Tom Arran, Thursday 22nd August 2019, 12:58 PM CEST
Polish Trading, Zero-Fee Investing, algorithmic execution tools

The Impacts of Zero-Fee Investing

The investment space for retail clients is changing at a dramatically fast pace. In the past, the only way investors were able to trade through financial markets was with conventional stockbrokers. This typically meant interacting through a one-way phone call, which would lead to the broker buying or selling the order you placed. However, the industry is different in 2019. Trades are now place able with the click of a button, with making accounts and passing KYC Checks never being more manageable. This has made the stock market highway and open highway. The road could soon be jammed with the introduction of industry-wide Zero-Fee Investing. This means that all fees relating to purchasing a stock would become obsolete and effectively make the traditional stockbroker unneeded. There are already brokerages like eToro and Robinhood who are providing clients with the ability to purchase and sell shares without broker fees.

The Financial Market Status Quo Changing

The status quo in the financial industry is being fought for amongst the online and traditional spaces. Formidable brokerages like TD Ameritrade, Charles Schwab and Fidelity, are hallmark institutions that have provided stock trading services to worldwide traders for decades. The three have created global reputations built from their credibility, security and reliability. They’ve amassed billions, in some cases trillions in assets to cater to millions to clients.

However, the challenge that these hallmark institutions face in the short future is the growing implementation of zero-commission fees in the cryptocurrency and blockchain industries. TD Ameritrade, Fidelity and Charles Schwab have made significant portions of through profits from these brokerages’ fees or fixed trading fees. This usually comes in the form of maintenance fees every month. Furthermore, these institutions typically require clients to go through a rigorous KYC Verification Process and provide annual account balance reports. Due to all of these unfavourable conditions, the new digital stockbroker has become instantly famous in the financial space. Services like eToro that run under Fin-Tech platforms allow for the standard processes to be negated and for trading accounts to be created in minutes.

There have been claims from standard trading institutions that these quickly registered trading accounts are completed at the expense of anti-money laundering schemes on a domestic and regional scale. However, advanced identity verification programs and two-tone authorization ensures that anti-money laundering attacks are plausible. EToro hasn’t faced an attack in more than two years. The primary process that allows clients to complete the process quickly is the requirement of a government-issued ID, such as a drivers license or passport, be copied through scanners onto the registration process. Typically, with standard institutions, a photocopy had to be sent through the mail, which would increase the approval time to more than several business days.

Are trading fees a thing of the past?

The question on every retail client and traders mind is, are trading fees going to become a thing of the past? Those currently active in the online trading space are aware of Robinhood, the United States established brokerage that became operational in early 2013. They’ve become famous for their trading structure on stocks, which implements zero-commission fee trading. This covers almost all assets available on the exchange, including blue-chip equities. This extends to exchange-traded funds, crypto options, standard cryptocurrencies and Ethereum. These are all highly utilized trading products that cover thousands of trades a day. Considering that there are no fees connected to these trades, it’s become a guarantee that traders will inevitably move to Robinhood or other similar platforms.

robinhood international ltd

The popularity of Robinhood rose at a staggering rate, which allowed the trading network to expand its operations on an international level. Today, their services have been greenlit by European regulators like the United Kingdom Financial Conduct Authority. This has allowed for Robinhood to maintain their trading services to numerous countries worldwide. This marks the first international market for the firm, with many others estimated to follow in the coming years. Considering that a Rutgers built Robinhood, it only makes logistical sense that the platform would reach worldwide dominance in less than a decade after it’s creation. There haven’t been many other platforms that have adopted zero-commission fee trading other than Robinhood and eToro. However, there have been numerous exchanges that have proposed the idea publicly. It’s estimated that in a few years zero-commission trading will be implemented worldwide.

What’s Free?

There is a fundamental difference between the exchanges that provide just zero-commission trading or zero-fee commission trading. Though the two terms are used in the same context, they offer two different services to the trader. Zero-commission trading is typically a ploy that’s implemented by many brokerages in the online trading market. This ploy ensures clients that they won’t pay a fee on any determined trade. However, this doesn’t mean that an annual maintenance fee isn’t required out of the trader to take advantage of this service.

Additionally, these zero-commission exchanges typically won’t charge fees on equities. The spread cost will be significantly higher. In the long run, the cost of spreads and monthly fees counteracts any potential savings acquired through the zero-commission trading.

Zero-fee trading means that there won’t be any fee’s whatsoever to the client on proposed trades or maintenance of the exchange. However, there is a cost on equities and spreads, which again counteracts any possible savings. That’s why it’s in the interest of clients to trade with a zero-commission fee exchange like Robinhood or eToro. These exchanges maintain no costs on maintenance, trades, equities or anything else relating to the crypto space.

There are many insiders connected to standard trading institutions that have claimed the costs are secretly embedded into the price of the stocks. These claims have come from the Wall Street Journal and other notable sources. However, when reviewing the cost of shares on eToro or Robinhood, their no different than on these standard institutions or regular cryptocurrency exchanges. It appears that TD Ameritrade, Fidelity, Charles Schwab and the Wall Street Journal are all making false claims to reclaim clients to their platforms. Regardless of what’s said publicly, retail clients prefer the ability to trade without any fees. It’s this strong point that will be the downfall of these standard institutions unless they adopted zero-commission fee trading as well.

