When the cost to trade a stock went to $0 a few years ago, largely initiated by small platforms and brokerages, all the big banks and brokerages (Fidelity, Schwab, TD etc.) got into a race to be the first to offer them. Their rationale was that they will make up the lost revenue from trading by securing customers for other services such as wealth management etc. and also continue to benefit to be paid for order flow.
Right off the bat, it seemed like a bad idea for these large banks who attributed lost revenues from trading as one of the key reasons for their revenue drop in their quarterly earnings calls. And then, things got worse when COVID hit. A ton of investors signed up new accounts and began trading for free but not interested in any of the other services that the big banks had to offer. Consequently, the cost of servicing these clients and the cost of processing the paperwork etc. began to hit their profits.
Until, the trading frenzy in the past week took it to another level. Millions of shares of Gamestop, AMC and more recently Silver ETF began hitting record levels of trading in a day and even the one who started the $0 trade spectacle – Robinhood, had to raise more than $3 billion to meet its liquidity requirements. Of course, pay for order flow has alleviated some of the pain but the $0 trading gamble has come to roost for all the big banks.
Future Wealth’s View
The primary reason there is co-pay for a visit to the doctor is to prevent a flood of patients coming to see the doctor for every itch and scratch. Likewise, a modest trading fee of $5 per trade would have prevented much of the trading frenzy that occurred last week. But, that train has left the station and there is simply nothing these banks can do to limit the mindless in and out trading that appears to have caught the fancy of many millennials.
The ones who made some coin on their trades are likely to get some press and will likely try it again until their money runs out. The parallels to gambling in casinos is strikingly similar. For the big banks, their quest to turn these investors into other services that they have to offer, has not materialized. All in all, the $0 trading idea was a bad idea to begin with and will remain a bad idea for the foreseeable future. Smart investors who take a long term position on a stock or ETF were never enamored by this idea and will never be, because frequent trading is not common practice among diligent investors.