Zero commission

What Is Zero Commission?

Zero commission refers to a business model adopted by brokerage firms where they do not charge a direct fee to clients for executing trades of certain financial instruments, such as stocks and exchange-traded funds (ETFs). This approach falls under the broader category of investment fees, aiming to lower the apparent cost barrier for investors to participate in financial markets. While a direct commission is absent, brokerage firms employing a zero commission model generate revenue through other means, which may include payment for order flow (PFOF), interest on cash balances, and premium services.

History and Origin

The concept of zero commission trading has roots in the broader trend of democratizing access to financial markets and reducing [transaction costs]. Historically, brokerage commissions were a significant cost for investors, particularly for frequent traders. The "May Day" deregulation in 1975, which abolished fixed commission rates, paved the way for [discount brokers] to emerge, offering lower trading costs than traditional [full-service brokers].²⁸

However, the modern era of widespread zero commission trading truly began with the rise of technology-driven platforms. In 2013, Robinhood, a mobile-first brokerage app, pioneered commission-free trading, attracting a large user base, particularly among younger investors.²⁷,²⁶ This disruptive model exerted significant pressure on established brokerage firms. In October 2019, major players like Charles Schwab, TD Ameritrade, and Fidelity Investments rapidly followed suit, eliminating commissions on online U.S. stock, ETF, and options trades.²³, ²⁴, ²⁵ Charles Schwab, for instance, announced its move to zero commissions effective October 7, 2019, stating its vision to make investing accessible to all.²² This pivotal shift transformed the landscape of retail [trading] and quickly made zero commission the new industry norm.²¹

Key Takeaways

Zero commission trading means investors do not pay a direct fee for buying or selling certain securities.
Brokerage firms using a zero commission model generate revenue through alternative methods like payment for order flow, securities lending, and interest on uninvested cash.
The widespread adoption of zero commission by major brokerages in late 2019 significantly reduced explicit trading costs for retail investors.
While seemingly "free," investors should be aware of potential indirect costs and other ways brokers profit from their trades.
Zero commission has broadened market accessibility and encouraged greater participation from retail investors.

Interpreting Zero Commission

The move to zero commission significantly alters how investors perceive the cost of engaging with financial markets. For many, the absence of an explicit per-trade fee makes [trading] appear more accessible and less expensive. This encourages more frequent activity, especially among [retail investors]. However, understanding the true cost involves looking beyond the explicit commission. Brokerages still operate as businesses and derive [revenue streams] from various sources.

One primary source is [payment for order flow (PFOF)], where brokers receive compensation from market makers for directing client orders to them for execution.¹⁹, ²⁰ While brokers are obligated to seek the [best execution] for their clients, the practice of PFOF has drawn regulatory scrutiny due to potential conflicts of interest.¹⁶, ¹⁷, ¹⁸ Another revenue source comes from the difference between the interest earned on customer cash balances held by the brokerage and the interest paid to customers, often referred to as net interest margin. Firms may also earn revenue from lending out fully paid securities, charging fees for premium research or tools, or collecting fees on [mutual funds] or [options contracts].

Hypothetical Example

Consider an investor, Sarah, who opens a [brokerage account] with a firm offering zero commission trading. Sarah decides to invest $1,000 in shares of a company.

Scenario:

Sarah places an order to buy 10 shares of XYZ Company, currently trading at $100 per share.
With zero commission, the brokerage does not charge her an explicit fee (e.g., $4.95 or $6.95) for placing this buy order.
Sarah's account is debited $1,000 for the shares.

In a traditional brokerage model, Sarah might have paid an additional $5 or $10 commission on top of the $1,000, meaning her total cost for the shares would have been $1,005 or $1,010. With zero commission, the immediate, upfront cost of the trade is eliminated, making it appear more cost-effective for her initial investment. The broker, however, would still generate revenue through other mechanisms, such as receiving payment from the market maker who executed Sarah's trade, or from the spread on the transaction.

Practical Applications

Zero commission trading has had profound practical applications across the investment landscape:

Increased Retail Participation: The removal of per-trade fees has made investing more accessible and appealing to a broader base of [retail investors], including those with smaller capital amounts.¹⁴, ¹⁵ This has contributed to a surge in individual [trading] activity.¹³
Lower Entry Barriers: New investors can start building a [portfolio] without being deterred by transaction fees that could eat into small investment amounts. This has been particularly impactful for investing in [stocks] and [ETFs], which are often traded frequently.
Competitive Landscape: The shift to zero commission forced nearly all major online brokers to adapt, leading to intense competition not just on explicit fees but also on other services, technology, and execution quality. This competitive pressure generally benefits consumers.
Active Trading: For [active traders] who execute numerous trades, zero commission significantly reduces their cumulative [transaction costs], allowing them to potentially realize more of their trading gains.
Focus on Other Revenue Streams: Brokerage firms have diversified their [revenue streams] beyond commissions, focusing more on net interest income from cash balances, fees from margin lending, premium subscription services, and particularly [payment for order flow]. Regulatory bodies like FINRA have actively examined how these new revenue models impact firms' order routing and disclosure practices.¹⁰, ¹¹, ¹² A FINRA alert, for instance, emphasizes the importance for investors to understand how brokers are compensated when trading with "commission-free" models.

