The zero-fee craze is upon us, with a myriad of firms offering free options for trading equities, ETFs, options, Cryptocurrencies
Cryptocurrencies
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
Read this Term, and other asset classes aimed mostly at millennials.
US-based firm Robinhood was one of the first to pioneer this model, followed by existing investment companies, like Charles Schwab, which recently acquired yet another champion of commission-free trading — TD Ameritrade. Online banking giant Revolut had also rolled out a trading offering with no commission fees to its clients last year.
A few industry leaders have also spotted the potential and integrated zero-fee offering for their clients. JFD Brokers added the free stock trading option at the beginning of this year, followed by eToro in March. Interactive Brokers joined the list in September and added the fractional stocks trading earlier this month. BUX, the Amsterdam-based owner of Ayondo UK, launched a similar product for its Dutch clientele in September.
A question of sustainability
Along with the well-based firms, various startups have joined the race for the hearts and wallets of millennials. One such player is Bahamas-based online broker-dealer TradeZero, which offers commission-free stock trading and direct market center access to US stocks. The firm, which was established in 2014, has set up a US subsidiary in New-York City called TradeZero America (TZA) to target the US audience.
The commission free model is drawing criticism from a few angles. The first question that comes to mind when discussing this model is "how do they make money?" Considering the high operational costs for activating a brokerage, along with marketing and regulatory expenses, it's not very clear.
Another question is "what's the catch?" Along the lines of the famous phrase, "If you're not paying for it, you are the product."
We caught up with the Co-Founder of TradeZero America, Dan Pipitone, to learn about the firm's business model, future plans, and how it prepares to challenge Robinhood.
Standing out in the crowd
According to Pipitone, TradeZero's product differs from that of its competitors by offering a multi-tiered structure of different apps that cater to different types of traders. Another example is the capability for short selling. "We have investors who trade with competitors and are on the TradeZero America platform strictly for shorting. TradeZero America technology includes a stock locate feature, making it easier and simpler for the individual investor to locate hard to borrow shares for short selling", he added.
Beyond that, the firm launched a patent-pending innovation for its stock locator this summer, "if investors don’t use all their located shares, they can sell them to other TradeZero traders on the platform. Users of the service appreciate the ability to have control over as many aspects of their trading as possible, and this functionality gives them one more. Since launching this new feature at the end of July, customers have recycled more than 6,000,000 shares for symbols that were out of supply with our vendor suppliers. We have provided short ability to over 15,000 more short trades [that were performed] by having this functionality, as these were instances where there was no supply at all across all external vendors in that time."
Check out our feature with Finance Magnates and our partnership with Apex. https://t.co/P6muCSs2JI pic.twitter.com/5EHNQE3ltF
— TradeZero America (@trade0us) November 13, 2019
Beyond the brokers and startups, another sector that spotted the potential of this asset class is banking. Bank of America added a commission-free stock trading offering in October. Goldman Sachs’ retail unit Marcus (which is also rumored to have been bidding for yet another zero-fee broker, E*Trade) is also reportedly planning to launch a free app for trading stocks. However, Pipitone is not concerned: "TradeZero America’s short selling capability is what sets it apart and providing a competitive edge. Traders have come to know that when asking the question of “got shorts?”
"TradeZero America is the place they can find them. It is one thing to be long and wrong, but an entirely different thing to have identified a great short in the market, only to find out your broker does not have enough shares."
Commission-free, or occasionally commission-free?
Critics of TZA and other similar platforms claim that their model is not fully commission-free and that traders are required to pay for certain activities.
Pipitone denied those claims but mentioned that there is indeed one case when TZA charges money. "As long as the stock symbol is listed on the NYSE, AMEX or NASDAQ, and is priced at $1 or higher, you trade stock for free. We charge .002 per share for penny stocks for OTC stocks and listed stocks trading below $1."
zero fee everything... soon will be negative fees (pay you to trade or borrow money), just like in Europe or Japan.
— Kevin Chen (@kevinchenNYC) November 26, 2019
Pipitone also mentioned that TZA charges a monthly subscription on its premium channels: ZeroPro and WebPro.
No fees = no earnings?
Several analyses and op-eds suggested that this freebie model is not sustainable in the long run. To mitigate this balance-sheet challenge, different firms deploy different models.
According to CNBC and other sources, firms like Robinhood, TD Ameritrade, Charles Schwab, and E*Trade are making part of their earnings from selling their order flow to HFT firms like Citadel and Virtu. Other, more multi-asset brokers, are using the zero-fee approach as a lead-generation for their other offerings. Yet another model is based on diverting clients' deposits to sweep accounts. And obviously, there are additional models, including some hybrid versions.
