US Brokers Announce Commission Free Trading

For Stocks and ETFs only

As we highlighted on our social media channels, last week most major US brokers slashed online trading commissions to zero for stock and ETF trading. That news event made Barron’s cover page this weekend. While on the surface this news should be welcomed by investors, especially those focused on trading only stocks and ETFs, we are hesitant to get over excited.

With the new ‘free trading’ policy, TD Ameritrade (AMTD) is expecting to lose around $230M a quarter next year. AMTD fell 26% on the announcement last week. Management is desperate to make up for this lost revenue from the same clients it promises $0 commission trades. As Barron’s points out, brokers have plenty of other places to make back the lost revenue.

First and foremost is margin rates. You can expect the lending rates that brokers charge for margin trading to go up. Second are fees for borrowing stock for shorting. Borrowing stock could become more expensive. The third source of easy revenue is from increasing the bid/offer spreads on each trade. This can come from internalizing the transaction among the broker’s client or routing the trades through less liquid exchanges that pay for liquidity.

Execution Matters More

While competition among brokers is ideal for lowering trading costs, low fees should not be the main determining factor in choosing a broker (or in any other decision, for that matter). Execution quality often has a larger effect on overall investor costs than broker commissions.

Our favorite US broker still charges $1 for ETF and stock trades, and only $1 for opening options trades (no closing costs). We are not going to jump to recommending another broker simply because they can save us $1 for a stock trade! We prefer our clients work with a broker that we know is working in the interest of the broker to get the best execution for their trades, meanwhile offering an absolutely amazing trading platform, free educational videos daily, a top rated independent custodian, and the best support in the industry. Plus, their option trading prices are still capped, making them the cheapest for active options traders.