Zero-Fee Trading May Not Be Around Forever

Zero-Fee Trading May Not Be Around Forever

over 3 years ago2 mins

With commission-free investing piling strain on brokerage platforms’ profits, investors may want to take advantage while they still can.… 👀

What does this mean?

Brokerage firm Charles Schwab reported second-quarter earnings late last week – and like many online rivals, it had a busy lockdown. Customer accounts rose above 14 million – admittedly helped by Schwab’s takeover of USAA’s brokerage business – and the average day saw it manage 1.6 million trades, 126% more than a year ago.

And yet the company missed analysts’ expectations for both revenue and profit, with the latter down 23% across the first half of 2020 compared to the same period in 2019. While Schwab blamed quantitative easing and rock-bottom interest rates (it makes money from investing clients’ unused cash), there’s another factor at play.

Most of the firm's revenue comes from interest on customer cash (Source: Charles Schwab)
Most of the firm's revenue comes from interest on customer cash (Source: Charles Schwab)

Schwab schocked the investment world last October when it responded to the rise of “zero-fee” rivals like Robinhood by eliminating commissions on many popular investments, forcing old-school rivals to follow suit. And while such fees represented a relatively small portion of Schwab’s own income, the days of the no-commission brokerage business model may nevertheless be numbered… ⏳

Why should I care?

With the global economy in need of support, interest rates look set to stay low for some time to come. And if they officially turned negative in, say, the USA, then zero-fee trading could well disappear as brokerages scrambled to make up for their shortfall in revenue.

Given that Schwab is making less profit on more customers, cash, and trading, then even its pending mega-merger with TD Ameritrade may do little to change that – and the same goes for the likes of Robinhood, with its 13 million customer accounts. Indeed, the latter category may be even more at risk, given its heightened reliance on “payment for order flow” subsidizing commission-free trading – a controversial practice currently under scrutiny from financial authorities.

Payment for order flow doesn’t always lead to the best results for investors (Source: Bloomberg)
Payment for order flow doesn’t always lead to the best results for investors (Source: Bloomberg)

The upshot is that now could be a good time to invest. Not by trading for the sake of it – but setting up your long-term investments (and perhaps a reminder to tweak them in a few months to make sure your strategy is on track) is unlikely to get any cheaper in future. Assuming, that is, you think that markets themselves are currently fairly priced… 🤨

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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