In the case of Robinhood, the consensus is that these hidden fees are often embedded in stock prices. As per the Wall Street Journal, this is initiated by executing an order at a price much worse that would be available via a traditional broker.

How do these platforms earn their revenue?

The question that often boggles the mind of traders is how these zero-commission fee platforms earn a profit. It’s one of the most typically asked questions by investors unsure of if they should trade with digital currencies. The first way that these brokerages maintain a profit of revenue is by their marginal trading services. This means retail clients or investors have purchased equity with a higher valuation to the funds available in their account. These funds are paid back at an interest rate, per the agreement of the client or trader. Additionally, these digital currency brokerages charge fee’s on imported securities maintained from external stockbrokers. The most underrated form of revenue for Robinhood and eToro is the Payment Order Flow, which is arranged with high-frequency traders.

The Payment Order Flow is when high-frequency customers implement a trade. Robinhood or eToro then forward that order to the trader. Subsequently, the exchange earns money from the external brokerages that were selling the trade through Robinhood. This arrangement is typically seen as a rebate and has become typical for zero-commission fee platforms. However, there isn’t any reliable information that indicates this high-frequency trading process works in favour of traders. From all accounts, it benefits the exchange solely. Regardless of this well-known fact, online retail clients and traders cannot stop interacting with these platforms. Last year alone, Robinhood was listed at a valuation of $7.6 Billion.

What will traditional stockbrokers do?

When you dive into the inner workings of these zero-commission fee platforms, you realize that the service isn’t indeed fee. The hidden fees implemented with different services allow for the funds to be counteracted, and in many cases benefits the brokerage dramatically. The lure of fee-free trading has been enough to make most traders negate these factors. It’s estimated that eToro maintains a client base of three million individuals. Robinhood, on the other hand, has five million clients trading with their platforms. These numbers have caused the standard institutions to take notice of what’s happening in digital markets.

traditional stockbrokers

The traditional stockbroker isn’t just facing significant challenges from the online space, but their also facing challenges from new banking applications being released by banking institutions. The Challenger Bank, Revolut, Monzo and N26 have all released new banking applications that allow for consumers to trade with similar products that standard financial institutions provide. This has brought trading to the average European individuals. Luckily, these brokerages have taken notice of the continual changes occurring in the finance industry. This is leading TD Ameritrade, Charles Schwab and Fidelity to create two vital metric systems. The 1st system will be the same traditional services they’ve offered for decades, and the 2nd will be an online metric system that caters to the growing online trading space. It’s rumoured that these services will allow clients to alter their pricing structures and purchase or sell equities at a significantly lower cost. This would help transition traditional traders to the online space and help these standard institutions catch up to eToro and Robinhood.

Furthermore, these standard institutions are rumoured to implore fee’s only when the stock pays out for clients. Currently, clients and traders are charged on a single-order basis regardless of what happens with the trade. This will have a significant effect on how standard institutions engage with their clients and how trades are processed through worldwide stock markets. This will require that these institutions implement advanced technologies from artificial intelligence, machine learning and robotic spaces. This is the only way that these standard financial institutions could catch up quickly. It’d also enhance their metric systems tenfold and provide a more secure environment for clients. Right now, digital brokerages like Robinhood and eToro are already looking to add these technologies into their exchanges. The time for traditional stockbrokers to adapt is quickly dissipating.

When these standard financial institutions like TD Ameritrade begin facilitating an online exchange, customer experiences will rise dramatically. It’ll most likely mean that these institutions will remain for decades to come. However, with the current implementations from stockbrokers with paper-based and offline server systems, there’s a low chance they’ll ever be able to compete against Robinhood or eToro.

The Bottom Line?

In summary, these traditional stock brokerages need to alter their metric systems and account for the online platforms that are changing the financial markets worldwide. Countless average traders are running to platforms like eToro and Robinhood at an exponential rate. The lure of not having to pay any fees on stocks, trades and equities is unlike anything was ever before seen in the finance space. Even though these free trades are balanced by other costs elsewhere on the exchange, the overall costs are still dramatically lower than at standard institutions like TD Ameritrade or Fidelity. These conventional institutions also need to enhance their registration protocols for clients and make the process considerably more manageable, just like Robinhood and eToro have accomplished. That’ll be the only way for standard wall street firms to remain prevalent in worldwide markets.

Author: Tom Arran

Tom has over 10 years experience on crypto currencies, first mining bitcoin on an old university computer for 20 cents a coin to now day trading bitcoin in between helping to start Tom has previously held roles at a leading EU brokerage and provided insight and consultancy work for number of UK banks in Crypto. Tom Arran can be contacted at [email protected], View all posts by Tom Arran

Featured Brokers

  • AJ Bell Review

    Open AJ Bell Account

    Read AJ Bell Review

    CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

  • RoboForex Review

    Open RoboForex Account

    Read RoboForex Review

    CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

  • Tickmill

    Open Tickmill Account

    Read Tickmill Review

    CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

More From Author