Zero Commission a good thing?

[voidstar]

Like many, I saw the cost of trades go from $20, $7, partially-free on some certain selections, to now completely free.

So - now with a few years of history on this, has this been good for the market overall? And for retail traders in particular?

I'm skeptical since rarely does free actually mean free. FB and Google are "free" but comes at a certain cost.

But as computers are doing all the work, why shouldn't these transactions be free? We have complete faith in the transaction software, and obviously hardly any physical paperwork involved.

But something nags at me - years ago, with those $20 fee's, I feel like I put more thought into a trade. And it seems these days, even if that cost were 10 cents or a dollar, that'd prevent (or reduce) people just more casually just "selling everything" and rebuying on a whim.

So I've wondered if the Zero-Commission being fairly widespread now, has it contributed to more volatility in the market? (more so than there may have been if we had kept some form of commission fee?)

Not that we're going back, just curious on what people think about it upon reflection of a few years now.

 

[arcyallen]

If you look at the trading activity on Robinhood during 2020 you'll get some insight. Trading skyrocketed because people were BORED so they started trading more. And hey, it was "Free", right?

Creating transactions because you're bored and they're free sounds like a horrible plan. I think it definitely promoted a mindset of gambling. Charlie Munger HATES them because of this. And while I don't want unnecessary friction anywhere, having to pay a little will definitely slow people down a bit like you mentioned which might be beneficial for their financial wellbeing.

My biggest hang up is, as you mentioned, it's not free. They're just burying the cost and not making it transparent. People generally like that despite saying they don't - no one wants to pay for ketchup, tap water, or napkins. So they're "free". I like seeing most genuine costs up front, but I'm the oddball I guess.

 

[captain3d]

Good if you want to dollar cost average small amounts every week but I get your point.

Blockbuster vs streaming. Sometimes making a firm choice is better.

 

[voidstar]

I'm wondering about "bad actors" that have an interface to do many trades at once. In Robinhood, I can physically only swipe one trade at a time (likewise for the broker websites). But I imagine there are systems where people can do multiple trade at once - a kind of LIMIT order on an entire portfolio. For example: if they gain 10% (arbitrary), however they got there, go ahead and just sell everything. And, there is no friction in doing so (no overhead cost), so they can do that all day long (perhaps on smaller scales, or maybe on more grand scales than I can even imagine). And by doing that, it seems it would give some artificial impression about the market - on the other hand, maybe that's just how it is, whether it happens quickly or slowly, that's just the nature of the market.

EDIT: to clarify "bad actors" - not that there is anything wrong with certain folks having more direct connection to whatever network/API/interface that Robinhood or other major brokers have (those that seek out those interfaces and know how to exercise them are entitled to benefit). And not that "hardcore" day-trading is inherently bad (just that it is fairly localized profit). I just meant at some point, there is a threshold where one is taking advantage of the system - and bulk buying/selling (because there is zero-cost commission) is perhaps in that category.


And people often ask me how Robinhood can offer this for free. I'm no expert about it, but I don't think it's really a secret: #1) like banks, they can "do stuff" with your balance. It's transparent to users, such that your balance is effectively always available to you - but to the extent that they can, money is never sitting around and is always in motion (be it a half second or overnight). #2) It's not a scam, but I'd maybe use a word "skim" - where through various means, they profit fractions of a cent from each transaction. And, I'm ok with that - they built the easy-to-use system and maintain it, and deserve to profit from the service.


I'm just wondering if "free" trades now skews old valuation models. With no friction on transactions, things like "GME" (both up and down) can happen more often? Maybe that's not all bad - but does it imply valuation is now (to some extent) more of a popularity contest?


EDIT: I could be wrong though - maybe "everyone's" $5 trades here and there fundamentally still just doesn't really move the market in any significant way.

 

[clobber]

You need to listen to the recent Planet Money episode on this topic. Most certainly not free.
https://www.npr.org/2022/06/21/1106468243/the-price-of-free-stock-trading

 

[Koolau]

No such thing as free. Period.