The zero-fee craze is upon us, with a myriad of firms offering free options for trading equities, ETFs, options, cryptocurrencies, 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.

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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 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.”