Commission-Free Trading

Commission-free trading is a brokerage pricing arrangement under which the firm charges no explicit per-trade commission for executing customer orders, most commonly for online orders in US-listed stocks and exchange-traded funds. The Commission described the market this way in a 2022 rule proposal: "discount brokers typically provide commission-free trading for online purchases of stocks and ETFs, but often charge fees for purchases of other securities."

It is a statement about one line item, not about total cost. The commission is genuinely gone, which for a small order is a large saving relative to the per-trade charges that preceded it. What replaced it is a set of revenue streams the customer does not see itemized, and a set of trading costs, chiefly the bid-ask spread, that were always there and are now the largest thing left.

The shift happened quickly and it is worth being precise about why. In its economic analysis of a 2022 proposal, the SEC recorded that "PFOF brokers led discount brokers into zero-commission trading in 2019", and noted the dependency running the other way as well: if payment for order flow were to stop, some discount brokers might resume charging commissions. That is the clearest available statement of the relationship. Commission-free pricing is not a discovery that trades are cheap to execute. It is the substitution of one payer for another.

Where the money comes from is not secret, and published disclosures list it. Payment for order flow is one source, and our page on it covers the mechanism and the disclosure rules. Interest on uninvested cash is often larger: a broker that sweeps idle balances into its own bank or a partner bank earns the spread between what it pays the customer and what the money earns, which is why the default sweep rate on a cash balance is worth checking. Margin lending charges interest to customers who borrow. Securities lending earns fees from lending customer shares to short sellers. Fund revenue sharing pays the platform for distributing particular funds. Premium subscriptions, options contract fees and fees on foreign or over-the-counter securities fill in the rest.

Two charges are not the broker's revenue at all and survive on sales regardless of the commission model. Section 31 of the Securities Exchange Act, at 15 U.S.C. 78ee, requires each national securities exchange and each national securities association to pay the SEC a fee calculated on "the aggregate dollar amount of sales of securities", at a statutory rate of $15 per $1,000,000 that the Commission adjusts under subsection (j) to match its appropriation. Brokers pass that through to the selling customer, which is why a sale confirmation carries a few cents of fee and a purchase confirmation does not. FINRA levies a separate trading activity fee on its members on the same one-sided basis. Both are small, both change periodically, and neither is a commission.

The cost that dwarfs both is the spread. Buying at the offer and selling at the bid means giving up the difference each time, and on a thinly traded security that difference can exceed anything a commission ever was. Our page on the bid-ask spread covers how it works. The point specific to this page is that removing the commission removed the one cost that was itemized, leaving the larger one invisible.

There is a behavioral consequence too, and it cuts both ways. A per-trade charge is friction, and friction discourages trading. Removing it lowers a real and regressive barrier for someone investing $200 at a time, and it also removes the pause that a $9.95 charge used to impose on an impulse. Both effects are genuine, and which one dominates for a given person is not something a pricing model decides.

The broker executes the order and posts no commission to the account. Its revenue arrives from the sources above. The customer's cost arrives in the execution price and in the small regulatory fee on sales.

A hypothetical illustration of how the invisible cost compares with the visible one it replaced. A stock is quoted at $30.00 bid and $30.05 offered. An investor buys 200 shares at the offer, paying 200 multiplied by $30.05, which is $6,010.00. If nothing moved and the position were sold immediately at the bid, the proceeds would be 200 multiplied by $30.00, which is $6,000.00. The round trip cost $10.00, all of it spread, and it is 0.17 percent of the purchase.

Under the pricing that preceded this model, the same round trip at a hypothetical $4.95 a side would have cost $9.90 in commissions, plus the same $10.00 of spread. So the saving is real, and on this order it is about $9.90, not the whole cost of trading. The spread was the larger number both before and after.

Now change one variable. On a thinly traded security quoted at $30.00 bid and $30.60 offered, the same 200-share round trip gives up $120.00 in spread. No commission model, free or otherwise, would have made much difference to that outcome, and the limit order is the instruction that addresses it.

What it genuinely delivers

• It removes a fixed charge that fell hardest on small orders, where a flat commission could be a full percentage point or more of the amount invested.
• It makes regular small contributions practical, since a $100 purchase is no longer eaten by a $5 charge.
• It removes a reason to delay rebalancing or to hold an unwanted position, both of which used to be defended on the grounds that trading cost money.
• Pricing became simple and comparable across firms for the most common order type.

What it obscures

• The largest cost on a typical order, the bid-ask spread, is unchanged and now unaccompanied by any itemized cost at all.
• The broker's revenue depends on decisions the customer does not make, chiefly where orders are routed and where idle cash is swept.
• The default cash sweep rate is frequently well below what the same money could earn elsewhere, and it is easy to leave unexamined.
• "Free" applies to a narrower set of transactions than most people assume, and options, mutual funds, foreign shares and broker-assisted orders commonly fall outside it.
• Zero marginal cost per trade removes a friction that used to discourage impulsive activity.