While competitors TD Ameritrade and PhillipCapital do offer lower minimum commission fees for trading US stocks, both require higher minimum funding than Tiger or Moomoo.
7 out of 10 of its employees are engaged in R&D
Price is a big factor for users. The low commissions, combined with the free trades and rebates from referring others to join the platform, were some factors Kua says he likes about trading with Tiger.
Users like him have powered the adoption of Tiger and Moomoo’s apps in Singapore. The platforms have surpassed established players like PhillipCapital’s Poems app and are currently the third- and second-most downloaded apps in the finance category, according to data from App Annie.
That said, Tiger and Moomoo are not competing solely on the basis of low commission fees.
They have bombarded the market with advertisements – from traditional out-of-home advertising to paid promotions with personal finance websites.
To acquire customers, the apps are also offering various incentives like commission-free trading for a limited period of time and a gift of one free share in US blue chip companies for new users – Moomoo offers one share in Apple while Tiger gifts Starbucks shares.
The two also tout their focus on technology. Moomoo parent firm Futu is “a tech company that provides financial services,” says Futu Singapore director Gavin Chia, adding that seven out of 10 of its employees are engaged in R&D. Futu’s strong suits, he notes, are its “platform interface, speed of transactions, and stability of the system,” which form the bedrock of user experience.
Tiger, meanwhile, highlights its “streamlined technology-enabled Know-Your-Client process, which combines automation and artificial intelligence to improve processing time and make account approval faster”.
Show me the money
Given their low fees, how do Tiger and Moomoo make money?
Robinhood famously charges zero trading commissions. Instead, it makes money from selling order flows to market makers who execute the trades.
A market maker is a member firm of an exchange that buys and sells securities for its own account. It profits from the difference (or spread) between the bid and ask prices of a security. This spread is generally small, so volume of transactions is key to making the business profitable.
Market makers are therefore willing to pay Robinhood for the right to execute the trades its users have made.
Unlike Robinhood, Tiger and Moomoo do not yet offer commission-free trading. In fact, 56% and 60% of their respective 2020 income still comes from trading commissions.
The apps do not require traders to use their own money when making trades. Rather, users have the option to trade using funds borrowed from the brokers (also known as margin trading), and the interest they pay shows up as interest-related income on the platform’s income statements. This is the second-biggest segment for both players.
Other income is generated from services such as IPO subscription, currency exchange, and funds distribution.
As with all fast-growing disruptors, Tiger and Moomoo face unique challenges. Tiger parent firm Up Fintech’s own regulatory filings state that it “may be unable to effectively manage [its] rapid growth.”
As apps serving retail customers – many of whom will not hesitate to air their grievances publicly – examples of customer unhappiness are readily available.
While research has shown that online reviews tend to overrepresent the most extreme views, they do allow for comparisons between the various brokers.
Image credit: Timmy Loen
Tiger and Moomoo are in the middle of the pack when it comes to ratings.
The most common complaint is of poor customer service, which seems to be an issue that players faced across the board.
To be fair, there are probably plenty of users who are happy with their experience and do not post about this online. This includes Kua, who regularly trades on Tiger. He found customer service to be “quite fast,” stating that while he faced some issues trying to withdraw funds from his account, these were resolved within two days of sending an email.
Both Tiger and Moomoo responded to this negative feedback by highlighting the steps they are taking to improve customer service.
Tiger, for its part, is streamlining its responses by allowing customers to reach them through various channels (landline, email, social media).
You have to be very careful when you are using margin accounts
Meanwhile, Futu says that it has live agents working around the clock to answer queries and has conducted focus groups with users from different age brackets to solicit feedback. Futu’s Chia says that he personally runs through client service emails to better understand the situation on the ground.
As previously mentioned, UP Fintech and Futu make around 30% of their revenue from extending margin trading facilities to users. Margin trading offers users a higher potential profit but also amplifies losses and is considered more risky than traditional investing.
Kua says this as the “only issue” he had with using Tiger. “You have to be very careful when you are using margin accounts. Most people don’t explore the app enough and they don’t realize they are doing a finance loan.”
