Robert D. Mather, Ph.D.

The Conservative Social Psychology Blog
The Economics of $0 Commissions at Online Brokerages

In the United States, the stock market has become much more accessible for investors in the past 50 years. After the 1975 deregulation of brokerage commissions (Charles Schwab Corporation, 2021), Charles Schwab Corporation led the way in “discount brokerages” that made investing cheaper and easier for middle- and lower-class Americans. E*TRADE revolutionized investing in the early 2000’s with opportunities for online investing by everyone, with low commissions on trades as a low barrier to entry for investors.

In 2019, most online trading platforms removed their commissions for trading stocks. That means someone could open an account and purchase or sell a stock with no additional fee for the transaction (for how the business model works, see Carey, 2021). By removing this barrier to entry and additional decision factor for trading, it increased trading activity among investors who handle their own stock trades online.

The outcome of no commission trades was quite predictable from basic economic principles. First, there was no longer anything resembling a monopoly. When there were only a handful of brokerages in the 1970’s, other brokerages could not enter and compete and there was no incentive to capture market from each other (it was kind of a racket…). Once Schwab entered as a disruptor in the deregulated industry, there was competition and fees decreased. When E*TRADE had a monopoly as the only online trading platform, they charged fees lower than their competitors but as high as they could to capture value. Then other online platforms like Capital One Investing, Fidelity, Charles Schwab, and TD Ameritrade all joined the competition and drove the fee prices down to the point where the only way to capture market share was to charge no fees for a stock trade. Then the others were forced to follow or go out of business.

Mature, competitive markets stabilize their supply and demand around equilibrium and all competitors end up charging a price equal to their variable costs for their product (which in this case is apparently zero dollars).  



Charles Schwab Corporation (December 9, 2021) Company history.

Carey, T. W. (July, 18, 2021). Who wins a brokerage price war? With commissions at zero, do customers or brokers benefit? Investopedia (online)

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