Most stock brokers charge fees for trading stocks and some of them charge like $7-9 per trade. Why do they charge fees? Do they need to pay fees with stock exchanges like nasdaq when shares are traded or is it to make more profit for the brokerage firm?
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4The stockbroker is doing some work for you: selling the shares that you own or buying the shares that you want to buy. Once upon a time, there were share certificates, pieces of paper, that had to be transferred and other pieces of paper (checks, currency) to be collected or delivered; nowadays it is a matter of sending a few electrons over. Do you think it is reasonable to have to pay the stockbroker for the work that has been done on your behalf, part of which money would go towards paying for the Internet connection to send those electrons?– Dilip SarwateCommented Sep 26, 2015 at 13:36
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4This is a stupid question, why would a company provide you a service and not charge for it? Are they a charity or a business out to make a profit after paying their employees and other expenses?– user9822Commented Sep 26, 2015 at 22:32
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yes, a stupid question as stated. Some background information as to how the Q came to ask, experience, etc. would have helped.– michaelCommented Sep 27, 2015 at 0:40
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1@user1573133, before online brokers full service brokers used to charge $100+ per trade. If a broker is charging you little to no commission on trades it will probably be making the same amount of money or more through larger spreads. This to me is a less transparent cost than just having a commission.– user9822Commented Sep 27, 2015 at 21:59
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1There are no stupid questions.– user273872Commented Oct 24, 2016 at 1:17
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2 Answers
They are providing you a service and they charge you for it. The service includes giving you a trading platform(website and the infrastructure), doing all the background work for setting up services for you, relaying your orders to the market or as a broker fulfilling your orders, doing settlement when an order is matched, giving you access to the stock market(the costs are quite high to get a license to relay orders to the market and I believe it needs to be renewed every year). There are transaction fees which the stock exchanges charge the brokers to use the stock markets infrastructure and connect to it. And then interfacing with banks for monetary transactions and also doing according to the law in the jurisdiction they are located in.
Most of it is an one time cost, but they are a private enterprise out to make profit so they will charge for their services.
answered Sep 26, 2015 at 13:35
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1+1, exactly, the question should be why would they do it for free?– user9822Commented Sep 26, 2015 at 22:28
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1Agree that nasdaq has yearly membership fees of $3000 + $1000 monthly fee and per transaction fees (with max .0035 per share) which may not be enough to justify $7-10 fee for stock trade. The last comment in money.stackexchange.com/questions/14501/… follows the same lines. Commented Sep 27, 2015 at 4:33
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1This is grossly off topic. Only discuss personal financial situations.– jtermCommented Aug 30, 2016 at 16:45
Retail brokers are generally not members of unless they are routing orders directly to those exchanges.
Most retail brokers that charge a $7 commission are considered to be discount brokers. They route orders to Market Makers who are members of the exchanges.
All brokers and market makers must be members of FINRA and must pay FINRA registration and licensing fees. Discount brokers also have operational costs which include the cost of their facilities, technology, clearing fees, regulation and human capital. Market makers have the same costs but the cost of technology is probably much higher.
Discount brokers also have market data fees which they pay to the exchanges for the right to provide real time quotes to customers. Some of these fees can be offset through payment for order flow (POF) where market makers pay routing brokers a small fee for sending orders to them. The practice of POF has allowed retail brokers to keep their costs low but shrinking margins and spread market makers POF has significantly declined over the years.
Markets makers generally do not pass along exchange access fees which are capped at $.003 (not .0035) to routing brokers. Also note that the SEC and FINRA charge transaction fees. SEC fees for sales are generally passed along to customers and noted on trade confirms. FINRA TAF is borne by the market makers and often subtracted from POF paid to routing firms.
Full service brokers that charge higher commissions are charging for the added value of their brokers providing advice and expertise in helping investors with investment strategies. They will generally have the same fees associated with membership of all the exchanges as they are also market makers subject to some of the list of costs mentioned above.
A point of note is that Market Making technology is quite sophisticated and very expensive. It has driven most of wholesale market makers of the 90s to consolidate. Retail routing firms save a significant amount of money for not having to operate such a system (as well as having to worry about the regulatory headaches associated with running such a system). This allows them to provide much lower commissions than full service or bulge bracket brokers.
