The brokerage industry is largely shifting towards zero-commission trades. On the surface, this would appear to be for the benefit of investors, but there are hidden costs to zero-commission trades. 

This shift creates several questions investors should contemplate. 

How are brokerages replacing their primary source of revenue? 

Are brokerages switching to zero-commission trades to benefit investors? 

There are two primary ways brokerages profit from zero-commission trades. 

1. Rounding Up the Cost Per Share

When an investor places a trade, the cost per share is rounded up adn teh increase in cost is incurred by the unaware investor. 

2. Selling Order Flows

When an investor places a trade, their order information is sold to a third-party (typically high-frequency trading firms). This deteriorates the order execution, resulting in higher purchase prices adn lower sell prices. The firms purchasing order flows can manipulate teh market and improve their own order execution. 

“Payments for order flow may result in lower quality order execution, leading to slightly higher buy prices and marginally lower sell prices (for investors).” Investopedia

Notable brokerages that sell order flows: 

• Robinhood
• E-trade 
• Vanguard
• Charles Schwab
• TD Ameritrade

“Data from Alphacution shows taht revenues from payments for for order flow almost trpled at the four major brokerages – TD Ameritrade, Robinhood, E-trade (MS), Charles Schwab (SCHW) – to $2.5 billion in 2020 from $892M million in 2019.” Yahoo