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The Hidden Costs Of Commission-Free Trading

TedTed
in Fund Discussions
FYI: Over the past few days, online brokers have rushed to roll out commission-free trading deals, but is there a catch?

Robinhood started the trend of free trading. Recently, other brokerages jump on the bandwagon. Late last week Interactive Brokers previewed IBKR Lite to offer an unlimited commission-free trading service. Then Charles Schwab and TD Ameritrade jumped on board, with Ameritrade includes options as part of the commission-free offer. So what are the implications for investors?
Regards,
Ted
https://www.forbes.com/sites/simonmoore/2019/10/01/the-hidden-costs-of-commission-free-trading/#7a3dba1562b7

Comments

  • catch22catch22
    FROM the article:
    The first is that free trading may cause bad trading behavior. In the markets, medium- or long-term investment decisions are generally better. This paper supports the view that long-term holding periods can lead to better investment outcomes and short-term trading driven by overconfidence can be misguided.

    So free trading may save you money on trading costs, but if it causes you to trade rashly, your returns may suffer. For most investors, investment returns are a much bigger deal than trading costs. Therefore, being able to trade for free can be counter-productive if it tempts you to become a day trader and tank your investment performance. What do I have against day traders? Well this study showed that the vast majority of day traders lose money after fees, further bolstering the case for longer term investment horizons. If commission-free trades create more day traders, that's probably a bad thing.

    >>>YES to the above, but if one travels this behavior path; there is more than free trading that needs to be addressed, and that would be the psychological side of life.
    My statement excludes those in the rare space of exquisite trading behavior leading to perpetual profits.
  • sma3
    Since these brokers sell their order flow for money to make up the difference, the spreads will widen and you wont get the best price. Assuming I did the math right, if you loose a penny better price on a $40 stock you loose money if you trade more 500 shares at a time. All depends on your behavior and your portfolio
  • CrashCrash
    sma3 said:

    Since these brokers sell their order flow for money to make up the difference, the spreads will widen and you wont get the best price. Assuming I did the math right, if you loose a penny better price on a $40 stock you loose money if you trade more 500 shares at a time. All depends on your behavior and your portfolio

    ...But if a stock or fund is trading that particular day at a discount? Or even for an extended period of time? (IRL, CM, others.)
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