The USA-based crypto exchange, Kraken, has been around for a dozen years. Like others they have had their share of regulatory issues in the last couple of years. They have paid more than $30 million in fines. The biggest hit for Kraken and other crypto exchanges is not regulation but a significant loss of interest in crypto investing and trading after crypto winter. Today we see that Kraken hedges crypto risk by adding stock and ETF trading to its offerings.
Trade US Stocks on Kraken Exchange
A crypto exchange makes money when folks trade cryptocurrencies on their exchange. They make less money when folks lose interest in crypto. One of the ways such a business can make up the difference is by offering other things to trade. In the case of the Kraken crypto exchange, they are going to let you trade US stocks free of commissions. Bloomberg reports that Kraken will offer trading in US stocks starting in 2024. Kraken’s new division, Kraken Securities, has gotten the necessary regulatory permits in the UK and has a request under consideration in the US for a broker-dealer license with the Financial Industry Regulatory Authority.
Zero-commission Stock Trading Competitive Market
It appears that the niche Kraken will aim for is zero-commission stock trading. It will compete with Robinhood and Public.com. This is a competitive market. Folks like Robinhood let you trade stocks and stock options using a smartphone. A common complaint about this process is that it makes it too easy to place trades without thinking. It can work like a trip to an online casino. There are horror stories about folks getting addicted to trading on Robinhood, putting second mortgages on their homes and then losing everything.
Why Is Zero-commission Trading Attractive?
When a person trades stocks, or crypto, there is the potential for profit and the risk of loss. There is also the day to day cost of trading in fees and commissions. A person can potentially eat up all of their trading profits in these “overhead” expenses. Thus, it becomes attractive to look for low, or ideally, no fees when you trade. There is a problem here. The exchange, such as Robinhood, Public.com, or Kraken needs to make money somewhere. Otherwise they go out of business. When they cannot make money on the fees that you see and pay, they make it somewhere else. How they do this is by how they route your trade orders.
How Zero Fee Brokers Make Money
Commission-free brokers make money by selling their orders to a market maker instead of going directly to a stock exchange. The market maker makes their profit from the spread between buy and sell offers on public stock exchanges. While the client is paying price X for a stock, the market maker is buying it for price Y (which is significantly cheaper). They pay Robinhood, Public.com, or Kraken for the order and pocket the rest as a profit. The trader thinks they got a great deal because they did not have to pay a commission on their trade. However, they paid too much for the stock in question!
Can Kraken Make Money Offering Stock Trading?
As we noted, commission-free trading is a competitive market. What Kraken will bring to the table is their own stable of customers who are accustomed to trading on Kraken. Ideally, for Kraken, these folks will be pleased to have more trading options than the current list of crypto tokens currently being offered by Kraken. The question for customers is if they can make money trading US stocks on Kraken. The statistics for day trading stocks are that two-thirds of day traders lose money and one third profit from their trades. Long term investing in an ETF that tracks the S&P 500 is likely to be profitable over the long term but investors often need to stay invested for years and not try to time the market. That strategy will not be especially profitable for folks like Kraken, Robinhood, or Public.com who want you to trade actively day after day.
SlideShare Version – Kraken Hedges Crypto Risk
