Before Robinhood became the go-to place for commission-free investing — and the focus of Congressional hearings — Barry Schneider was trying to open up equity investing to small investors.
Schneider previously headed Loyal3, which was best known for placing IPO shares in the hands of small investors.
Now he's the CEO of Parkside Securities, which aims to solve a problem Loyal3 faced: building the infrastructure to offer trades cheaply and quickly for retail stock buyers.
"I learned quickly that the infrastructure wasn't up to speed," he said. "Loyal3 and other fintech innovators had cool front ends, but they were dependent on backend operators that were legacy. That compelled me in January 2019 to attack the infrastructure."
Parkside is an extension of what Schneider was trying to do at Loyal3: provide low-cost access to equities for retail investors. When Loyal3 got started, it wasn't possible to scale without compromising performance and provide real-time, low-cost, small transactions, Schneider said. With Parkside, he's offering the infrastructure for trading fractional shares, quickly and cheaply, focusing first on international customers.
It's often difficult for international investors to buy U.S. stocks, unless they are wealthy and have an account with a firm that can buy U.S. shares, said Schneider. Parkside aims to make it easier for international investors to access U.S. stocks.
"We're looking to get more millennial and Gen Z investors," Schneider said. "We want to do that by making sure the experience is easier and also allows smaller increments of investments."
Parkside, which is a clearing broker-dealer in the U.S., will work with counterparties that are licensed in each country. Parkside will be launching next quarter in a "very large country with a very large counterparty," Schneider said.
There are other brokerage-as-a-service companies, such as DriveWealth and Alpaca, that provide trading infrastructure for apps and financial advisers.
Parkside says it's different because it's focusing on fractional share purchases. While other companies have done fractional shares, Parkside says it allows investors to buy virtually any U.S. equity — 6,500 stocks, ETFs and ADRs — with fractional shares, and it has developed technology to ensure that fractional shares are priced the same as traditional shares. Fractional share prices typically receive worse pricing than whole-share purchases, Schneider said.
"It's all algorithmic-driven. As a rule our customers always get [National Best Bid and Offer] or better pricing," he said. "What we'll deliver is fractional shares delivered in real-time with always the best execution. In our system, with the rules of the algorithm, if somebody buys $1 of Amazon or 10,000 shares of Amazon, the price should be the same."
With other brokerages, fractional share orders are aggregated and traded in batches once or twice a day, Schneider said. But that doesn't provide the best prices. Others offer only certain stocks in fractional shares.
Parkside's focus on fractional shares is not just to grab Robinhood day traders, but to enable more international retail investors, because many retail investors overseas make stock purchases of as little as $10 or $1, Schneider said. In China, for example, the market is 80% retail investors and 20% institutional, while the U.S. is roughly the opposite. The average share price in China is $2 to $5 per share compared to about $100 in the U.S., Schneider said. That practice has made fractional shares less needed there.
Parkside was inspired by China's Yu'e Bao, once the world's largest money-market fund, which grew by focusing on small accounts for China's masses. "That inspired me to see the breadth and power of small accounts aligned," Schneider said. "We set about saying: 'Could a broker-dealer in the U.S. exist with that type of unit economics?'"
Parkside plans to work with traditional broker-dealers seeking to offer easier access to U.S. equities to clients, as well as digital banks and other fintechs that are already tech-enabled but need a U.S. partner.
Parkside's team includes President Marco Pellini, one of the first employees at E-Trade and later COO and president of E-Trade Capital Markets, as well as CFO Marc Metcalf, who was president of GE Capital Insurance Services.
Parkside charges its enterprise clients, who then decide how to charge clients or offer free trading, Schneider said.
"Every market has a different structure," he said. "The way people trade in Southeast Asia may be different than in other parts of Asia or Europe. It's not up to us to set that."
Payment for order flow is a practice that came under scrutiny after Robinhood temporarily stopped purchases of GameStop and drew Congressional attention. Parkside has agreements to optimize for price improvement. It can still use payment for order flow but it won't be a priority, Schneider said. "Practical implication is we'll never maximize [payment for order flow]," he said. "It won't be a major source of revenue because it's not a priority."
Parkside will use market makers for trading but will take inventory risk — buying shares — when necessary for fractional shares, Schneider said.
The San Francisco startup has raised $24 million in series A funding led by Shanghai-based Enlight Growth Partners, with existing investors Mubadala Capital, FinTech Collective and Colle Capital, and new investors Peak6 Investments and Entrée Capital.