand. Perhaps different stocks could have different risk levels (amounts they want to hold). You could potentially build up demand over some time and only execute when that crosses, perhaps over days. That wouldn’t be bad if it was transparent.

Also worth noting that they don’t have to buy a new share each day, they can re-use unclaimed fractions of a previously bought share they hold.

T212 doesn’t allow fractionals right now but should this month… will be interesting to see if it includes ETFs immediately or not

Thanks for clarifying! I should probably follow them a bit more closely.

Oh, and as for Revolut, their trading legal page says in the “Getting to know us” section that they’re an appointed representitive of Sapia Partners LLP. You can see Saphia’s FCA authorisation here and will find Revolut listed under appointed representitives along with a whole lot of other companies.

Revolut obviously have their own FCA authorisations, but they’re related to banking and other things they do. I’m no expert, but it seems like Revolut are in a different situation as an authorised representative rather than an agent. Would be nice to know more about that if anyone can help.

Sapia Partners can do the same stuff as FT and T212, just with a larger selection of financial instruments including things like forex. I have no idea why their APIs and integrations are like.

Right now they’re not doing anything ;p their full buy/sells are instant. Adding a delayed option makes sense for another feature they are implementing/have on the backlog which is automated investing (direct debit + portfolio %s). Better to combine ones scheduled for the same day together

Im talking about what they say they’re going to do, not what they do now. From https://www.trading212.com/en/Order-Execution-Policy

Orders will be filled using proprietary software on Trading 212 Group’s servers. Fractional Orders will be held throughout the day and aggregated at a set point each Business Day or as soon as reasonably practicable thereafter and processed in accordance with our Best execution policy. Orders received after the agreed aggregation point will be held until the aggregation point the following Business Day.

So it doesnt seem like they will be doing instant fractionals. They go on to say

Given the factors above, the Board of Trading 212 UK Limited considers that it can offer Best Execution for fractional shares with this arrangement.

You seem to follow T212, so feel free to update here when they go live :slight_smile:

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T212 fractionals feel pretty live to me. Unless they are running so many transactions, waiting til they get to a whole number and then clicking ‘go’, but either way feels pretty fast.

Fractionals are just on US and UK stocks by the looks of it and where offered (mainly those that might have otherwise been unaffordably - I.e £10+).

Note: trading 212 do set minimum limits on some orders. Eg I had to buy a min of 2 Airbus shares on the Frankfurt Stock Exchange for over £100 each!