Freetrade. Where’s the catch?

[Phooey]

Just listened to Freetrade’s advert on the radio saying it’s “free” to trade, and when you sign up you get a “free” stock up to the value of £200.

I know I’m paying for it somehow. So how do they make their money when places like Hargreaves Lansdown charge between £5.95 and £11.95 per deal.

[Mr Overheads]

They charge £3 a month if you hold an ISA with them and they also charge if you hold a SIPP. They also have a Plus accoutn which opens up some extra shares, but 99% of popular shares are all on free not Plus.

[marked1]

I now use freetrade instead of HL

I think i added up all my trade fee's with HL over the 2 years and they come close to a grand. I wish I started to use Freetrade earlier. I only have a standard stock and shares account so cannot comment on the ISA accounts. The only downfall is that you cannot trade certain stock unless you are a plus member, this costs £10 a month. I would say this is about 10% of stock available.

[Bikesalot]

I understand they make a few pence per trade, as they price they show you might be a minute or two behind real stock price?

I use freetrade, got a free £20 share on sign up when referred by a mate, takes 7 working days or so for you to get said share. Fund withdraw (not needed) is slow.

[halo34]

Little slow when you need to cash out but fine otherwise.

My main issue is choosing poor stocks, then watching my Vanguard ISA do really well. But thats just poor guessing/planning on my part.

I find the lack of intel a bit frustrating - but I am a data guy and graphs dont always tell the whole picture.

[DaveGrohl]

It seems obv to me that with free trading l Iike this the loss is in the spread. Does anyone have any actual experience of comparing spreads?

[emicen]

Have a search for any of DonkeyApple’s posts regarding Robinhood during the GameStop nonsense at the end of last year and start of this one.

[DonkeyApple]

Phooey said:

Just listened to Freetrade’s advert on the radio saying it’s “free” to trade, and when you sign up you get a “free” stock up to the value of £200.

I know I’m paying for it somehow. So how do they make their money when places like Hargreaves Lansdown charge between £5.95 and £11.95 per deal.

The way it tends to work in the UK is to firstly limit the stocks available to those with a lend fee and to seek to earn that from the customer positions but the backbone of a UK regulated business using comm free is to attract customers who haven't the funds to purchase whole US shares and who need to trade in fractions.

By attracting customers whose primary objective is to trade US stocks in fractional form you open up the revenue pathways. First of all, under Mifid, a UK broker can't receive PFOF but it can execute with a partner who can, so you sell your US stock flow to an agent in the US. You won't receive any PFOF but you don't get any clearing charges, however, your customer does get the downside of paying the PFOF premium albeit probably reduced. But the real profit stems from the fact that your UK customer is trading US stocks. Bingo, there has to be an FX transaction each way, each time. Physical FX is not subject to the same regulations as exchange broking or even OTC broking. It's the FX deal that is done alongside every single trade and that is of the same size where you levy your commission plus some other charges if you desire.

So, a UK client buys £10,000 of Tesla. You get them to do it through you by being comm free. You're 'giving' the flow to a PFOF entity and you gain is zero costs, they'll pay all your costs. But simultaneously you do a £10,000 fx deal in Cable for the client and you charge them 0.50% comm. if you play the 'spot' trick you could get them paying you as much as 1% comm per side hidden in the spread if you were so inclined.

So the basic premise is that your smaller customers are all mostly trading US stocks so are paying 0.5% per side in comm but the comm is on the FX trade that costs you nothing to execute and you can receive PFOF on if structured correctly.

That leaves your higher net worth customers and those trading UK stocks. Without the FX comm you have to look for different revenues and the most popular method is to put them on a monthly subscription as well as lending out all their stock and putting their cash into the money market. This gives a pretty robust AUM return for zero risk to the broker.

Of course, the other way is to have a holding company outside of European jurisdiction and a subsidiary inside that holds the regulatory license. The subsidiary receives no PFOF as per the regulations and instead its paid to the overseas parent.

