How brokerage fees work

Brokerage fees cover a wide range of costs that your online brokerage charges when you have an active account with them. These fees vary from broker to broker and can impact your returns. 

There are two types of brokerage charges you need to keep an eye on as they affect your trading experience and bottom line the most:

  • Trading fees – these brokerage fees occur when you make a trade. Trading fees typically include the following:
    • Commission: the fee you pay your broker to execute a trade. This is usually based on traded volume or, alternatively, charged as a flat fee per trade.
    • Spread: the difference between the buy and the sell price, or in other words, the bid and the ask price.
    • Margin rate: trading on margin basically means that you borrow money from your broker to trade. The broker will charge you interest for the borrowed money. 
    • Financing rate or overnight rate: this is charged when you borrow money from a broker to trade (on leverage) and you hold this position for more than a day. A typical example would be a forex trade or a CFD trade.  
    • Currency conversion fee: this is charged when your transaction requires a currency conversion.
  • Non-trading fees – these are fees charged by your broker for services not directly related to trading. Non-trading fees typically include the cost of depositing money, withdrawing money, or not using the broker for an extended amount of time (inactivity fee).

Brokerage fees and their amount are different at each broker. For example, a stockbroker will not charge a financing rate, but it might charge withdrawal fees. 

What is commission-free trading? 

Some brokerages offer commission-free online trading, in other words, they scrap their commissions. This type of new and popular business model has been spearheaded by Robinhood, which came to the market in 2013. Demand for such easy-to-use trading services was great and the model quickly gained ground. Commission-free trading has become particularly popular with millennials. 

Commission-free trading is not synonymous with free-of-charge trading. Even though the broker does not charge a fee for executing a particular trade, it may and most often will charge other fees and costs. 

We asked Alvin Chow, CEO of Dr. Wealth, a website that provides trusted financial education, how financial institutions and service providers can afford to offer commission-free products.

“Institutions and brokers are able to make money by selling the customers’ orders to a private exchange (dark pool) instead of the public stock exchange. The buyers of these orders are often High-Frequency Trading (HFT) firms who conduct microseconds arbitrage between the private and public exchanges. These HFT firms would pay the institutions and brokers for selling orders to them.”

The ​​payment for order flow (PFOF) is a controversial practice whereby a broker receives compensation from a market maker in exchange for routing its clients’ trades to that particular firm. 

​​The PFOF model, used by some zero-commission brokers to generate income (rather than relying on commissions), could potentially create a conflict of interest between you and your broker. This may result in trade execution (like routing your orders to specific market makers) that might be unfavorable for you under certain market conditions, especially when using market orders (as opposed to limit orders, which seem to be less affected).

We asked Alvin Chow about the hidden costs traders should watch out for when trading through zero-commission brokers: 

“The costs would be hidden in the price spreads. The difference between the bid and ask prices could be wider. Imagine that a customer placed an order to buy a stock at $1.00. The order gets routed to the dark pool. An HFT firm bought the stock at $0.99 from the public exchange and then passed the customer the stock and collected $1. It has pocketed the $0.01 difference. That means that the customer could have bought the stock at $0.99 instead of $1 if the order had not been routed to the dark pool. But this is hard to verify since private exchange prices are opaque and prices in public markets fluctuate fast.”

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