The Online Broker Race to Zero Fees (2024)

JPMorgan Chase& Co. (JPM) launched its online investing platform, You Invest Trade, which allows commission-free trading of stocks, exchange-traded funds (ETFs), and options, in 2018.When yet another brokerage launched a service that offered free trading, the buzz about the race to zero got louder.

This is great news for individual investors. But even though most online brokerages now offer "free" trading, there are limits to each offering. If you're deciding among platforms, read their offer to understand what they are. The free offer may be limited in the number of trades per month, or it may mean free stock trading but a charge for trading mutual funds and ETFs.

And don't forget, none of these are nonprofit organizations. They're all making money one way or another, and commission-free trading is a giveaway with a goal.

The Big Names in No-Fee Trading

The big names with free trading options as of the start of 2021 include Merrill Edge, ETRADE, TD Ameritrade, Robinhood, and SoFi. Vanguard, Fidelity, and Charles Schwab all have their own platforms as well. Interactive Brokers offers no-free trading in U.S. stocks, although its marketing focus is on global markets.

About You Invest

You Invest is the newest of these, having launched commission-free trading in 2019. Previously, the free trading offer was limited to Chase customers.

So was this really such a big deal?Merrill Edge already had a commission-free plan in place on stock, options, and ETF trades.You can use Robinhood’s app to place free transactions for stocks and options, though its analytical capabilities are close to non-existent.Tastyworks charges no commission for trades that close a position, whether that is stocks, ETFs, or options.

The Competitive Response

We asked executives of several online brokers what the launch of You Invest meant to them and whether they felt the need to respond with some other offer to draw customers.

Tastyworks’ Tom Sosnoff got right to the point, saying, “I believe rates are already as low as they can go unless the online firms 1) stop giving streaming data, 2) stop building software 3) stop supporting clients through a trade desk 4) stop providing content. It’s ultimately a horrible trade-off.”

Barry Metzger of Charles Schwab Corp.(SCHW)said, “We’re always happy to see firms improve their offer — that’s good news for investors. And that’s been something we’ve focused on for a long time.”

In a statement issued when JPMorgan made its initial announcement, Fidelity said it "believes investors should look closely at the overall value provided by their brokerage firm.”

Fidelity focuses on the quality of its trade executions, saying that clients receive an average of $16.15 in price improvement on a 1,000-share marketable order vs. the industry average of $2.61. ”Fidelity can achieve this level of price improvement because we do not take payment for order flow for equity orders,” the statement said.

Steve Sanders of Interactive Brokers got a little deeper into what you’re really getting from an online broker.Looking at the bigger picture of what an online broker offers clients, Sanders said, “The JPMorgan savings is a drop in the bucket compared to the incremental interest revenue and the savings in interest expense most clients can expect to achieve at Interactive Brokers.”

Beyond Price

You Invest, at launch, only allowed trading of U.S.-based stocks and ETFs, but later added options and mutual funds.That’s just a fraction of the possible investments open to retail traders, but they’re by far the most popular with individual investors.

Signing up for an account is simple if you already have an account of any flavor with Chase. The information on the Chase credit card is sufficient to fill out the application form.Unlike most online brokerage accounts, you might have to wait at least one business day for your You Invest account to be approved.

Once logged in, the website and app are easy to use. You can set up a watchlist but the display is static—the quotes do not stream, so for updated quotes, you’ll have to refresh the page.

Each company’s page shows an overview of the firm, a summary of JPMorgan's research and estimates, and a small chart that displays its end-of-day pricing over the last three months.

You can switch the chart to one day or one year, but those are your only choices.If you switch the chart view, You Invest reverts to a three-month chart the next time you get a quote.There’s also a list of recent headlines at the bottom of the page.

That said, there’s a little more there on You Invest than you’ll find on a Robinhood quote page. If you’ve already got a relationship with JPMorgan or Chase Bank, it might be worth having the app just to place an occasional quick trade.

The Downside of "Free" Trading

Be wary of “free” trades from any source. You don’t get what you don’t pay for.

You will likely get less-than-optimal prices for your transactions since the broker has to make money somewhere. Free trades are generally paid for by routing purchases through market makers, who pay the broker for the order flow but do not prioritize for the best price.

Steve Sanders warns, “Brokers that give away so-called free or cheap trades make their money by paying next to nothing on idle balances, executing trades at inferior prices, and charging exorbitant borrowing fees, which is costly to those that don’t do their homework."

He notes that Interactive Brokers pays 1.42% on idle cash balances, charges 3.42% or less to borrow, and offers stocks, options, futures, forex, and bonds all around the world at low commissions.

And remember, as commissions head to zero, brokers will find other ways to make money. Idle cash in customer accounts is a profit center, as the zero-commission brokers pay no interest on it. They also make money by lending securities to short sellers and keeping the loan proceeds.

Just remember: if you’re not paying for a service, you are the product.