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The Implications of Zero-Fee Trading

Originally published on

michael ralby zero fee trading

Trading has become more popular and accessible through advancements in technology. A new development in the field will encourage more activity from traders but could pose additional risks for banks and brokerage firms. However, in light of recent changes made by Charles Schwab to enact zero-dollar fees in its dealings, the competitive advantage of such an approach is evident. In order to appeal to different audiences and a changing investor dynamic, brokerage firms must decide whether a zero fee approach is right for them.

Millennial Investors

Any notion that Millennials are averse to investing is uninformed. The truth is, just like preceding generations, Millennials see value in growing their wealth through an investment portfolio. What is different with this generation is their preferred methods and approaches to investing. In general, Millennial investors will be keen on researching stocks prior to investing, and they may be more conservative with the amount they initially invest. Millennials are also hesitant to spend money when they do not immediately receive something in return; paying fees on investments, for instance, lacks appeal since Millennials grew up with access to a number of worthwhile products online (like the social media platforms Facebook and Twitter) for free. While their goals with investing are the same as all other investors, Millennials tend to require a different tactic when it comes to appealing to their desires and reservations.

Robinhood & Other Apps

The practice of trading today is much different than it was a few decades ago, and many young investors have turned to digital trading for its accessibility, simplicity, and ease of use. Robinhood Financial is a significant player in this realm. Like other digital trading and loan startups, Robinhood provided its services without any fees, drawing in millions of customers. Robinhood, as of November 2019, had earned a valuation of $7.6 billion. With this surge in high-value, appealing investing startups that operate on a digital front, traditional firms must gain a competitive edge by researching the tactics used by these emerging companies.

Zero Fee Profitability

Even without a trading fee, brokerage firms and other service providers still stand to make a profit. Charles Schwab, for instance, does not rely on trading to support its operations, enabling it to allow free trading. Established firms have more flexibility than startups in this regard, as they are able to make bold, competitive moves without sacrificing their business. For firms like Charles Schwab, free trading is a method of earning more new clients; they can still make money off of aspects like interest, securities lending, and order flow (when shares are sold to high-frequency traders).

While the shift to zero fee trading may sound risky, it has proven to be a profitable decision for firms like Charles Schwab who are aiming to attract and retain new clients. Listen to the clues.

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