Tag Archives: commissions

How zero-commission securities brokers get paid

Ever wonder how that can work? How can TD Outhouse, or Squab– or eSuperCheapoTechSavvyStox4U.com–afford to stay in business if they don’t charge you to trade stocks?

Okay, you know what happens with NTF mutual funds: They get kickbacks. Fine. But where’s the money come from on market-day securities trades?

It comes from you. You just don’t realize it.

The foregoing link is to a Mother Jones article that I found very informative. If you elect not to read the article, I’ll summarize it. The brokerage gets a fee from a market maker (a firm that is always buying and selling the actual securities), who gets a better deal than you do. The fee is called PFOF, or payment for order flow. The difference between what you realize and what the market maker realizes is the market maker’s profit.

If you want to watch your broker stammer and dissemble, ask them how much PFOF they get.

Does that mean that your brokerage actually does not give you the best execution on your trades? Sure does! It also means, as the article makes very clear, that the market makers want frequent trades. People who buy and hold index ETFs are their nightmare. They are making billions off the eager young investors who change their portfolios even more often than they change cellphones or social media platforms.

Is that so bad, though? Someone sells someone else the right to conduct your transaction at a slightly better price than you are going to receive. You are, in theory, your broker’s client. In practice, you are the merchandise. And the more you trade, the more often you get rooked.

It would not be bad if they put it out into the open. They don’t. Wait, if it’s legit and reasonable, why not broadcast it loud and proud? They can’t have this both ways. Either it’s sleazeball, and they would rather evade the subject, or it’s honest and decent. If it were, they’d have commercials bragging about it.

Ask yourself why they don’t.

They even have a term for this: the “dumb money” trades. Yes. The people who buy and sell stocks frequently? They tend to lose–not just in the slimy behind-the-scenes way, but because the real money is made by people who know more about it. If you’re a loser, someone else won. Of course eEpiccGetRichQuiccTrade.com will do anything it can to appeal to younger, phone-based investors with amounts of money in inverse proportion to their eagerness to risk them. They’re the easiest to fuck over.

When you see me use profanity here, it is rarely just a frustrated voice. The normal reason is to make a point. These people are fucking you, and the more business you do with them, the more they fuck you. The people you trust are whoring your trades to e-leeches. None of it is in your best interests.

I want to win. My method is to buy and hold index ETFs. I research the area of the market I want to be in, compare the available index ETFs, and accumulate shares over time. I keep doing that.

It’s dull.

It gives me no [x]-baggers to brag about.

It wins.

If you want thrills while losing money, support your local reservation casino. Then when you take a bath, at least it’ll work toward a good cause.

Will this harm eSnapStoxx or eWealthFreedumb or whatever the fad app-based brokerage is this month? Gods, I hope so. They need to be harmed. But even if you aren’t feeling vindictive and punitive, you should at least be feeling avarice in service of your best interests. Whatever makes you more money consistent with your risk objectives and temperament, that’s where you should be.

Your future isn’t a charity for the mega-rich.