[Phooey]

Thanks for all the replies. DA, that sounds quite complicated for someone like me. In short is it cheaper than Hragreaves Lansdown?

At the moment i just buy stocks through HL and pay max £11.95 or min £5.95 per trade. I'm always wary of stuff that's advertised as 'Free' so will probably stick with HL for now. It's not cheap, but it does what it says on the tin, apart from often not quoting at the lower end of share-prices on popular stocks but I think that's just down to the traffic at the time.

[Shnozz]

I found there were many stocks I couldn't trade with Freetrade (not obscure stuff either) that I could trade with T212 so tend to use them.

[DonkeyApple]

Phooey said:

Thanks for all the replies. DA, that sounds quite complicated for someone like me. In short is it cheaper than Hragreaves Lansdown?

At the moment i just buy stocks through HL and pay max £11.95 or min £5.95 per trade. I'm always wary of stuff that's advertised as 'Free' so will probably stick with HL for now. It's not cheap, but it does what it says on the tin, apart from often not quoting at the lower end of share-prices on popular stocks but I think that's just down to the traffic at the time.

It's going to boil down to the exact nature of the activity. There will be a size and type of transaction where HL is cheaper. With HL you're getting an actual broking service with the others you're not, it's a hybrid where your type of business may cost them money.

Trade size is probably the most important factor. The comm free models favour micro trades, that's the business they target, preferably US so they earn a chunky commission and the client isn't market price sensitive so will accept things like aggregation and sending to a single destination and not readily notice the impact of subscription fees on their pot.

Frequency also matters and this also leads into trade duration where short term duration favours spread betting on UK markets as the funding is less than the stamp duty.

It's hard to really work it out without knowing what someone is specifically doing but maybe a very crude rule of thumb for someone transacting in UK stocks, so no fx costs, is that if the fixed fee of a traditional broker works out at less then 0.5% then you're probably getting the better deal with them but if it's more than 1% then the masked charges of the comm free type house are probably better.

Once you're looking at US then you have the complexity of the murkiness of FX to contend with which is where a broker can bury lots of charges, plus the issue of the end clearer possibly/probably using PFOF so a loss of best ex. And the aggregate cost risks of fractional trades.

[Phooey]

DonkeyApple said:

It's going to boil down to the exact nature of the activity. There will be a size and type of transaction where HL is cheaper. With HL you're getting an actual broking service with the others you're not, it's a hybrid where your type of business may cost them money.

Trade size is probably the most important factor. The comm free models favour micro trades, that's the business they target, preferably US so they earn a chunky commission and the client isn't market price sensitive so will accept things like aggregation and sending to a single destination and not readily notice the impact of subscription fees on their pot.

Frequency also matters and this also leads into trade duration where short term duration favours spread betting on UK markets as the funding is less than the stamp duty.

It's hard to really work it out without knowing what someone is specifically doing but maybe a very crude rule of thumb for someone transacting in UK stocks, so no fx costs, is that if the fixed fee of a traditional broker works out at less then 0.5% then you're probably getting the better deal with them but if it's more than 1% then the masked charges of the comm free type house are probably better.

Once you're looking at US then you have the complexity of the murkiness of FX to contend with which is where a broker can bury lots of charges, plus the issue of the end clearer possibly/probably using PFOF so a loss of best ex. And the aggregate cost risks of fractional trades.

Thanks again DA. The above makes sense - especially the bit about size and frequency - if I'm doing trades with HL of only a couple of hundred quid then £11.95 is going to have a big % impact whereas a trade of something sizable like £10k is (off the top of my head) approx 0.05 to 0.1%.

Shnozz said:

I found there were many stocks I couldn't trade with Freetrade (not obscure stuff either) that I could trade with T212 so tend to use them.

I forgot about T212 - I tried to register earlier in the year but weren't taking new clients at the time. Mmmm