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Who Wins a Brokerage Price War?
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Who Wins a Brokerage Price War?
While commission-free trades have become the norm for customers of discount online brokers, in October 2019, it was big news. Charles Schwab, TD Ameritrade, E*TRADE, and Ally Invest all cut equity commissions to zero the first week of October 2019, and Fidelity joined the crowd on October 10. Bank of America's Merrill Edge extended free trading to all members of its loyalty program on October 21.To get more news about low commissions brokers, you can visit wikifx.com official website.
The industry had been taking baby steps in that direction for several years. Major online brokers started offering a select list, averaging 50-100, of exchange-traded funds (ETFs) for no commission back in 2010. In early 2017, Schwab set off a round of commission cuts that re-set the industry-wide base commission rate at $4.95-$6.95, slashing fees from $7.95-$9.95.
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The major brokers enhanced their commission-free ETF offerings in the wake of those cuts.
By making all stock and ETF transactions commission-free, brokers eliminated the benefit of offering a list of ETFs to their customers that do not incur transaction fees—but they have also eliminated the fees that the fund providers had been paying them. However, as we'll see, brokers have many other ways of generating revenue, including earning revenue from the influx of new investors drawn to low-cost trades on easy-to-use online platforms.
None of the brokers that cut their equity and base options commissions to zero has completely given up all their commission revenue. Brokers still charge per-contract fees for options trades, and also levy charges on futures, forex, bonds, and some mutual fund transactions.Jennifer Butler, director of asset management and broker research at Corporate Insight, says, "A lot of this movement is geared towards inactive traders, but I don't think they'll make up the revenue by opening new accounts." She believes that brokers are moving further into providing advice in order to function in an environment free of commissions on stocks and exchange-traded funds (ETFs). When analyzing the robo-advisor offerings available for our 2020 Best Robo-Advisors Awards, online brokers that also offer managed accounts pushed their customers, often not very subtly, into those products.
What About Cash?
A large percentage of a brokerage's revenue comes from idle cash. If new clients are drawn in by the idea of paying no commission on equity trades, they'll bring some cash along. Brokers and clearing firms earn interest on idle cash. Some share that interest with the clients, but quite a few keep the majority of interest revenue to themselves.A look at a broker's financial statements shows that firms are not dependent only on revenue from trading. According to Schwab's filings with the SEC, approximately 40% of the company's revenue came from interest revenue for the three months ending March 2021.
Cash Sweeps
Most brokers offer their customers some kind of cash sweep program, by transferring money at the end of the day into an interest-bearing account. For some brokers, this action is automatic. However, the interest rate offered on these accounts can be quite low, something investors should be aware of if they are hoping to generate income from their cash that is not currently invested in equities.According to Schwab, holding uninvested cash in a brokerage account is best for short-term situations where the investor is planning to spend the money within a few days or will soon place a trade. Long-term cash should be invested in a higher-yielding option, such as a certificate of deposit (CD) or yield-bearing savings account.
How Do Brokers Make Money Without Equity and Options Base Commissions?
Revenue streams for online brokers come from a variety of sources, including interest on clients' cash balances as discussed above, but also from stock loan programs, commissions on other products, management fees on advised accounts, and of course, payment for order flow.Several brokers share the revenue they generate with their clients who hold the stock that is lent out in their stock loan programs. For example, Interactive Broker has a stock-yield enhancement program that enables its customers to earn extra income by allowing the company to lend out fully paid shares of stock held in their account. The firm lends these shares to other traders who want to borrow them in order to sell them short and are willing to pay interest to do so. This interest is then shared between the broker and the customer lending the stock.
Commissions are not going away entirely. Brokers are still charging a $0.50-$0.65, on average, per options contract. Eliminating the per-leg commissions of $4.95-$6.95 saves a lot of money for spread traders, who typically trade multi-leg options strategies. Some brokers continue to charge their base commission to trade penny stocks (OTCBB). Certain mutual fund transactions incur a fee, and there are still commissions charged for bond transactions and trades made with the help of a live broker.