Note that
these are only a few of the most common ways business brokers can replace their
trading commission earnings. Brokers can supplement their revenue with
additional sources like software fees, premium services, and fund management
services.
Sweep of
Cash:
Your money
isn't necessarily "invested" when you're an investor. Your brokers
will "sweep" your un invested cash from your cash sweep account and
deposit it in one of their banking subsidiaries or reinvest it on their terms.
Your broker will, of course, give you a certain amount of interest in exchange.
This way,
rather than having your cash lie idle in your account, you may at least make
some interest on them. Here's how they make money off it: Charles Schwab
presently pays less than 0.1 % on cash sweep accounts, investing the difference
at around 2.5 % and pocketing the difference.
Order
Flow Payments:
While these
firms no longer charge commissions, it doesn't imply they're not profiting from
your stock trading. It's worth noting that payout for order flow varies per
broker.
These
brokerages are essentially charged for sending their clients' buy and sell
orders to algorithmic trading businesses. These automated trading businesses
will then connect buyers with sell orders that they have issued themselves.
This is
especially contentious because these firms are betting against regular traders,
with the business brokers gaining. To put it another way, algorithmic
businesses can only build alternative models because they have access to retail
traders' information.
Furthermore,
because they are on the other side of the deal, these businesses take up the
slightest margins or gaps between the futures market and stock prices.
Spread of
the Bid/Ask:
In my
perspective, this largely pertains to forex brokers, but I'm finding it more
and more with stockbrokers. Changing the bid and ask spread is the equivalent
of charging a per-share commission without informing the clients.
Let's say
the current bid on a stock is $30.50, and the current ask is $30.51. Some
brokers may put the offer at $30.49 and the ask at $30.52 on the board.
Alternatively, even though the current bid is $30.50, the broker can complete
your market order for $30.49. Guess who receives the $0.01 difference in their
pocket?
Let's assume
the broker increased the spread by 0.001, multiplied by 1000 shares for a deal,
and the broker earns $1. Multiply it by the number of clients the broker has
and the number of sales they do every day. You can figure out how much your
broker profits from this strategy if you do the math.
Most
customers aren't aware of this. Therefore they'll happily place purchases under
the impression that there are no fees. As a result, if you're a scalper, your
broker must adore you!
The argument
is that many business brokers may have offered free trades due to the
commission battle. It does, however, come at a cost. It prompted these brokers
to employ alternative revenue-generating strategies behind the scenes, which
most retail traders and investors are ignorant of.
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