Winners and Losers from Traditional Discount Brokers Going Commission Fee Free

Fidelity, TD Ameritrade, E*TRADE, Schwab, Interactive Brokers (for their lowest tier), and Firstrade have all now eliminated commissions on stock and ETF trades. A big thank you to disruptors like Robinhood for forcing the bigger firms down to zero.

In general, this is great news for investors. Saving on fees isn't the only benefit. Now that the brokers can't compete on price, they'll have to compete on services and other offerings. This should lead to better platforms and various innovations. (I am waiting for fractional share purchases with limit orders.)

Another benefit is that investors will be able to buy better ETFs. For example the recent commission free ETF offerings at E*TRADE and TD Ameritrade haven't been that great, with mostly thinly traded and relatively more expensive ETFs.

It was better than nothing. But now that every ETF has no fees to buy, investors can pick the best ETF that suits their needs. In other words, Vanguard and iShares should see inflows while SPDRs, the various JP Morgan ETFs, and others (and perhaps WisdomTree) might see outflows. This may also lead to innovations by the more expensive ETF families, as they won't be able to attract investors by being commission free at certain brokers.

Is there a downside for mom and pop investors?

Investors could be harmed by zero commission fees in at least two ways. First, not having to pay any commissions could encourage more trading. The more you trade, the more likely it is that you'll lose money.

Second, the brokers that derive more of their revenue from trading fees (E*Trade, for example, derives 17% of its revenue from trading commissions and this is supposed to go down to 10% as a result of zero fees on stocks and ETFs) might go bust or be weakened enough to be bought by a larger player. Moreover, brokers like Robinhood might have a harder time in attracting new clients, as no commissions has been their primary selling point--the traditional discount brokers offer a lot more products and services. This may also result in some firms going bust or being bought out. If either scenario happens (bankruptcy or sale), there would be less competition and therefore less innovation.

We shall see how all this plays out. In the meantime, enjoy your commission free trading!

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