The answer is fractional trading, which is already well established in the US. Mohr says a number of continental banks have solutions where they warehouse fractions in-house. In the UK, there has been a fully-fledged solution to trade fractions of ETFs since May 2017 when Winterflood Business Services (WBS), the agency services and custody arm of market-maker Winterflood Securities, started to offer trading in fractional ETFs to their client base, which includes robo-investors, advisor platforms, and other financial institutions.
As a market-maker, Winterflood Securities executes around 65% of all retail ETF trading in the UK. Through its bilateral relationships with retail brokers it provides speed, highly competitive pricing and often greater liquidity than is available in the London Stock Exchange (LSE) order book – though all transactions are on-exchange and so governed by LSE rules.
“There’s a real demand for fractional trading of ETFs in the UK,” says Alex Skrine, Director, Electronic Trading at Winterflood Securities. “Not only from traditional advisor platforms, who want ETFs to be as tradable as mutual funds so that portfolio switching becomes more straight forward, but also from new fintech robo-advisers looking to plug the advice gap by facilitating regular investing / micro-investing to a new generation of investors.”
The WBS solution is designed to overcome the main challenge to fractional trading in the UK – that you cannot trade a fraction in the market, settle a fraction in the settlement system, CREST, or have a fractional nominee holding. When WBS gets demand for, say, 3.2 shares in a given ETF it buys (and settles in CREST) four shares into the WBS Nominee, but internally allocates the 0.8 of a share in a residual account. It maintains a ‘value cap’ on the maximum holdings in that account. The entire process is fully automated, including any aggregation and reallocation requirements, leveraging technology to create a seamless experience for the end customer.
Skrine continues: “We do provide the same quality of execution for clients regardless of where the assets are held. Domestic retail assets are typically all held in Euroclear, whereas institutional assets are a mix of both domestic and, where applicable, the new International Central Securities Depository (ICSD) model with Euroclear. Either way we can provide our customers with the same high levels of service, and have worked closely with Euroclear to ensure seamless and cost-effective realignment where necessary.”