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Broker-Dealers have been in a race to get to zero commissions, a trend expedited by FinTech firms and established players who offer no-fee transactions, attracting millions of new investors. As zero-commission trades have become the norm, a new trend has emerged: Fractional Share Trading.
Fractional Share trading allows investors to buy fractional portions of equities and ETFs with as little as $1, giving smaller investors the ability to own partial shares of many of the most popular equities, allowing them access to these securities and the ability to diversify their portfolios while still being able to own a stake in higher priced shares. Fractional share trading removes the dollar amount barrier to owning securities and diversifying portfolios, allowing smaller investors to participate in a similar way, but on a smaller scale than higher net worth investors.
In the last year, brokers saw an explosive increase in trading volumes, which was in part due to new retail investors. These new investors have been attracted to FinTechs and investment apps, many of which allow Fractional Share trading that provides opportunities to investors to follow strategies such as dollar-cost averaging and access to tech giants or blue chips without barriers due to lack of capital.
As more firms provide the ability to buy and sell fractional shares to their customers, others who do not yet offer that capability will need to enhance their trading platforms to stay competitive and be able to capture a new generation of investors. The appeal of owning individual securities in self-directed brokerage accounts combined with popular equities having high share prices has made the ability to buy and sell fractional shares a key differentiator for brokerage firms.
In addition to the commercial value of offering access to high priced, and often high profile, assets at a low minimum, offering fractional share trading can also provide benefits outside of retail brokerage trading. Firms with the ability to process fractional share trades of equities and ETFs can leverage the functionality to lower minimums in model-based and SMA advisory and Robo accounts. Removing the limitation of only being able to buy, sell and hold full share positions, firms can provide their clients access to investment models at a lower minimum by creating the same asset allocation and reducing cash drag that would only be available at a higher dollar minimum if only trading whole shares. Similarly, fractional share capabilities will allow for the democratization at a lower minimum of what may be the next key trend in wealth management products - direct and custom indexing portfolios.
Firms that offer stock plan administration to corporate clients, including public companies with high stock prices that offer equity to employees as part of their compensation, may want the ability to allow for fractional share distributions. This allows participants the flexibility to trade their vested shares in fractions and can provide broker-dealers a competitive advantage and be a key differentiator in both attracting corporate clients and converting stock plan participants into traditional wealth management clients.
While it’s clear that the ability to trade fractional shares offers benefits and competitive advantages across business lines, firms must carefully consider implementation strategies and approaches to be efficient, scalable, and in-line with industry standards and regulatory and compliance considerations and properly integrated with existing operations and technology infrastructure. Because fractional shares aren’t traded on exchanges, implementing a solution for managing orders and inventory can be complex. Additionally, firms trading fractional shares have come under increased scrutiny to ensure they are properly reporting those trades.