Posted at 9:00 a.m.
Recently, online brokerage firms have offered to carry out transactions for the sale or purchase of securities free of charge. These companies are certainly not operating at a loss. It would be interesting to know where they get their income from when they offer this service free of charge.
Jacques Larose
At the turn of the 2000s, the fees charged by retail investors to buy and sell stocks ranged from $25 to $40 per transaction, depending on the discount broker used.
Pricing could even increase to $70 per trade if traders traded in person over the phone with the direct assistance of a representative.
Since that time, the popularity of independent investing has exploded and a major trend, particularly from the United States, has allowed traders to take advantage of lower and lower transaction costs.
An unprecedented enthusiasm for online brokerage was also observed during the pandemic.
So in August of last year, National Bank Direct Brokerage became the first broker affiliated with a major Canadian bank to adopt zero commission pricing.
The Disnat subsidiary of Desjardins Group followed suit the following month with similar pricing.
However, not all transactions can be done without commission. The main transactions, such as those on stocks and exchange-traded funds (ETFs), are commission-free, but there are fees for the purchase of options or on fixed-income securities, for example.
The standard in the United States
In the United States, where most online brokers are now commission-free, one of the main ways to make their operations profitable is to sell buy or sell orders to third parties who execute them: in English, this is called payment for order flowand it’s a practice Robinhood is well known for, points out Julien Brault, CEO of Hardbacon, creator of the personal finance app of the same name.
In Canada, this is an illegal practice. So commission-free brokers have to rely on other sources of income.
Julien Brault, CEO of Hardbacon
For example, low-commission brokers affiliated with financial institutions can generate revenue with annual fees, inactivity fees, margin accounts (interest on cash or stock loans) and currency conversion fees.
You should also know that online brokerage is not a relatively important activity in the overall operations of a large financial institution and Julien Brault does not believe that these fees are sufficient to make an online broker profitable.
If they offer brokerage services at reduced commissions, the large financial institutions do so more to preserve the relationship with the client than to make a profit, according to Julien Brault.
“Commission-free brokerage is a strategy of loss leader for banks and financial groups like Power Corporation, which is notably behind WealthSimple,” he says.