Will Investing Be Free?

Herbert Moore has a provocative thesis — that investing will be free in five years. I’m not sure if I agree with his endpoint, but the trends he describes are certainly real.

Here’s a sample:

Trading fees: Zero is inevitable

Investors are also increasingly benefiting from lower trading fees. Whereas brokerage firms charged close to $40 per trade through the 1980s and 1990s, online brokerages now charge less than $10. With scalability, the marginal cost to a broker for processing a trade becomes zero, and brokerages will be able to offer free trading by focusing on other revenue streams.

Processing a trade costs a brokerage (virtually) nothing

Trading commissions consist of a clearing fee (though if the broker self clears there is no clearing fee), an exchange fee, and any markup by the broker to cover the cost of the platform, customer service, etc. Of these, the exchange fee is the only inescapable cost, while the others are simply markups charged by a clearing or brokerage firm. The actual costs of clearing a trade through an exchange are minimal at just fractions of a cent. The NYSE, one of the more expensive exchanges, charges $0.0025 if you are taking liquidity with a trade, and rebates $0.00150 if you are providing liquidity. While the brokerage and clearing infrastructure can be expensive to create, at thousands or millions of trades, the cost per individual trade becomes negligible to the firm. An external brokerage and clearing firm like Apex (clears for smaller online brokerages like TradeKing, Zecco, Firstrade and others) charges just pennies per share on anything over 100,000 trades per month, giving a proxy for how much the internal trading infrastructure costs at scale.

It’s true that investing has become more democratic over the years. Discount brokers, ETFs, trading in decimals, plus growth of blogs and Twitter have opened the door on Wall Street.

The downside is that like the sorcerer’s apprentice, the potential for mischief has risen as well.

Posted by on February 19th, 2014 at 6:18 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.