The first week of Q4, 2019 has proven to be quite eventful for the online trading world. What started as a significant step taken by a well-known player in the industry seemed to have paved the way for a new trend in online stock trading: 0% commission. As many other online brokers are falling in line, it is evident that this change is a form of a natural evolution of the Fintech industry.
Schwab Sets the Tone
The first US-based broker to introduce zero commission trading was Interactive Brokers. However, the trend kicked into high gear when well-known brokerage firm, Charles Schwab made a similar move, announcing that it was eliminating the fixed fee of $4.95 for stock trades. While for long-term stock investors, who only refresh their portfolios a few times a year, this was not a major announcement, for short- and mid-term traders, who often open and close positions on a daily basis, this was quite significant. Soon afterwards, other popular brokers, such as TD Ameritrade and E-Trade, followed suit.
The general tone in the industry is that Schwab’s move came in response to relatively new players in the industry, such as Robinhood and eToro, which are geared towards a more dynamic and fast-paced trading environment.
The New Traders
Initially, day trading was focused more on asset classes other than stocks, such as Forex. However, as global barriers began to break down and stock trading became more accessible and affordable, many other categories, such as ETFs and indices, became popular. Moreover, the rise of the highly volatile crypto market in recent years has attracted new traders and investors, who gradually expanded their fast-paced, highly technical trading style into the stock market.
Millennials are a major driving force in the industry today. The generation that is considered the most brand loyal, has matured and is now a major demographic segment with growing financial power. With brand loyalty and a smartphone in every pocket, these Generation Y-ers are more inclined to invest their available income in the companies with which they identify. Moreover, the relative ease and accessibility brought forth by the Fintech Revolution, have placed a plethora of financial assets at the fingertips of these people, who have now entered the phase of planning their financial future.
The Financial Downside
Commissions and fees are the bread and butter of many online brokers, which is why Schwab’s move came as a bit of a shock to some investors, resulting in its stock declining more than 9% after the announcement. However, the elimination of fees was also perceived as giving Schwab a competitive edge, which is why the value of the stock of several of its main rivals, TD Ameritrade and E-Trade, fell 26% and 16%, respectively.
When eToro first introduced 0% commission stock trading for European and UK clients in May of this year, it explained the financial reasoning behind such a move. As CEO Yoni Assia explained when he unveiled the Fintech company’s plan, absorbing the cost of buying the stocks in clients’ names has long-term financial benefits. In essence, by removing one of the main entry barriers into stock trading, eToro will attract new clients and increase its assets under management. Aside from announcing zero commission stocks months before Interactive Brokers, Charles Schwab and the others, eToro also offers a wide selection of exchanges from around the world (and not just Wall Street), which also increases its appeal.
No Commission? No Problem
2019 has not been a pleasant year for many online brokers. Of the ones mentioned above, several are publicly traded, including Charles Schwab, which is down more than 16% for the year, TD Ameritrade, which lost around 40%, and E-Trade, which is down more than 20%. Therefore, the losses incurred by forgoing per-trade commissions may not be the worst of their financial problems.
In fact, going commission free might just be what the giants of the industry need. Lowering entry barriers could attract a new generation of investors and the banking sector has been proving for centuries that there are numerous ways for a financial body to turn a profit without charging commission. Either way, zero-commission trading could become the new industry standard. What eToro announced in May, as a relatively young, nontraditional broker, is now becoming the norm, and it is safe to assume that many of the institutions that offer online trading will have to adjust accordingly to stay in the game.
Zero commission is available to clients of eToro (Europe) Ltd., eToro (UK) Ltd. and eToro AUS Capital Limited (AFSL 491139).
For clients of eToro AUS, only stocks traded on US stock exchanges are available as underlying assets and with no commission. These stocks are offered through eToro Service (ARSN 637 489 466), operated by Gleneagle Asset Management Limited ABN 29 103 162 278, and promoted by eToro AUS Capital Limited CAR 001281634. Refer to our FSG and PDS before deciding whether to trade with us. All other stocks are offered as derivatives and bear commission.
Zero commission does not apply to short or leveraged positions. Zero commission means that no broker fee will be charged when opening or closing the position. Other fees may apply. For additional information regarding fees, click here. Your capital is at risk.