Trade Republic and Payment for Order Flow (PFOF)

[roman_guy (Roman)]

@zaccharles

Tipping is definitely common in the USA,

The racist, twisted history of tipping

" The federal minimum wage is a paltry $7.25 an hour, but in 18 states servers, bussers, and hosts are paid just $2.13—less than the price of a Big Mac. This is known as the federal “tipped minimum wage” because, in theory, these food workers will make up the difference in tips."

[Raul (Ann Onymuz)]

@zaccharles

There are heaps of stories in the news of companies keeping tips intended for employees.

This is just wrong. Abusive behaviour in it’s finest. That article on amazon… It’s just not right.

@zaccharles

Who really wants to trust their money to a broker that relies on tips? If they don’t rely on tips, why would they need tips?

I agree with the point that a business model where tips are the cornerstone doesn’t inspire much confidence. What if I, an individual, want to make a small contribution without expecting anything in return for it? What can I do? Back in the day, when Fretrade’s instant orders were £1 and Basic orders were the only free option, I could make a contribution by placing the occasional instant order and could feel I was giving something in return for the bargain I was getting. Tips may be a way for me to do something like that. It’s not the best way to do it? Ok. Maybe one day something shows up. Nowadays there’s no £1 instant orders, but there’s premium accounts… what if I want to gift £10 to the company this year?

@zaccharles

As someone else said, it all seems like a marketing ploy to me. Capitalising on PFOF being in the news. They even say in their FAQ on tipping:

Building off the events of last week and the call for more transparency in our industry, Public.com is ending its participation in Payment for Order Flow and introducing an optional tipping feature.

I just read this as “we thought we’d get away with PFOF, but now it’s in the news, so we’re changing our business model before we’re in the headlines”.

I couldn’t agree more. It looks like a marketing ploy. It smells like a marketing ploy…

@zaccharles

If they truly believed PFOF was wrong, they wouldn’t have done it in the first place (i.e. Freetrade).

Nothing to object here either. Quite the opposite.

Here’s how I look at PFOF.

Let’s make a few assumptions. I’m going to keep the example as simple as I can for the sake of fluidity. Real life is more colourful and different scenarios may be added and are welcome. Freetrade’s case is absent.

A person wants to invest in the stock market. Let’s call that person Freebie.

He’s looking at different brokers and is undecided between two.

The first one we can call BrokerFlow and the second CommissionTrade.

BrokerFlow offers commission free trading and receives PFOF. It discloses it for its costumers.

CommissionTrade charges £10 per order.

Lets forget FX fees and stamp duty to keep it simple.

Is there any situation where BrokerFlow gives more value to Freebie than CommissionTrade?

Let’s imagine the following.

Total cost of a trade inclusive of commissions: £100

Price per share: £0.10 with the bid and ask prices going up and down around that figure.

Orders are executed at the same time.

Because CommisionTrade charges £10 per order Freebie’s purchasing power would be £90. He would get, for the sake of simplicity, 900 shares.

BrokerFlow gets PFOF. How many shares will Freebie get? If Freebie gets less than 900 shares, then its good to forget about PFOF reliant brokers. If he gets the same, what’s the point then? If Freebie gets more than 900 shares then there’s a case for PFOF.

In a scenario like this one the commision fee we get from CommissionTrade amounts to 10% of the total. I find it very hard to believe that the PFOF execution is beaten by an execution with a 10% amputation. There will be, however, a point where they match. And beyond that point CommisionTrade will be unquestionably a better deal for Freebie.

I am very interested in finding that sweet spot. I find it hard to believe it to be bellow £100 per trade, or £200 even. I think this is the key to solve the puzzle. It can’t be only on principle. A bit of pragmatism also has its place.

Makes sense?!

At surface PFOF does seem wrong. But I’m convinced there are circumstances where it can be useful for wallets of the smaller size.

Hence:

1. PFOF should be an allowed option.
2. Those brokers whose business model rely partially or totally on PFOF should disclosed in a clear easily accessible manner: mandatory disclosure.

[Raul (Ann Onymuz)]

@roman_guy

Public.com is European stonk companyy with an office in the States, according to Professory Scott Galloway, whos an investorr.

They got an office inCoppenhagen.

