U.S. Brokerages Brace for Internationalization of Their Customer Base

I often say that “disruption” in any industry is an opaque phenomenon that, by the time participants and analysts address it as a disruption, it is already done and has left everyone managing the tail end of the trend. The most prominent disruption of the moment is the growing number of retail investors globally opening and trading in the U.S. markets, and the internationalization of its customer base.

This year, more than 3.5 million funded brokerage accounts have been opened at U.S.-regulated online brokerage firms by residents and citizens of other countries including Asia Pacific, Middle East, Latin America, and Europe. This totals up to more than 20% of new funded accounts opened in the U.S. These are folks who trade differently, rationalize the markets differently and are impacted by policies and economic conditions differently. International brokerage accounts are the single largest category of new retail traders, after options trading, that the industry is bracing to deal with. Understanding the drivers behind the seismic change, and how the brokerage industry is trying to service them will be important for the future of the industry.

One of the main reasons for this change is that the U.S. stock market provides the largest opportunity for citizens of many developing countries to diversify their domestic portfolio with some of the leading global technology, e-commerce, social and manufacturing companies. Following the pandemic in India, the U.S. stock market recovered a majority of its losses while the Indian market did not. Diversification of investments with U.S. stocks would have proved to be a gainful strategy for Indian investors. The story that played out between the S&P 500 and the Indian Sensex has occurred in many developing countries when they compare the local markets with the U.S. Markets. The pandemic has been a fueling factor for many international accounts being opened at U.S. brokerage firms.

Another driving factor behind this change has to do with the appeal of U.S. listed securities. For example, blue-chip U.S. listed securities have been a fan favorite for retail investors globally because of the admiration of American brands. U.S. listed stocks have an aspirational aspect particularly to the younger generation who use American brands in their daily lives. Individual U.S. stocks and exchange-traded funds (ETF) offer a new set of investment possibilities that the local markets fail to provide, not to mention that the U.S. stock market and its size drives confidence, sparking interest among global retail investors.

The dollar exchange rate is yet another driving cause— many local currencies have been struggling against the U.S. dollar over the course of the pandemic. The local currency-dollar exchange rate substantially increases the overall returns that a retail investor makes when they invest in U.S. listed stocks. When a U.S. stock is purchased, that asset is retained in U.S. dollars. Any depreciation of local currency against the dollar helps increment returns compared to the local currency. In many cases, even if the U.S. stocks lose some value or stay flat, the retail investors still gain due to the rate of depreciation in the local currency.

The growing number of U.S. brokerage firms offering embedded finance-based technology products and API’s make it convenient and hassle-free for startups and established firms to connect to U.S. brokerage firms and offer self-directed and digital advisory products. These firms offer products that illustrate the complexities of the U.S. markets and provide a one-stop option to launch investing products locally. We at Tradier have seen a 3x increase in international demand from firms and entrepreneurs who seek access to the U.S. market through brokerage APIs.

U.S. brokerage firms have been doing their best to quickly adjust to the realities of a growing category of retail traders. In fact, many have started offering simplified platforms for a seamless onboarding of international accounts. Brokerage firms have also implemented educational efforts to engage their international account base to offer a deeper understanding of the U.S. markets and advanced products such as options. Some firms have also started to offer multi-language support and adjust their support hours to meet local time zones. Brokerage firms that, for decades, have had to primarily manage KYC, AML and risk processes with a domestic account in mind, are now expanding services to a larger global domain.

What is more fascinating and intriguing than the retail global interest and response from brokerage firms, is the impact that this changing landscape will have on the direction and volatility of U.S. markets in the years to come. While the industry is grappling with the growing dominance of retail trading and meme stock rallies, it is captivating to understand how retail volumes will play out when the retail base becomes dramatically global. We may not be far away from stock volatility in specific securities that will have nothing to do with the U.S based retail trader. Traders, analysts, regulators and embedded finance platforms will carry a tremendous responsibility to support, empower and monetize this disruptive trend.