The Impact Of Free Commissions On Online Brokers – Tim Bellamy (01/31/2020)

There have been many controversies on the impact that will befall online traders that decide not to charge commissions on your interests when they trade on your behalf.

People expected events such as low-interest rates and low volatility to bring income down.

The online stock brokerage has received much attention and boosts with the introduction of perks such as removal of account minimum. 

One wouldn’t be wrong if they alluded that the best time to invest in online trading is now, and for a good reason. Coupled with the vast benefits you stand a chance to gain by trading through a broker; zero commissions should be your number one motivating factor to start trading.

What Zero Commission Implies

Whenever you sell or buy stocks, ETFs, or any other products on a trading platform, there are fees involved and most of the time; these online brokers charge a commission. 

However, the majority of online brokers such as Ameritrade, Schwab, and Etrade have recently introduced commission-free trading on their platforms. This is a huge step considering that the servicing fee will now be a burden on the brokers’ side. But what does this mean for them?

Impact of Commission-free Trading to Brokers

  1. Increase In Number of  Investors Transforms The Industry

This one is obvious.

The primary reason why stockbrokers went for zero commission trading was to attract more traders to transact through them. An increase in investors will automatically translate to large pools of ETFs and other securities. This increase has an impact on the trading platform, as well as the investors themselves.

  • High Trading Risk Involved

Alongside other decisions such as abolishing of account minimums, the broker will have to incur fees when transacting on behalf of the investor. However, that has the advantage of increasing their income.

In a recent announcement, Paul J. Brody, CFO at Interactive Brokers, said that their revenue income was driven by high net income from growth in client cash balances.

  • Overcrowding Causes Rise In Trading Risk

It is the goal of every investor to capitalize on income and reduce the risks involved. Furthermore, when a business is using most of the capital run a business, it translates to a shift in profit margins. In this case, online brokers have to incur the trading fees in the place of the investor, and thus, they end up using their funds to trade. This has the effect of;

  • An influx of Lite Accounts

Lite accounts are these accounts that can trade without being charged a commission on their interests. With most of the online brokers endorsing the zero commission agenda, they expect to receive substantial sign-ups by investors. Thomas Peterffy, Chairman, BODs Interactive brokers said that account owners switched from Pro to Lite accounts. They feel that with the increase, there might be a reduction in the profitability of the trading.

  • Reduction Of Projected Brokers Returns

Zero-commission means the total earnings from trading commissions will reduce, as explained by Stuebe Nancy, Director, Investor Relations at Interactive Brokers. On the other side, online traders don’t see it as a problem they are putting more energy and investment on different strategies that will soar their business higher, such as routing trader orders to high-frequency trade and get paid for that.

How This Influences The Behavior Of Investors

All in all, it is essential to note that this action does impact not only the online broker but also the investor. In that case, here are some of the implications it has.

  1. Investors Can switch To Lite Accounts

This means that an existing investor can choose to operate with their existing account as Lite – zero commission. We have already seen that the Lite accounts are more profitable to an investor, the more reason they opt to switch. During the call, in a Q/A session, Thomas Peterffy expressed concerns that with the rise in Lite accounts, they will realize some difference. Implying that the impact of zero commission trading will be gradual on both sides.

  • Improve Trading Psychology

Frequently, traders fear to trade because they pained paying the commissions; now, you can breathe a sigh of relief. A trader can invest more money in trading since the returns under their discretions.



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