Hey guys! Wow!
What a week!
So this week all major brokerages
announced zero commissions, and in
this video, I want to talk about
the pros and cons and why it could
actually be a bad thing
of having zero commissions.
So, right now I am in Cayman
Island. I spent the week here
trading with my private group
of Mastermind students.
We had an amazing week, and
yes, this is when the news broke.
So here's what happened: two weeks
ago Interactive Brokers announce
that they will offer zero
commission trading.
What does it mean? It means that you
can trade and don't pay
anything for trading stocks.
Now, for trading options, you still
might pay.
Thirty-five, sixty-five cents
depending on the brokerage, but
trading stocks is now free.
Now this week Charles Schwab
reacted to this and said, "You know
what? We are doing the same thing.
Zero dollar commissions for
everybody." Now this
pressured TD Ameritrade.
So TD Ameritrade a day later
announced, "All right!
We are doing the same thing.
Zero commissions for everybody."
And then E-Trade followed
suit, and I believe over the next
few days other brokers will do
it as well. So, this means
that you don't have to pay
commissions anymore.
So, is this a good thing?
First of all, it sounds like a good
idea because you might
have paid a few hundred dollars, or
maybe even a few thousand on
commissions and now you can save
this money.
However, if commissions
are making or breaking your
success as a trader
you're doing something wrong.
I mean, you should make, when
you place a trade, you should be
able to make hundreds or thousands
of dollars.
So five-dollar commissions as
we used to have it should not make
a difference to your trading
account. And I know everybody wants
to save money but, listen,
if this is determining
the success or failure for you
as a trader you're doing something
wrong. By the way, if you would
like to know how I personally
trade, how I find the very best
stocks to trade, how I
know when exactly to enter,
how I limit my risk and when I take
profits, I've set up a website
for you it's called mytradingroutine.com.
I have a quick video with there that
shows you everything that I
personally do.
But back to the subject.
So the big question is right now,
if you have zero dollar commissions
how do brokers make money,
right?
Here's how. So there's two other
ways. In addition to commissions,
there's two other ways how brokers
make money.
First of all, they are getting paid
by the exchanges and by market
makers for order flow.
So yes, there are different market
makers that your orders
are being routed through and they
are paying the broker based on
how many orders they receive.
So, what does this mean?
It means that the brokers will send
the order to the market maker
who pays them the most.
It means that you might not get the
best fills.
And again, might not be a big deal
because we are talking about
probably a penny or two penny.
And again, if this is making or
breaking you as a trader you have a
different problem.
So, just be aware that
brokers are getting paid from
these market makers based
on order flow.
So, you might get a little bit worse
fills than you have in the past.
Now, the other way how brokers make
money is on dormant
money. What does it mean?
Well, some people open a trading
account, put ten thousand dollars
into it and then do not trade
and the ten thousand dollars is just
sitting there.
Now the broker does pay you right
now some interest rates, but
the interest is probably
0.1% maybe
0.2%. So, in essence,
nothing.
Now, how much do you think the
broker will make on the money that
you deposited with him if he
gets it to work?
I would estimate, I don't know for a
fact, but I would estimate maybe 3%.
Now, here's the deal.
A company like TD Ameritrade right
now has $147,000,000,000
in cash.
If you make 3% on
$147,000,000,000 that's a little bit
over $4,000,000,000.
Just shy of $5,000,000,000.
Not bad, right?
I mean, so, what
does it mean for brokers?
Well, TD Ameritrade's business
was mainly based on commissions, 25%
of their revenue came from
commissions. So this is why right
now TD Ameritrade is
hit hardest.
And over the past few days, they
lost almost 30%
of their value, so the stock price
went down almost 30%.
For Schwab it's not as significant,
for Schwab it's around
7-8% of their revenue are
held up in commissions.
So, they plunged a little bit, I
think they will do very well, and
also Interactive Brokers I think was
only down 4% or 5%.
So, I said in the beginning,
Why could these
zero commissions be a bad thing?
Here's why.
Think about it this way, zero
commissions probably will
enable a few traders to trade
more, right?
Because now, hey you don't have to
pay commissions anymore, so you
might as well place more trades,
and that's usually a bad idea.
Often the best trades happen
when you are extremely picky.
I'm very picky, and again, if you
would like to learn more on how I
personally trade go to
mytradingroutine.com it's
a website that I set up for you
where I have a 30 minute video that
explains to you exactly my
trading strategy.
You can check it out there.
So, right now we already have
no barriers of entry when
you open an account. I mean, the
broker asks you a few questions
like, "What do you do?
What is your net worth?" something
like this. But in general
everybody can open an account, and
now with zero commissions, I feel
that more and more people might
be attracted to trading who should
not be trading yet.
Because when you enter the game
of games you need to have a solid
education, you need to have a
trading strategy that is rock
solid, that is proven,
that is producing results for you.
So, the zero dollar commission
thing at first,
or on the surface, it sounds like
a great idea but when you look
behind the scenes, yes,
it will hurt the revenue of the
brokers so they might not provide
the same level of service that they
have been.
It definitely enables
many traders to trade more and
it could lead to worse fills.
So keep this in mind as much as the
whole world is right now celebrating
that there is zero dollar
commissions.
There's always another side of the
coin.
Hope this helps.
And I'm right now enjoying my time
on the island here on Cayman Island.
I think I'm going to go for a swim.
I'll talk to you then.