Pipitone noted that only a small fraction of TZA's earnings come from Payments
Payments
One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonly the basis of exchange involves fiat currency or legal tender, be it in the form of cash, credit or bank transfers, debit, or checks. While typically associated with cash transfers, payments can also be made in anything of perceived value, be it stock or bartering – though this is far more limited today than it has been in the past.The Largest Players in the Payments IndustryFor most individuals, the payments industry is dominated currently by card companies such as Visa or Mastercard, which facilitate the use of credit or debit expenditures. More recently, this industry has seen the rise of Peer-to-Peer (P2P) payments services, which have gained tremendous traction in Europe, the United States, and Asia, among other continents.One of the biggest parameters for payments is timing, which looms as a crucial element for execution. By this metric, consumer demand incentivizes technology that prioritizes the fastest payment execution.This can help explain the preference for debit and credit payments overtaking check or money orders, which in previous decades were much more commonly utilized. A multi-billion-dollar industry, the payments space has seen some of the most innovation and advances in recent years as companies look to push contactless technology with faster execution times.
One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonly the basis of exchange involves fiat currency or legal tender, be it in the form of cash, credit or bank transfers, debit, or checks. While typically associated with cash transfers, payments can also be made in anything of perceived value, be it stock or bartering – though this is far more limited today than it has been in the past.The Largest Players in the Payments IndustryFor most individuals, the payments industry is dominated currently by card companies such as Visa or Mastercard, which facilitate the use of credit or debit expenditures. More recently, this industry has seen the rise of Peer-to-Peer (P2P) payments services, which have gained tremendous traction in Europe, the United States, and Asia, among other continents.One of the biggest parameters for payments is timing, which looms as a crucial element for execution. By this metric, consumer demand incentivizes technology that prioritizes the fastest payment execution.This can help explain the preference for debit and credit payments overtaking check or money orders, which in previous decades were much more commonly utilized. A multi-billion-dollar industry, the payments space has seen some of the most innovation and advances in recent years as companies look to push contactless technology with faster execution times.
Read this Term for order flow. According to him, the vast majority of its income derives from three main sources:
"The first is on the monthly platform subscription fees. The second area is on stock loan and stock locates used for short selling. Finally, client debit and credit interest rates are marked up and marked down."
New products to come
TZA's main product is stock locates. According to Pipitone, the interest in this offering doubled last year. Therefore, the firm seeks to expand its offering in that field.
"Coming mid-December will be the ability for users to bid for locates that are out of inventory. These bids may potentially motivate those customers that are currently holding the locate to sell what they are holding to recoup a larger part of the cost for getting into the locate, or potentially profit from selling the locate. This new feature is another instance where TradeZero America is putting the investor in control. This is another innovation used to mitigate the dreaded 'no shares available' message to short sellers."
The broker-dealer, however, will not be offering fractional shares anytime soon. "Currently, fractional share trading is not offered but it may be something to consider in the future. We have been focused on those investors that trade the markets a bit more actively."
The zero-fee craze is upon us, with a myriad of firms offering free options for trading equities, ETFs, options, Cryptocurrencies
Cryptocurrencies
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
Read this Term, and other asset classes aimed mostly at millennials.
US-based firm Robinhood was one of the first to pioneer this model, followed by existing investment companies, like Charles Schwab, which recently acquired yet another champion of commission-free trading — TD Ameritrade. Online banking giant Revolut had also rolled out a trading offering with no commission fees to its clients last year.
A few industry leaders have also spotted the potential and integrated zero-fee offering for their clients. JFD Brokers added the free stock trading option at the beginning of this year, followed by eToro in March. Interactive Brokers joined the list in September and added the fractional stocks trading earlier this month. BUX, the Amsterdam-based owner of Ayondo UK, launched a similar product for its Dutch clientele in September.
A question of sustainability
Along with the well-based firms, various startups have joined the race for the hearts and wallets of millennials. One such player is Bahamas-based online broker-dealer TradeZero, which offers commission-free stock trading and direct market center access to US stocks. The firm, which was established in 2014, has set up a US subsidiary in New-York City called TradeZero America (TZA) to target the US audience.
The commission free model is drawing criticism from a few angles. The first question that comes to mind when discussing this model is "how do they make money?" Considering the high operational costs for activating a brokerage, along with marketing and regulatory expenses, it's not very clear.
Another question is "what's the catch?" Along the lines of the famous phrase, "If you're not paying for it, you are the product."
We caught up with the Co-Founder of TradeZero America, Dan Pipitone, to learn about the firm's business model, future plans, and how it prepares to challenge Robinhood.
Standing out in the crowd
According to Pipitone, TradeZero's product differs from that of its competitors by offering a multi-tiered structure of different apps that cater to different types of traders. Another example is the capability for short selling. "We have investors who trade with competitors and are on the TradeZero America platform strictly for shorting. TradeZero America technology includes a stock locate feature, making it easier and simpler for the individual investor to locate hard to borrow shares for short selling", he added.
Beyond that, the firm launched a patent-pending innovation for its stock locator this summer, "if investors don’t use all their located shares, they can sell them to other TradeZero traders on the platform. Users of the service appreciate the ability to have control over as many aspects of their trading as possible, and this functionality gives them one more. Since launching this new feature at the end of July, customers have recycled more than 6,000,000 shares for symbols that were out of supply with our vendor suppliers. We have provided short ability to over 15,000 more short trades [that were performed] by having this functionality, as these were instances where there was no supply at all across all external vendors in that time."
