3 ms·

tl,dr; brokers don't charge commissions because it costs them anything to execute your trade, the fair price for a retail trade is actually less than $0. When y

tl,dr; brokers don't charge commissions because it costs them anything to execute your trade, the fair price for a retail trade is actually less than $0. When you're paying e-trade $10, you're paying for their marketing. For those wondering why they can offer $0 commission, it's because retail brokers actually make money on every trade you make. When you send your $10 through etrade or some other brokers, they don't actually send your order to the market, they sell it to getco or some other market maker. The reasons are complex and linked to NMS regulation. In short, there are two types of traders, informed and uninformed. Market makers do not want to trade with informed traders, because they tend to lose money on those trades. However, reg NMS mandates that every one gets the same best bid and offer. So the spreads you'll see on the market reflect conditions where adverse selection is anticipated, which is why it's very profitable to trade at those prices against uninformed flow. Now why don't brokers offer to pay rebates (less than $0) to customers? Well they're not legally allowed to do that. The SEC regulates the maximum rebate and it's not that big. So why does Ameritrade for instance will charge you for trades? They don't execute anything after all... Well, they're just the middle men. What you're paying for is their advertising campaign that got you to open an account in the first place.

cynicalkane 13y ago
This isn't true. The money gained by selling the trade to market makers is small, and can easily be much less than the commission. The commission is the cost of doing business. Regulatory compliance and information technology ain't free. Maybe you mean the marginal value of a trade is less than $0, but I'm not convinced that's true ether. However, AFIAK the rest of the information in this post is accurate.
- sseveran 13y ago
  The Tx costs of a trade will probably yield a rebate but they will need to move significant volume to generate enough revenue to cover their other costs. There would be no commission if they sold their flow. The only other way to make money here is to internalize even further and give bad fills or jack up other fees.
- murbard2 13y ago
  Sure, the marginal cost. You do need to have a staff, compliance, etc.

cynicalkane 13y ago

This isn't true. The money gained by selling the trade to market makers is small, and can easily be much less than the commission. The commission is the cost of doing business. Regulatory compliance and information technology ain't free. Maybe you mean the marginal value of a trade is less than $0, but I'm not convinced that's true ether. However, AFIAK the rest of the information in this post is accurate.

sseveran 13y ago
The Tx costs of a trade will probably yield a rebate but they will need to move significant volume to generate enough revenue to cover their other costs. There would be no commission if they sold their flow. The only other way to make money here is to internalize even further and give bad fills or jack up other fees.
murbard2 13y ago
Sure, the marginal cost. You do need to have a staff, compliance, etc.