The narrative that retail investors are less experienced than their Wall Street counterparts (aka institutional investors) has shifted significantly over the last five years. Perhaps the democratization of trading tools and education has empowered ‘Main Street’ traders to become more sophisticated and self-directed. 

During the COVID-19 pandemic, retail participation surged as people stayed home and sought new ways to manage and grow their finances. In response to the retail investor boom, brokers were quick to launch fractional trading services, seizing the opportunity to attract and retain this growing segment. By opening up the market to allow investors to buy a portion of a large share, Fractional Trading makes high-priced blue-chip stocks more accessible to a broader audience. 

Robinhood was one of the early adopters, launching its fractional share trading feature in December 2019 and adding over 3 million new accounts by the end of 2020.

Schwab, and Fidelity closely followed suit, capitalizing on the retail surge to launch their own fractional trading programs.

Making the Business Case for Fractional Trading

Offering fractional trading on their suite of offerings can provide several benefits to brokerages:

1. Increased Market Participation: By lowering the entry barrier, fractional trading attracts a wider range of investors, including those with limited funds. This democratization leads to higher trading volumes and greater market liquidity. During COVID-19, 40% of trades on SoFi Invest, a startup stockbroking firm, came through fractional shares.
2. Enhanced Customer Engagement: By empowering young investors to own a piece of high-priced stocks, fractional trading helps increase user engagement and loyalty, as clients appreciate the flexibility and accessibility of fractional shares.
3. Diversifying Revenue Streams: With more investors participating in the market, brokerages can see a boost in trading activity and, consequently, an increase in revenue. Fractional trading can open up opportunities for offering additional services, such as financial education and portfolio management tools. Brokers can generate additional revenue streams through increased trading fees and premium service offerings. In 2022, firms that adopted fractional trading and allied offerings reported a 25% uptick in their annual revenue owing to the surge in small-volume transactions.

Technology Competencies for its Implementation

While fractional products have great potential, the capital markets industry has not been very successful in incorporating them at scale (particularly fractional options)–without complicating the interface and negatively impacting the customer experience. 

An overly complex platform can quickly turn users away and diminish the overall appeal of fractional trading. To be successful, brokers have to strike a balance between functionality and simplicity. 

Here are proven strategies that can equip a brokerage to add fractional trading to their portfolio offerings:

Advanced Order Management Systems with Fracker technology

OMS platforms are integral to managing and routing fractional orders efficiently. These systems must integrate smoothly with trading venues to facilitate seamless execution. Modern OMS systems, equipped with specialized sub-core systems to support fractional products (patented DriveWealth Fracker technology), typically include additional business logic and checks for efficient and accurate fractional trade processing.

Strong Integration & Data Management Capabilities

Existing trading systems need to be upgraded to integrate fractional trading capabilities without causing friction or incompatibilities. This involves coordinating various components, including OMS, execution management systems (EMS), and client-facing interfaces. The ability to integrate these systems smoothly is critical in providing retail customers with a cohesive trading experience. 

To support the increased transaction volume from fractional share trading, brokerages need scalable infrastructure. Cloud-based solutions can dynamically allocate resources to handle peak trading periods without compromising performance. Implementing robust data processing systems that can update and reconcile fractional share ownership in real-time is key to ensuring all transactions are accurately reflected in the investor’s portfolio.

Intuitive UI and UX

The user interface must demystify fractional trading for the average investor. A trading platform with a fractional trading module should have an easy-to-navigate UI and UX. Crucial components are displaying fractional shares in a clear and understandable manner, offering real-time price updates, and ensuring that investors can easily track their investments. Fidelity’s success with fractional trading can be largely attributed to its focus on user experience. Their trading platform simplifies the process by allowing investors to specify dollar amounts instead of share quantities, making investing more accessible.

Expert Take

Tom Sosnoff, the man behind the Thinkorswim options trading platform (recently acquired by TD Ameritrade for $750 million), succinctly captures the current market sentiment: 

Today’s investors are more informed and demand more control over their investments, making fractional trading an essential offering.

Tom Sosnoff in 2022 on Fractional Trading

Jumping onto the fractional trading bandwagon is only a matter of time for Wall Street firms if they want to remain relevant. Think of it as the “Netflix effect”—if you’re not keeping up with what consumers want, they’ll find someone who does. Those who were slow to adapt struggled to keep up. 

But let’s not forget the challenges that are lurking around in implementing it at scale. There’s no real cookie-cutter approach to implementing fractional trading, given the complexity, unique requirements, and existing infrastructures of different brokerages. Early success with a pivot module is not going to be enough. Brokerages must keep at it, consistently investing in advanced trading systems with strong integration capabilities, enhancing data management systems, strengthening compliance, and focusing on security.  

Collaborating with a Tech Partner who possesses deep FinTech industry expertise allows brokerages to address unique challenges, work around their business goals, and deliver a seamless fractional trading experience. Our client, a prominent brokerage in the US, leveraged our deep Tech and Domain expertise to integrate Fracker technology into their Java-based trading OMS to add fractional products to their line of offerings. We built for them an advanced Tradeblotter module that provided comprehensive market and credit risk insights, enabling proactive risk management and preventing compliance issues.