Check out our feature with Finance Magnates and our partnership with Apex. https://t.co/P6muCSs2JI pic.twitter.com/5EHNQE3ltF
— TradeZero America (@trade0us) November 13, 2019
Beyond the brokers and startups, another sector that spotted the potential of this asset class is banking. Bank of America added a commission-free stock trading offering in October. Goldman Sachs’ retail unit Marcus (which is also rumored to have been bidding for yet another zero-fee broker, E*Trade) is also reportedly planning to launch a free app for trading stocks. However, Pipitone is not concerned: "TradeZero America’s short selling capability is what sets it apart and providing a competitive edge. Traders have come to know that when asking the question of “got shorts?”
"TradeZero America is the place they can find them. It is one thing to be long and wrong, but an entirely different thing to have identified a great short in the market, only to find out your broker does not have enough shares."
Commission-free, or occasionally commission-free?
Critics of TZA and other similar platforms claim that their model is not fully commission-free and that traders are required to pay for certain activities.
Pipitone denied those claims but mentioned that there is indeed one case when TZA charges money. "As long as the stock symbol is listed on the NYSE, AMEX or NASDAQ, and is priced at $1 or higher, you trade stock for free. We charge .002 per share for penny stocks for OTC stocks and listed stocks trading below $1."
zero fee everything... soon will be negative fees (pay you to trade or borrow money), just like in Europe or Japan.
— Kevin Chen (@kevinchenNYC) November 26, 2019
Pipitone also mentioned that TZA charges a monthly subscription on its premium channels: ZeroPro and WebPro.
No fees = no earnings?
Several analyses and op-eds suggested that this freebie model is not sustainable in the long run. To mitigate this balance-sheet challenge, different firms deploy different models.
According to CNBC and other sources, firms like Robinhood, TD Ameritrade, Charles Schwab, and E*Trade are making part of their earnings from selling their order flow to HFT firms like Citadel and Virtu. Other, more multi-asset brokers, are using the zero-fee approach as a lead-generation for their other offerings. Yet another model is based on diverting clients' deposits to sweep accounts. And obviously, there are additional models, including some hybrid versions.
Pipitone noted that only a small fraction of TZA's earnings come from Payments
Payments
One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonly the basis of exchange involves fiat currency or legal tender, be it in the form of cash, credit or bank transfers, debit, or checks. While typically associated with cash transfers, payments can also be made in anything of perceived value, be it stock or bartering – though this is far more limited today than it has been in the past.The Largest Players in the Payments IndustryFor most individuals, the payments industry is dominated currently by card companies such as Visa or Mastercard, which facilitate the use of credit or debit expenditures. More recently, this industry has seen the rise of Peer-to-Peer (P2P) payments services, which have gained tremendous traction in Europe, the United States, and Asia, among other continents.One of the biggest parameters for payments is timing, which looms as a crucial element for execution. By this metric, consumer demand incentivizes technology that prioritizes the fastest payment execution.This can help explain the preference for debit and credit payments overtaking check or money orders, which in previous decades were much more commonly utilized. A multi-billion-dollar industry, the payments space has seen some of the most innovation and advances in recent years as companies look to push contactless technology with faster execution times.
One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonly the basis of exchange involves fiat currency or legal tender, be it in the form of cash, credit or bank transfers, debit, or checks. While typically associated with cash transfers, payments can also be made in anything of perceived value, be it stock or bartering – though this is far more limited today than it has been in the past.The Largest Players in the Payments IndustryFor most individuals, the payments industry is dominated currently by card companies such as Visa or Mastercard, which facilitate the use of credit or debit expenditures. More recently, this industry has seen the rise of Peer-to-Peer (P2P) payments services, which have gained tremendous traction in Europe, the United States, and Asia, among other continents.One of the biggest parameters for payments is timing, which looms as a crucial element for execution. By this metric, consumer demand incentivizes technology that prioritizes the fastest payment execution.This can help explain the preference for debit and credit payments overtaking check or money orders, which in previous decades were much more commonly utilized. A multi-billion-dollar industry, the payments space has seen some of the most innovation and advances in recent years as companies look to push contactless technology with faster execution times.
Read this Term for order flow. According to him, the vast majority of its income derives from three main sources:
"The first is on the monthly platform subscription fees. The second area is on stock loan and stock locates used for short selling. Finally, client debit and credit interest rates are marked up and marked down."
New products to come
TZA's main product is stock locates. According to Pipitone, the interest in this offering doubled last year. Therefore, the firm seeks to expand its offering in that field.
"Coming mid-December will be the ability for users to bid for locates that are out of inventory. These bids may potentially motivate those customers that are currently holding the locate to sell what they are holding to recoup a larger part of the cost for getting into the locate, or potentially profit from selling the locate. This new feature is another instance where TradeZero America is putting the investor in control. This is another innovation used to mitigate the dreaded 'no shares available' message to short sellers."
The broker-dealer, however, will not be offering fractional shares anytime soon. "Currently, fractional share trading is not offered but it may be something to consider in the future. We have been focused on those investors that trade the markets a bit more actively."
