Commission-free stock trading: The good, the bad, and the ugly

Preet Banerjee — Fri, 12 Nov 2021 19:12:13 +0000

Buying and selling stocks without having to pay any trading commissions is a relatively recent innovation. One one hand, it’s increased financial inclusion: more people have access to invest their hard-earned money because the barrier to investing is lower than ever. On the other hand, it’s also increased access to bad investing behaviour for the same reason.

Investors on Robinhood (free trading app) traded stocks 40 TIMES as much per dollar invested compared to investors at Charles Schwab. And they traded options contracts (which can be incredibly risky) 88 TIMES MORE.
NYTimes.com & alphacution research

I put together a deep dive on YouTube that looks at the following:

How are trades that used to cost over $600 in commissions (adjusting for inflation) available for free today?

Disruption in most industries involves disintermediation (getting rid of the middlepersons), but commission-free trading seems to be enabled by increasing the profitability of intermediaries. I explain exactly how with detailed examples.

What is “Payment For Order Flow” and why is it allowed in the US, but banned in Canada and the UK?

How is commission-free trading possible in Canada?

By reducing the barriers to trading, people trade more. But academic studies have shown this leads to underperformance. Watch the video (21 minutes) to learn more.

Have a fantastic weekend!

Preet

p.s. I'm going to be switching to a new newsletter delivery service soon so . I'm almost finished my doctoral thesis and once that's done I'll be creating more content again. But because it's been a long time since I've put out content consistently, I will not be offended at all if you unsubscribe from this newsletter. I get it.

Bonds are for losers

Commission-free stock trading: The good, the bad, and the ugly