The race in lowering commissions is over, and the customer is the winner. Last week, the giant brokerage firm Interactive Brokers lowered their stock and option trading commissions to zero. They were quickly followed by other giants like Charles Schwab, TD Ameritrade, and E*trade. Several banks already offered zero commissions for a period of a year for new investment accounts. Unlike tiny zero-commission firms that give you very-bad price fills to survive (Robinhood, for example), these are the real big boys that now let all their customers trade stocks and options for free, from now on.
The first cautious question is, “How will the brokers make any money? Is there some dark sinister side to this?” The answer for these large brokers is ‘no’ because they all knew this day was coming, have been planning for it, and earn far more money from selling their large order flow. Most high-volume stocks and ETFs have a penny-wide spread between the bid and ask prices – and that will not change. Now that commission comparison between brokers is gone, the question now is: who has the best trading platform for you. Which one is easiest, closest to the market, and offers all of the best technology features that you are looking to employ.
I expect zero-commission trading to change the market in this one way. Since the cost to trade is now zero, some traders will experiment more with trading strategies live in the market instead of paper trading them; use more complex option positions (like 4-6 legs) that were too expensive to get in and out; and tiny profit scalping tactics may become more common. And the average trader may increase their frequency of trading and hedging. For example, if there is going to be a big news announcement (Fed meeting or employment report), it costs you nothing to buy an inverse ETF to hedge your portfolio for the day. If the announcement is at 2pm, buy some ticker symbol SH or DOG to short the general market in case of a large down move, and then sell it later before the close or first thing in the morning (to avoid day-trading violation for accounts under $25,000).
So congratulations, it now costs you nothing to trade the stock market!