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The DIY Investing Podcast

Do you want to learn how to manage your own investments? Are you ready to stop paying investment management fees and start building wealth? The DIY Investing Podcast is dedicated to providing you with the knowledge, skills, and resources you need to be a better investor. Learn how to make investments through the use of fundamental analysis, mental models, and business management insights.

 

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  2. 46 - Broker Price Wars: End Game ($0 Commissions)

46 - Broker Price Wars: End Game ($0 Commissions)

Oct 11, 2019

Mental Models discussed in this podcast:

  • 2nd-order effects
  • Price Competition

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Show Outline: Broker Price Wars

The full show notes for this episode are available at https://www.diyinvesting.org/Episode46

Major Online Brokers eliminated commissions on Stock Trades:

  • Interactive Brokers (IBKR) - On September 26th announced IBKR Lite, with unlimited free trades on United States exchange-listed stocks and ETFs. 
  • Charles Schwab (SCHW) - Effective October 7th, Schwab eliminated commissions for stocks, ETFs, and options on U.S. and Canadian exchanges. 
  • TD Ameritrade (AMTD) - Effective October 3rd, TD Ameritrade eliminated commissions for stocks, ETFs, and options on U.S. and Canadian exchanges. 
  • E-Trade (ETFC) - Effective October 7th, E-Trade eliminated retail commissions on U.S. listed stock, ETF, and option trades. 
  • Fidelity (Private) - Effective October 10th, Fidelity eliminated retail commissions on U.S. listed stock, ETF, and option trades. [Not announced prior to the recording]

Robinhood: The beginning of the end

  • Popular with young investors (Millenials)
  • Free trading - announced in 2013 as a startup
  • Receives payments for order flow

2nd-order effects

  • The potential demise of the paid index fund
    • Why pay a non-zero management fee, when you can replicate the entire index for free?
    • Fidelity has already shown this with zero-fee index funds.
  • Higher returns for investors all-else equal
    • If you don't change your trading behavior, your returns should rise with this change. You have lower expenses but the same gross return. Your net return should be higher.
  • Changing behavior that promotes more frequent trading. (Could be a major negative)
  • Changing behavior that increases the number of investors and the amount they invest
    • Leading to lower returns in the aggregate as more money chases the same number of assets. 

How do brokers make money?

  • Robinhood makes money through order flow
  • Brokers also earn money through:
    • Spread between cash interest paid and earned by the broker to investors
    • Internal ETFs and Mutual Funds
    • Asset Management Fees

Summary

The end game has begun in the brokerage price wars. We have reached the zero bound in terms of commissions now at $0 for US and Canadian exchanges. This will have a major impact on the accessibility of investing and will certainly change the recommendations I have made in the past to new investors.