Eng Thiam Choon, CEO of Tiger Singapore / Photo credit: Tiger Brokers
Eng Thiam Choon, CEO of Tiger Singapore, says that using margin to trade “may be good or bad, depending on how you use it.” Tiger, he says, educates users, clearly displays margin levels, and excludes those under 21, retirees, and lower-income groups from margin facilities.
Similarly, Chia says that Moomoo does not provide margin trading to users below 21, has a risk-management team which monitors margin levels in real-time, and provides an “account risk level indicator” which offers a visual indication of the level of risk a client is taking on.
While online brokers have benefited from recent macro trends, they may face greater challenges if the winds change.
For example, many companies are encouraging employees to return to the office, which could result in reduced trading volumes.
This is the case for Kua, who says that he now works from home only on alternate weeks, which has “definitely” changed his trading patterns. “When you actually go back to the office on a usual day, you can’t monitor the market all the way,” he notes.
At the peak of his trading, Kua says he was making about “70 to 80 trades a month.” But now, he trades “at least 80% less”and attributes this to a combination of going back to the office and recent market volatility.
Indeed, a huge risk for online brokers may be a big market crash that scares retail traders away. This is not unprecedented: The bursting of the dot-com bubble in 2000 “dealt a heavy blow to the culture of individual share ownership,” according to a report by wealth managers Cazenove Capital.
However, Tiger and Moomoo remain sanguine about their prospects, even in such a doomsday scenario.
If that were to happen, “there will be an impact in terms of confidence and interest,” says Eng. However, he thinks that investors would still want to deploy their money somewhere, and Tiger provides access to more conservative investments that might fit the bill. For example, it offers a Fund Mall option that enables users to buy money funds and bond funds.
What to expect
How can we expect the industry to evolve?
Lower fees seem inevitable. This could actually lead to higher revenues if it results in a proportionally higher level of trading. Significantly, both UP Fintech and Futu are profitable, with 2020 net income margins of 15% and 40%, respectively.
Could fees fall to zero as they have in the US?
Eng “will not commit” to this, but says he “wouldn’t be surprised if that is where the market goes,” reiterating that Tiger “can react very quickly.”
This, however, may require some changes to its business model, including selling of order flows to market makers.
Apart from competing on fees, online brokers may sustain user engagement by catering to the preferences of younger millennial and Gen Z users.
Today, Gen Z traders already make up 30% of Tiger’s Singapore customer base, while Futu says that the median age of its clients is 34.
Gen Z “likes to be in control” and “loves to know what is going on around them,” Chia observes.
To that end, Futu provides these users with “real-time level two data. This means that clients can see live pricing and market depth, and that’s where they can gauge market supply and demand and the number of sellers and buyers,” says Chia.
Just as ecommerce is becoming more social, investing and trading could be going down the same path. Online brokers who are able to integrate social media into their applications may stand to benefit.
One of the reasons Kua was attracted to Tiger, for example, was because of the community. “It’s always nice to have this community section in the app so that you can cross-reference whatever you are thinking or doing,” he says.
Online brokers may also start encroaching on the turf of the robo-advisors, a group that we covered last year. These platforms have attracted investor attention recently, with Singapore-based Endowus securing US$17 million in series A funding and its peer StashAway raising US$25 million in a series D round.
Photo credit: Endowus
While robo-advisors offer different value to users than trading apps, we may begin to see the two segments converge on retail wealth management in general.
For example, Tiger’s recently launched FundMall offers investment in stock funds, bond funds, and money market funds.
Huge opportunity, fierce competition
The wealth management opportunity in the Asia-Pacific region is massive.
But at this stage, trading apps may focus on markets with smaller but wealthier populations such as Singapore, Hong Kong, and Australia.
This mirrors what is happening in the traditional wealth management space. Even as financial giant Citigroup announced plans to retreat from 13 consumer markets (including 9 in the Asia Pacific region), it intends to double down on wealth management in Singapore and Hong Kong, adding 2,300 employees in these hubs.
Singapore will also serve as a bridge to the rest of Southeast Asia, with potential new markets to tap in Malaysia and Thailand, whose populations are more affluent than other countries in the region.
With so many players in the space, the industry can expect competition for assets to remain fierce.
In this environment, having friends and partners helps. In December 2020, Futu announced that it had secured an investment of US$260 million from a “leading global investment firm.”
Don’t be surprised to see more tie-ups between incumbents and challengers going forward.