There are other ways to trade stocks for free. But there is a catch.


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Ilia Pavlov

A price war could soon erupt in the stock exchange commissions.

Interactive brokers

(ticker: IBKR) announced last week that it is rolling out a new “lite” version of its trading platform with free and unlimited trading for US stocks. The service will launch in October, the firm said, with relatively low rates on margin borrowing and a yield 1.5% lower than the Fed Funds rate on cash reserves (higher than most other brokers. ). Interactive’s traditional platform is now called “IBKR Pro” and customers can switch between the two several times a year.

Interactive is fast becoming the first major online broker to offer free and unlimited exchanges. Startup broker Robinhood has been trading commission free for years. Several Wall Street companies also offer free trades with limits. Merrill Edge, the discount brokerage division of

Bank of America

(BAC), allows 100 free stock transactions per month for clients with a banking relationship and at least $ 100,000 on deposit with the company.

JPMorgan Chase

(JPM) has a new retail trading platform, You Invest, with 100 free transactions per year for Premier Plus banking clients or unlimited transactions for clients with a higher level banking or advisory relationship with the ‘business.

But with all free trading, there is a catch. Brokers may charge high margin rates or offer low returns on cash reserves. They may charge additional account fees or charge high rates for trading options or other products.

There are also hidden costs, such as whether a trader gets the “National Best Bid and Offer” price or the NBBO price, or better. Brokers have an obligation to find “best execution” for clients. But how they go about it varies. Most brokers receive payments for routing orders to e-commerce companies, called market makers. This practice can result in clients receiving worse trade execution than they would get without such payments in the mix.

Paying for the flow of orders poses a conflict of interest to the broker, according to the CFA Institute. “Brokers can be incentivized to route client orders to the highest bidder rather than the market maker or trading platform offering the best prices and fastest execution,” the CFA Institute wrote in a comment. guidance note in 2016.

Other countries no longer allow it. The UK financial authority effectively banned payment for order flow in 2012, for example. The result? Transactions executed at the best quoted prices rose from 65% to over 90% between 2010 and 2014, the CFA said in its article.

Interactive says stock orders on its new Lite platform will flow to market makers in exchange for “payment for the order flow.” Previously, the company did not pay for the order flow, using a “smart routing” system to try to find better prices than the NBBO.

This system will still be used on the IBKR Pro platform, said Steve Sanders, executive vice president of marketing and product development for Interactive. He adds that the system saves investors an average of 43 cents per 100 shares, or about $ 7 in savings per trade.

Lite platform customers will not benefit from these savings. And if they trade frequently, the savings on Pro would be more than what they would save in no-fee commissions on the Lite platform.

“Market makers are not in the charitable sector, so they have to pay for something,” says Sanders, referring to e-commerce companies that pay for the flow of orders.

It is not clear exactly how traders are ultimately affected. Regulators in 2017, for example, demanded that Citadel Securities, the largest market maker for retail transactions, pay $ 22.6 million for failing to fill orders at the best price, according to the the Wall Street newspaper. A Citadel spokesperson told the Journal that the company takes our obligations to fully comply with all laws and regulations “very seriously” and is “committed to providing superior service and workmanship to our customers. “.

Payment for orders does not disappear. And as commissions get closer and closer to zero, brokers may look for more revenue sharing deals with ecommerce companies.

Some analysts see Interactive’s new pricing as the start of a potential price war.

“Just when you thought it was safe to go back in the water: commission-free transactions hit close to where you live,” UBS analyst Brennan Hawken wrote in a note released last week.

Actions of

TD Ameritrade
(AMTD) and

E * Financial Trade
(ETFC) was sold after Interactive announced zero commission. TD stock fell 6.5% and Etrade fell 4.8%, he noted.

Commissions represent 34% of estimated 2019 revenue for TD Ameritrade and 17% for E * Trade, Hawken wrote.

Charles Schwab

(SCHW) would not suffer as much since trading represents only 7% of its turnover.

Interactive’s no-fee commissions may not trigger an immediate price war, in part because the company has long been a price leader for active traders. But Hawken added that “the chances of such an outcome cannot be completely ruled out.” The stocks of discount brokers are likely to “suffer from a surplus”, he added, as trading commissions remain “in the spotlight”.

Write to Daren Fonda at [email protected]


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