ESMA believes that piecemeal stock trading should be subject to the same marketing, promotion and appropriateness rules for retail customers as CFDs and other OTC derivative contracts。To date, the brokerage industry has not treated and promoted fractional stock trading in this way。

What is fractional stock trading?？

Fragmented stock trading is increasingly popular with brokers and clients because it allows traders and investors to hold stocks regardless of the face value of individual stocks。

For example, the U.S.-listed Booking company is trading at about $2,540 per share, which many retail traders are unable to buy due to price and risk concentration considerations.。

But with fractional stock trading, you can more easily fit into many retail portfolios by buying only a tenth (or other fractional portion) of a high-priced stock。

ESMA classifies fractional shares as derivatives

However, ESMA argues that fragmented shareholders invest in derivatives of the stock price rather than the underlying stock itself, so ESMA argues that "fragmented stocks raise specific investor protection issues."。

The ESMA statement makes it very clear that "fractional stock derivatives are not corporate stock."。Therefore, any customer information about these tools, including marketing campaigns, must not imply to the customer that they have acquired part of the company's shares. "。

Also, "since fractional share derivatives are not corporate shares, companies should not use the term fractional share when referring to these instruments."。ESMA considers the use of this term to be misleading and therefore contrary to the requirements of MiFID II "。

For smaller investors, piecemeal stocks are an easy way to get family FAANG shares, but like derivatives, traders don't own the underlying stocks。

Financial marketing and promotion of fragmented stocks

Brokers now need to modify the way they promote and market piecemeal deals to retail clients and assess whether the product is suitable for their target audience, which ESMA says should be identified in more detail and with a narrower focus.。

This is not the first time ESMA has intervened in mature markets. The regulator is the main driver of the ban on binary options trading in Europe and the UK, and has encouraged the reduction of the use of leverage in OTC margin trading, mandatory negative balance protection, and retail customers. Played an important role in conducting stricter appropriateness tests。

FCA's view on fragmented stocks

The UK FCA has often followed ESMA in regulatory matters, but since Brexit, at least in theory, the FCA can take a different view。However, the FCA has not yet developed guidance specifically for fractional share transactions.。

Fragmented stock trading was mentioned in a research paper on the gamification of stock trading apps, a trend the FCA sees as fuelling a gambling mentality among traders, an issue to be addressed by the FCA's forthcoming consumer liability rules.。

I'm a big supporter of innovation that benefits retail traders and investors, and fractional stock trading seems to do just that。However, as with all financial promotions, such products need to be properly marketed through appropriate risk disclosures and provide all key information so that consumers can make informed choices.。