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All zero commission stock brokerage firms I have looked at are able to offer zero commissions because of payment for order flow (PFOF). Is PFOF a necessary component of zero commission stock trading, or are there alternative methods for stock brokerages to offer zero commissions without PFOF? PFOF seems to be available only in the more developed markets. For jurisdictions where PFOF doesn't exist, is outlawed, or has not been legalized, I am wondering whether or not they will ever get zero commission stock trading.

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Fidelity, Schwab, Vanguard, etc. make billions of dollars per year from investors. They make money from:

  • Net interest income

  • Mutual fund and ETF service fees

  • Advice solutions

  • Sale of annuities

As an example, only 6% of their Schwab's revenues came from commissions before they eliminated them. Their largest source of revenue is “net interest income”. Customer's uninvested cash earns minimal interest and Schwab invests it at a higher rate.

Payment for order flow (PFOF) contributes to the bottom line for companies that route orders for PFOF. For traditional brokers, it's much less important compared to the other revenue sources. OTOH, for a broker like Robinhood that offers no other services, it's the basis of their profitability.

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No, there are other income methods, in the case of Schwab, Fidelity, Vanguard, there are fees related to their funds, 0.03% of SWTSX is a lot of money. Net interest margin is a big contributor as well, they pay you way less on your cash than their earning. Schwab is a mortgage lender. Schwab and Fidelity have co-branded credit cards which I’m sure share fees. All will also give advice for a fee, etc etc etc.

I’m not even sure that payment for order flow revenue is significant at these non-fin-tech $0 brokers.

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