Ok. The pieces I’ve read on Public.com refer them as being New York based… I assumed Denmark was a second office. But it makes sense the other way around

@roman_guy

Id treat Public.com as Freetrade’s other new competitor thats about to enter the crowded market

yup. And now that they got rid of PFOF they might find it easier to get to the UK than RH did

[Jimmy]

An interview interview with Charlie Munger including his thoughts on pfof

‘Nobody should believe that Robinhood’s trades are free:’ Charlie Munger

[saf]

Financial Times - Zero-commission trading in Europe faces scrutiny by EU markets watchdog

Christian Hecker, co-founder of Trade Republic, said it earned money from payments for order flow. But he said the platform, which is reported to have more than 600,000 customers, guaranteed its customers prices in line with the spreads offered by the exchange, Deutsche Börse.

“Trade Republic is certain that the way we are using [payment for order flow] is to the benefit of our customer,” said Hecker.

[deathwaltz]

Just saw this:

Berlin’s Trade Republic nabs $900M led by Sequoia at a $5B+ valuation to take...

They have 1 million customers across Germany, Austria and France. On average each customer holds €6k.

Would be eager to hear everyone’s thoughts; Is this the end of Freetrade’s european expansion goals? Room for more than one player? etc.

[David76 (Davide)]

WOW…$900m from Sequoia? Sequoia is the best of the best

[deathwaltz]

Absolutely. They’ve raised from founders fund (Peter Thiel’s fund), Accel and Creandum previously too.

[J4ipod94]

It just show’s how big the opportunity is for FT as they expand to Europe

[szb (Sergey)]

This is good news!

Their app is on par with FT’s at the moment with some things that FT does better (instant deposits, stock universe, community, fractional US shares) and some they do better (crypto already launched in Germany, limited auto investing)

US’ example shows that there is room for multiple players. What’s nice is that they are going to be spending their $ to educate people in Europe about low cost investing. Already tired of seeing their ads on Facebook in France.

How do they get a valuation like this if their business model at the moment is based on taking a fixed commission of 1 EUR per trade regardless of the trade’s size. An average client making 2 transactions per months brings 24 EUR of revenue per year. PFOF is the only explanation I can think of unless their fee structure evolves.

[Sims]

They could just buy freetrade now!

[Raul (Ann Onymuz)]

They don’t have enough money for it

[Sims]

what’s the valuation of freetrade? 500m? they could just offer cash and shares. I’m obviously not really suggesting they would.

[szb (Sergey)]

With Robinhood’s upcoming IPO and this the slide talking about valuation comparisons in the next pitch deck will be interesting.

[J4ipod94]

Is it bonkers that the valuation increased 10 fold in 1 year?

[Raul (Ann Onymuz)]

@Sims

what’s the valuation of freetrade? 500m? they could just offer cash and shares. I’m obviously not really suggesting they would.

Trade Republic has just been valued at $5.3 Billion with 1 Million customers.

Freetrade has currently 700 thousand customers. That’s 30% less.

Freetrade doesn’t have crypto yet but has plans to implement it.

Freetrade, like Trade Republic, is expanding into continental Europe but Trade Republic is more advanced in this process.

Trade Republic relies on PFOF contrary to Freetrade.

Let’s be generous and say that given all this Freetrade’s valuation is 50% of Trade Republic’s and not 70%.

That’s $5.3B/2=$2.65B rather than $5.3*70%=$3.71B

$500 Million? That’s so January 2021

[toms]

This firepower is very alarming for Freetrade. This will enable them to hire fast and go VERY quickly.

Sequoia clearly backs the TradeRepublic team to become the Robinhood of Europe (they also backed RH so will share insight).

This is however also very positive for Freetrade going into its next fundraising round, but I would now hope Freetrade would be looking for much more fire power in its series C (hopefully in Sept).

I’d like to see £200m raised ideally at a £1.5bn valuation or more (in the worst case!)

Get this wrong and Freetrade could be beaten to the punch… get it right and game on!

[deathwaltz]

Couldn’t agree more. Trade Republic have said they plan to expand across the entire Eurozone in the next four months. If Freetrade’s European expansion doesn’t happen by the end of this year, the trophy’s lost in my opinion. I do like that Freetrade have a first/second mover advantage in Canada and Australia though, for example.

[David76 (Davide)]

Freetrade $50m Series B seems so small compared to the $900m just raised by Trade Republic.

But I mostly worried about the value added that Sequoia can deliver to the company …

[toms]

Freetrade needs to scrap the pesky £20m crowdfund and focus on raising £200m from an institution.