Limitations and Criticisms

While zero commission trading offers apparent benefits, it also presents several limitations and has faced criticism:

Payment for Order Flow (PFOF) Concerns: The primary method for brokers to recoup lost commission revenue is often [payment for order flow (PFOF)], where market makers pay brokers for directing customer orders to them.⁹ Critics argue that this creates a potential [conflict of interest], as brokers might be incentivized to route orders to market makers who pay more, rather than necessarily providing the absolute [best execution] price for the client. The Securities and Exchange Commission (SEC) has expressed concerns over PFOF, with its chair indicating that the agency is exploring ways to improve market efficiency and fairness, potentially including a reevaluation of the practice.⁶, ⁷, ⁸
Bid-Ask Spread Impact: Even without commissions, investors still encounter the [bid-ask spread], which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. While PFOF proponents argue it allows for price improvement within this spread, some suggest that the PFOF model could lead to wider effective spreads for retail orders in some scenarios, thereby representing an indirect cost to the investor.⁴, ⁵
Increased Trading Activity: The absence of explicit per-trade costs might encourage investors, particularly inexperienced ones, to [trade] more frequently than is optimal for their long-term investment goals, potentially leading to poorer performance due to overtrading.³
Lack of Transparency: The reliance on hidden revenue streams like PFOF can make the true cost of trading less transparent for the average investor. Investors may not fully understand how their broker profits from their activity if not through direct commissions.² [Regulatory scrutiny] has increased regarding the transparency of these arrangements.¹
Service Tiers: While basic trading is free, some brokerages may offer premium features, advanced research, or dedicated customer support as paid add-ons, effectively segmenting their services.

Zero Commission vs. Commission-Free

The terms "zero commission" and "[commission-free]" are often used interchangeably in the financial industry, and for most practical purposes, they refer to the same concept: the absence of a direct, explicit fee charged by a brokerage firm for executing a trade. Both terms highlight that an investor will not see a line item for a commission charge when they buy or sell a particular security, such as a [stock] or [ETF].

Historically, "commission-free" might have implied a more limited set of assets (e.g., a specific list of ETFs offered without commission by a particular broker), whereas "zero commission" in the modern context often refers to a broader, across-the-board elimination of commissions for widely traded securities. However, this distinction has largely blurred since late 2019, when major brokerage firms broadly adopted the "zero commission" model for online trades of U.S. listed stocks, options, and ETFs. The core idea remains consistent: investors do not pay a direct trading fee. Both models operate by deriving revenue from alternative sources like [payment for order flow] or interest on cash balances.

FAQs

Q: Is zero commission trading truly free?

A: While you won't pay a direct fee for buying or selling certain securities, zero commission trading is not entirely "free" for the brokerage firm. These firms generate [revenue streams] through other means, such as receiving [payment for order flow (PFOF)] from market makers, earning interest on uninvested cash in client accounts, or lending out securities.

Q: How do brokers make money with zero commission?

A: Brokers employing a zero commission model primarily profit from [payment for order flow (PFOF)], where they route customer orders to market makers in exchange for compensation. They also earn interest on clients' uninvested cash balances, charge fees for premium services like margin lending or advanced [trading] tools, and may engage in securities lending.

Q: Does zero commission mean I always get the best price for my trade?

A: Brokers have a regulatory obligation to provide [best execution] for their clients' trades, regardless of whether a commission is charged. However, the practice of [payment for order flow (PFOF)] has raised [regulatory scrutiny] due to potential conflicts of interest, as brokers might be incentivized by the payments they receive. While often providing price improvement, the absolute best available price is not always guaranteed, and investors should be aware of the underlying mechanisms.

Q: Has zero commission trading increased overall market risk?

A: Zero commission trading has lowered the barrier to entry for more [retail investors], potentially leading to increased trading activity. While this enhances market participation, some critics suggest it could lead to more speculative [trading] by inexperienced investors. Regulators continue to monitor the implications for market stability and investor protection.

Q: Are all investments zero commission?

A: No. While many [stocks], [ETFs], and [options contracts] now commonly trade with zero commission, other investments like [mutual funds] (especially those with sales loads), bonds, or international securities may still carry commissions or other fees. It's crucial to review the fee schedule for your specific [brokerage account] and the investment products you intend to trade.