How do stockbrokers in the U.S. manage to be so cheap? In Germany, I know a few brokers but at most of them, the cost of an order is over 5€ (approx. 6$) every time. In the states, you have brokers like M1 Finance where they invest your money from dividends automatically and with zero commission. As they need to pay the stock exchanges too, how does this work? How do they afford this?

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    FYI 2 years ago around $6/trade was quite standard in the USA also, with only novelty brokerages like Robinhood and M1 offering free trades. Then Vanguard removed the commission for ETF trades (while keeping it on ordinary stock) and that started a domino effect -- within about 6 months all the online trading platforms that had sufficient levels of automation announced free trades on stocks and ETFs.
    – Ben Voigt
    Jan 15 '21 at 18:35
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    Interactive Brokers was the first to offer across the board zero commission trading when it offered Interactive Brokers Lite service. Schwab then following and it then cascaded as Ally, Fidelity, E-Trade and TD Ameritrade, E-Trade, Ally Invest and Fidelity followed. Vanguard was very late to the game, several months later. Jan 15 '21 at 18:50
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    I think robinhood also brought about change in the sector with its 0 commissions. This prompted more brokerage companies to move to no commissions as well.
    – candelas
    Jan 15 '21 at 23:15
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    Zecco (since bought by Trade King, since bought by Ally) offered free trading before Robinhood existed. The very diversified brokers simply noticed commissions weren't a significant portion of revenue and all participated in a race to the bottom. Maybe Robinhood's popularity had something to do with it, but now that you can use a broker like Schwab or Fidelity for the same price as Robinhood and get access to all the ancillary services and support of Schwab or Fidelity or Ally I have absolutely no idea why anyone uses Robinhood.
    – quid
    Jan 16 '21 at 7:38
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    I agree. Given that major discount brokers offer far more and far better services than Robinhood and these major discount brokers are now commission free, it makes no sense to trade at Robinhood. If you're a serious investor who needs better services and more than a stripped down platform, you should be trading elsewhere. Jan 16 '21 at 12:15

Traditionally, commissions were a large part of the annual revenues for brokerage firms. As discount brokerage became more popular and as the industry evolved, brokers diversified into other areas.

In recent years before their elimination, commissions were a minor fraction of most brokerages’ revenues. Commissions made up 28% of revenue at TD Ameritrade, but just 17% at E*TRADE and 6% at Charles Schwab. Here's an article that breaks down brokerage revenues before commissions were eliminated.

Other sources of revenue for brokers include:

  • interest on cash balances
  • margin lending
  • borrow fees from shorters
  • payment for order flow
  • sale of annuities and insurance
  • asset management fees
  • mutual fund/ETF management fees
  • financial planning fees
  • market making

From the linked article, the lion's share of broker revenue comes from interest: 67% at E*Trade, 60% at Interactive Brokers, 57% at Schwab and 51% at TD Ameritrade.

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    Applying this to Germany, as asked, and other markets: as long as they all charge huge fees, they can continue to do so. Once the first broker breaks ranks and offers ‘free trading‘, they‘ll be all under pressure to follow (or lose customers). Same process as in the US.
    – Aganju
    Jan 15 '21 at 20:56
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    @Aganju: A cartel, then? Jan 16 '21 at 12:12
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    @Aganju: There are low fee brokers since several years, still local banks didn't reduce their fees. Stock trading is a niche, Germans rather put their money into a traditional pension plan.
    – Chris
    Jan 16 '21 at 13:11
  • @Chris which brokers are you refering to? i dont know any broker wich offers low fees for more than a year because of marketing.
    – snenson
    Jan 16 '21 at 23:13
  • @clomee: there are several ones targeting already experienced users, e.g. CapTrader and Lynx Broker with less than 0,15% per order, which are using the international Interactive Broker platform. At the moment "etoro" is also running a lot of marketing campaigns aimed at beginners with zero fees (I haven't digged deeper if there is any hidden disadvantage).
    – Chris
    Jan 17 '21 at 12:37

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