Jon Light, Senior Director of Product Management at Devexperts
As the lines between crypto exchanges, neobanks, and zero commission brokers continue to blur, the traditional role of OTC brokers is being thrown into question. What was once the cheapest and most frictionless way for smaller investors to access global markets is being replaced by a new kind of finance “everything app.”
In this article, we explore how a new generation of app-based financial service providers are becoming the first point of contact for a younger generation to the world of trading, and consider what can be done by OTC brokers to remain relevant in this new reality.
Crypto disruption
Crypto exchanges have arguably been the biggest disruptors in this story as they’ve not only risen to prominence in a relatively short period of time, but they’ve also popularized access to an entirely new asset class. Consider that there were no crypto exchanges when the Bitcoin blockchain launched in January of 2009 and compare this to the current reality where crypto futures are traded on the CME and CBOE, and Coinbase is a Nasdaq listed company.
Crypto exchanges have not, however, been content to occupy a specialist niche, and have subsequently been accumulating licenses via strategic acquisitions. Today, Kraken and Coinbase are licensed broker-dealers and Futures Commission Merchants with full banking license applications in the works 1,2. Both offer stocks, derivatives, and debit cards. Additionally, both exchanges have moved to provide EU customers access to US equity markets via tokenized stocks.
Zero-commission revolution
A parallel revolution has been taking place in the world of zero-commission brokerage, which was inaugurated by the founding of Robinhood in 2013. By 2017, traditional brokers like Fidelity and Charles Schwab were racing against each other to bring their own fees down to compete, and by 2019 most US retail brokers had been forced to cut commission fees completely 3.
Robinhood’s success wasn’t just about fees, though. The ease of access offered to younger traders via its user-friendly app caused it to surge in popularity, particularly during the pandemic. Robinhood went from half a million funded accounts in 2015, to over 5 million in 2019, then to 12.5 million in 2020, and to a staggering 22.7 million in 2021 4.
Robinhood pursued an expansive strategy well before its active users peaked, moving to offer crypto trading in 2018, cash management services in 2019 via FDIC-insured partners, as well as futures trading and tokenized stocks for EU clients in 2025.
Neobank opportunity
Born out of global regulatory changes aimed at preventing the kinds of excesses that led to the 2008 crisis, neobanks initially benefitted from regulatory asymmetry, allowing leaner fintech firms to get around restrictions faced by incumbent banking institutions.
In the US, they partnered with smaller banks benefitting from a rule change that capped interchange fees for banks holding over $10 billion in assets. This allowed them to gain FDIC insurance and to generate large revenues from debit card transactions.
In the EU, PSD2 regulation obliged banks to open their APIs to third parties, granting neobanks access to customer data and allowing them to build their own services on top of existing banking infrastructure. Neobanks like Revolut were able to gain users quickly via services like competitive foreign exchange rates and free instant peer-to-peer payments. Today, Revolut is Europe’s largest digital bank with over 70 million users 5.
Revolut has pursued a similar strategy to the other businesses described above, capitalizing on its massive user base to provide various trading services from within its app. It started offering access to crypto to its users in 2017, stock trading and fractional shares followed in 2020, then it expanded further into commodities in 2022, and robo-advisory services in 2023.
OTC’s response
What all three approaches have in common, beyond the fact that they are progressively moving into each other’s initial area of specialization, is that they are leveraging economies of scale and large user bases to become competitive in other areas of the financial services landscape.
In 2021, Plus 500 entered the US derivatives market following its acquisition of US FCM Cunningham Commodities and Cunningham Trading Systems. In February of this year, the firm finalized its acquisition of Indian financial services firm Mehta Equities. Both acquisitions appear to be related to the much-discussed OTC futures pivot, where larger OTC venues are attempting to lessen their reliance on OTC volumes as CFDs come to be more heavily regulated.
IG Group has also been referenced as an example of this pivot, following the UK-based broker’s acquisition of US futures and options broker, Tastytrade, which furnished the broker with both broker-dealer and FCM licenses.
What smaller brokers can do
One of the responses to the above trends we’re witnessing among smaller OTC brokers is the white labelling their trading infrastructures to other businesses that are seeking to enter the trading business, such as PSPs and banks. This is part of an attempt to lessen the reliance these businesses have on retail OTC volumes by diversifying into B2B. We’re also seeing them moving into alternative B2C business models that have found favor in recent years, such as prop trading.
Some, no doubt, will end up being absorbed by larger entities precisely due to their expertise in this specific area, while others may choose to remain within their respective niches. It should be noted that a large contingent of traders will continue to favor what OTC brokers have to offer; namely, frictionless and affordable multi-market access via a single high-leverage instrument, as well as the ability to switch between regulatory jurisdictions in order to avoid stricter regulatory regimes, such as those of the UK and EU. These venues will have to attract traders from other instruments to maintain their position in the long run, as well as expanding into growing CFD markets like Latin America.
Those interested in broadening their offering beyond CFDs into spot crypto, futures, options, and more, will find that the technologies required to support such an expansion have become much more affordable and accessible in recent years, just as trading as a whole has become increasingly democratized for retail participants. Competition among technology providers has made trading platforms, execution integrations, risk management software, and market data more accessible and affordable for small-to-medium sized trading venues.
Add to this the widespread availability of broker-centric AI tools that greatly increase the ability of small teams to segment and target clients in much more tailored ways, and you have a situation where small, well-positioned teams can compete with larger firms in their respective niches, while also expanding into other instruments.
References:
- https://www.bankingexchange.com/news-feed/item/10429-coinbase-applies-for-national-banking-license
- https://www.kucoin.com/news/flash/kraken-s-parent-company-applies-for-occ-charter-to-launch-federal-crypto-bank
- https://www.wtwealthmanagement.com/whitepapers/2020-07/
- https://investingintheweb.com/brokers/robinhood-statistics/
- https://www.statista.com/topics/13634/revolut/
