Commission Free Trades
Hi Terry,
I appreciated reading your article titled “Large Investment Firms ditch commissions”, but it raised one question. You point out two ways investment firms will still make money. The first is “payment for order flow”….getting the difference between the bid and ask price. My question is:
Can this be avoided by placing a “limit order”, controlling the buy or sell price? If so, do these large investment firms allow “limit orders” with these free trades? Or, do they add a fee for this type of trade? I’d understand that as it’s more work for them to manage.
Terry Says
No in these days of computers there is no extra charge for a limit order. But just remember that a stock can trade right THROUGH your limit if it gaps to the upside or downside! You might want to place a stop loss order — which becomes triggered as a market order if that price is reached. You may wind up selling at a much lower price than your stop loss, if the market is moving quickly to the downside.
As for the brokerage firms making money, payment for order flow is just a very small fee that the large trading firms pay retail brokers to direct orders to their “book” to execute, so they can make the tiny “spread” between bid and ask. You’re always guaranteed an execution at the best price available on the national market system. This is just a sort of hidden profit center for retail brokerage firms.
