How is it possible to offer commission-free stock trading? And why it is bad for investors

Commission-free trading is not as great as it might sound. In the United States the costs are offset by Payment For Order Flow (when your brokerage sells your order to a market maker, bypassing the stock exchanges), but that's banned in many other countries. Find out how it's possible to offer commission-free trading in countries that allow or ban payment for order flow, and why commission-free trading could ultimately be bad for many investors.

00:00 Intro
00:12 Payment for Order Flow
01:05 History of trading commissions
05:30 The Bid-Ask spread
09:40 Example of market making
11:50 Net Interest Margin
13:35 Currency Conversion Fees
15:35 Is commission-free trading good?
17:14 Investors trading for free taking more risk

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ABOUT ME: I've hosted a personal finance TV show on the Oprah Winfrey Network, used to be a stockbroker, went to school to become a racecar driver (failed), founded a fintech company that provides financial planning software to financial advisors who want to help more people who don't have lots of money, and I consult with wealth management companies on commercializing applications of behavioral finance. I'm also quite fond of donuts.

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[qosmioamit]

I was blown away as always by your style of simplifying complicated concepts. Thanks a ton!

[yr]

You've explained it so well Preet.

[jdavid]

wow!! fabulous dissertation Preet. learned a lot. and the ending? it is well worth the wait. cataclysm indeed.

[CJinsoo]

Peter Schiff discussed this with robinhood and gamestop, butyouprovide clearer explanation. your videosareoutstanding

[johnsamuel]

Great video! This was easy to understand

[bdkoz]

Thank you for the video Preet, I have been wondering how this worked for a long time.

[mohamedlaminksmara]

Hi thanks for the history and background information on commission free trade. However do you have any video on value stock and small cap stock.

[teenidol]

I still don't understand what ECN fees are and why market vs limit orders change the amount I pay in ECN fees. I understand it has something to do with adding or removing liquidity, but I can't seem to strategically place my orders in a way that I'm obviously reducing my own fees.

[NeptuneKnives]

That's why I see a penny difference on my history 😳

Freaking awesome videos

[James_]

I don’t understand the value of comparing the fees in today’s dollars while excluding the notion that my stock purchase would also be in today’s dollars. I will always think of the trading fee as a percentage of the total transaction. In your example wouldn’t that $3, 000 purchase in today’s dollars be $12, 753? So the $204.05 fee is still 1.6% of the trade - isn’t it? Or am I missing something? Don’t get me wrong, I pay $10/trade and I’m happy to do so.

[Amir-jnmo]

Thank you for the informative video. I want to ask, i still don't understand why not having PFOF specifically hurts Canadian investors more. From what i understand the reasons for Canadian investors paying steeper prices are currency conversion fees (if they are trading US listed stocks) and slightly worse ask-bid spread?? but i feel like the whole PFOF can be abused by private market makers so i wouldn't mind taking that slight increase in ask-bid spread if it means the broker has to facilitate trades through the stock market. Wanted to ask your thoughts on this.

For me personally since i am only buying and holding VEQT for the foreseeable future, the currency conversion fees and ask-bid spread doesn't matter too much since i can't think of anything that would be more liquid than vanguards all in one etfs.

[CJinsoo]

Robinhood pulls in the instant gratification “investor.”. these are not investors. to paraphrase Warren buffet quote, “the daily stock market is a voting machine. long-term it is a scale.”