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Why trading commissions aren't 0%

Why trading commissions aren't 0%
By get.Africa Weekly • Issue #80 • View online
Gud mככniŋ
That’s “good morning” in Krio
In Nigeria, there’s a saying that goes: 
“There’s no free lunch, not even in Freetown.”
It’s a combination of a popular English phrase and an assumption about the capital of Sierra Leone that was made only because, well, it sounds good to say. 
Whenever a for-profit internet company claims to provide their products for free, I’m immediately reminded of that saying. And having read the S-1 paper for Robinhood’s IPO recently, I was reminded of the saying once again.
When the user is the product
Robinhood is a US-based stock trading app. It popularized commission-free trading, making its money from other avenues instead. 
According to the report, 60% of Robinhood’s revenues came from payment for order flow (PFOF) from high-frequency traders (HFT).
In simple terms, say, you’re a Robinhood user and you place an order for Amazon stock at $100. (Psych! It can never be that low again). Anyway, the company goes to an intermediary to actually get the stock. And, courtesy of Robinhood, that intermediary knows what price you want to get it at. Armed with your data, they can sell the Amazon stock to you for $99.99 and make a profit of $.01.
In this example, the intermediary is an HFT, and your data is made available to them via PFOF, which they pay for access to. Robinhood currently has 18 million user accounts, if a number of them trade Amazon stock, the HFT can make $.01 x the number of users. 
Robinhood has caught a lot of flack for this practice, but PFOF isn’t a new concept in stock trading.
The reason why critics are hard on Robinhood is that, firstly, the company wasn’t initially transparent about it. And secondly, its business model relies mostly on newbie traders to make frequent trades, whether they have an idea of what they’re doing or not.
When the product is the product
Responding to demands from their users to lower their fees, Nigerian trading apps Bamboo and Chaka recently made some changes to their fee structure.
Bamboo introduced a 1% transaction charge for users with net deposits of $10,000 and above, and retained 1.5% for others, while Chaka introduced dynamic fees ranging from 1.5% for trades between 0% - $200 to 0.69% for $50,000 and above.
These are significant reductions, but some users are still not impressed. Constant comparisons to Robinhood plays a part in their high, or should I say low expectation. But even though on the front end, all trading apps democratize access to retail investors, on the back end, they operate vastly different business models.
For Nigerian trading apps yet to scale to millions of users, there is limited access to PFOF to subsidize trading fees. 
In a recent episode of the Wharton Fintech podcast, Chaka co-founder Tosin Osibodu explains how his company makes money:
“Our typical product is our widget SDK for business and then just the apps for customers [retail investors]. And depending on whether you’re a direct customer with us or you’re a partner to us, we have relevant products for each.”

What's the Big Deal?
+ XOF Ivory Coast-based fintech startup, Julaya raises $2 million pre-series A for its West African expansion.
+ ZAR South African payments startup Yoco raises $83M Series C backed by Dragoneer.
+ E£ Egyptian ride-sharing company Swvl plans to go public in a $1.5B SPAC merger. Making it Africa’s first “SPAC’d” startup.
+ $ Airtel Africa secures another $200m for its mobile money business, brings total investment to $500 million.
+ ₦ Piggyvest acquires, a wealth management app. Olumuyiwa Olowogboyega, author of Not a Deep Dive explains why.
Credit: Yu Hosoi (Unsplash)
Credit: Yu Hosoi (Unsplash)
Watch + Listen
Chiagoziem Onyekwena on the Global Chip Shortage (Full Interview)
Chiagoziem Onyekwena on the Global Chip Shortage (Full Interview)
+ Reads
+ Inside Safaricom: Safaricom shareholders approve Ethiopia entry, release KES 36.8 billion dividend payout. Also, high court rules Safaricom did not steal M-PESA 1 tap idea.
+ Naspers vs. the Chinese govt: The share prices of Naspers and Prosus have suffered major declines following news of a regulatory crackdown in China. Here’s why South Africans should care. Meanwhile, Prosus faces investor criticism over $144 million fee for Naspers share swap.
+ Twitter Ban Watch: Nigeria loses $243 million 51 days after Twitter ban.
+ Rejoinder: Derin Adebayo, author of Openly Distributed, pens a strongly-worded response to two stories: one in The Financial Times titled “African start-ups attract international investors — but need local ones too”, and the second in The Economist titled “Fintech is booming, despite a weak economy. Can that last?”
+ Repurposing licensing requirements: How Nigerian fintech startups are staying one step ahead of their regulator.
Overheard on Twitter
The Flip
Sometimes a big funding round has an impact on more than just the startup itself.

In this week's edition of The Flip Notes, we discuss the implications of @Yoco_ZA $83 million Series C on South Africa's startup ecosystem.

It gets the ecosystem flywheel spinning.

A thread 👇
I'm writing a book on remote work for African businesses
I'm writing a book on remote work for African businesses
+ To make whiteboard animation videos like this for educational or marketing purposes, please send us an email.
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