The online brokerage is moving faster than rivals to remove a rule limiting trading by low-balance accounts, aiming to boost trading volumes on its platform
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Key Takeaways:
- Webull will immediately implement the SEC’s repeal of a 25-year-old rule limiting trading by small retail investors when it takes effect on June 4
- The change, approved by the U.S. securities regulator last week, should help boost trading volumes on Webull’s app, charging up revenue from trading-related fees
Webull Corp. (NASDAQ:BULL), the discount brokerage with roots in China, is doing what it does best: moving ahead faster than everyone else to take advantage of a major new rule change that could charge up its revenue.
Rivals like Robinhood Markets (NASDAQ:HOOD) are probably still parsing the fine print of the Securities and Exchange Commission’s (SEC) decision last week to repeal its 25-year-old Pattern Day Trader (PDT) rule. That restriction required retail investors using borrowed money to maintain a minimum balance of $25,000 in their accounts to execute more than three day trades – the buying and selling of a stock in a single day – in any given week. The policy effectively limited activity by small retail traders that are some of the most enthusiastic stock buyers.
Webull, whose founding team harkens from Chinese e-commerce giant Alibaba, wasted no time announcing plans to capitalize on the big change.
Last Wednesday, the day after the SEC approved the reform, Webull said it was “unlocking active trading for all” and would apply the rule change as soon as it takes effect. The removal of the trading restriction will take effect June 4, and brokerages can take up to 18 months to fully implement it, something traditional institutions like Charles Schwab (SCHW.US) wanted to give them time to retool their old risk management systems.
Under the new framework, brokerages must adopt real-time risk models to ensure traders’ intraday positions don’t exceed their risk-adjusted capital. This requirement could give technology-oriented brokerages like Webull a critical advantage because they are already equipped with advanced risk assessment systems. But it can also turn companies like WeBull into effective Guinea pigs for finding any potential pitfalls of trading volumes that could surge under the rule change.
“Our priority is ensuring Webull customers can take advantage of these changes from day one while continuing to benefit from the advanced tools, real-time data, and full product access that define the Webull trading experience,” Anthony Denier, Webull’s president and U.S. CEO, said in the announcement.
The PDT rule is a relic of the 2001 dot-com bubble, aimed at preventing inexperienced investors from overleveraging their accounts. But for 25 years, the $25,000 minimum effectively barred millions of small retail investors from engaging in the type of high-speed trading that institutional players have enjoyed. The SEC has finally admitted that the $25,000 threshold is outdated as modern real-time risk-monitoring systems can protect the market more effectively than an arbitrary minimum account balance.
The rule change could turbocharge “gamified” trading that drives Webull’s revenue. Like Robinhood, Webull doesn’t charge commissions for trading U.S. stocks. Instead, it generates revenue by routing its trades to specific market makers that pay for that service. It also earns fees from customers for more advanced functions like margin trading and short selling. All these revenue streams require constant, high-velocity turnover to generate revenue and profits. So heavy volume trading is everything for Webull.
Under the PDT regime, an average trader with, for example, $5,000 in his account was a low-yield customer for the company. He could only conduct day trades three times a week, sharply limiting his order flows to market makers like Citadel Securities or Virtu Financial. Now, imagine that same customer can trade 50 times a day, equating to hundreds of orders to market makers each week.
While Webull’s revenue comes from millions of tiny fees, it also spends heavily on marketing to continuously lure new traders. As a result, it made an operating loss in 2024. It managed to turn a profit last year, but with a gross margin of just about 10%.
High-velocity trading
Because it uses a low-margin business model that depends on high trading volumes, Webull historically has jumped at every opportunity to grow revenue through increased trading. The brokerage was among the first to launch 24-hour trading for more than 500 U.S. equities and exchange-traded funds (ETFs) in 2023, and it has aggressively promoted options that expire within a trading day.
Obviously, Webull isn’t the only one eyeing the spoils of the regulatory easing. Among others, Robinhood, which has spent the last year trying to woo retirement accounts and grow its credit card business, is in strong position to benefit.
China-oriented rivals like Futu Holdings Ltd. (NASDAQ:FUTU) and UP Fintech (NASDAQ:TIGR), which provide U.S. stock trading for mostly Asian user bases, can now offer their customers high-leverage, high-frequency services for U.S. trading accounts that match the speed of their experience in other global markets.
Shares in all these brokerages rallied last week following the SEC rule change. But Webull led that charge, as its shares surged 11%. This indicates that investors are betting the company could be a prime beneficiary of the new regulatory environment.
Still, Webull shares have a lot of ground to recover. The company’s stock has lost a quarter of its value since it went public a year ago through a merger with a special purpose acquisition company (SPAC). Even after that, it still trades at a startling trailing price-to-earnings (P/E) ratio of 53, higher than 45 for Robinhood, and well above 16 for Futu and 8 for UP Fintech.
Webull may well thrive now that the trading restriction is gone. Its app, cluttered with technical indicators, deep market data and complex options chains, has always catered to people who take their stock trading very seriously. That means many users of its services are exactly the kind of traders who are ready to buy and sell stocks round the clock.
But as is the case with everything in life, a good thing doesn’t come without a risk. In fact, the removal of the $25,000 safety net introduces a serious financial risk for Webull. Without that large cash cushion, small-time traders using borrowed money can suddenly lose all their funds and much more if stock prices suddenly collapse.
In those moments, even the fastest monitoring software can’t sell their shares quickly enough to stop their accounts from dropping deeply into the red, leaving a company like Webull hobbled with bad debt from users who simply don’t have funds to pay it back. And with U.S. markets now trading in record territory and some predicting a correction is inevitable, Webull could quickly become a case study for how the rule change could hurt brokerages if markets suddenly turn south.
For now, at least, investors seem to be focusing on the positives. But only time will tell if Webull has a rigorous enough risk-management system to reap benefits from what appears to be a regulatory gift without getting gored in the process.
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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
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