It is often assumed that Australia is an importer of financial trends, particularly if it is happening in the USA. So, it is not surprising to read reports that it won’t be long before we have the equivalent of the eToro’s and Robinhood’s in Australia offering zero commission or free brokerage on share trading.
But I think this is unlikely due to the different structures of the markets, as I set out below.
Firstly, a historical perspective.
When I started CommSec with my colleagues Mal Stott, John Beggs and Mike Katz in 1995, the minimum brokerage rate per trade from any of the then 87 stockbroking firms was $125.00. We thought we were pretty “brave” launching CommSec with a minimum brokerage rate of $75.00, which we later crashed to $29.95 as online trading took off and to fight off the then American owned eTrade. A couple of years’ later after the odd price war, the minimum brokerage rate settled at $19.95.
Today, CommSec dominates the market. Some brokers are cheaper, with SelfWealth currently promoting itself as “Australia’s cheapest online broker” and charging a flat rate of $9.50 per trade.
Over this period and despite 25 years of inflation, brokerage rates have fallen from $125 to $9.50. “Research” and “execution” have been disaggregated (so if you want genuine stock research you pay more), and technology/automation/CHESS and volume have made execution so much cheaper, but this is still a pretty impressive price drop.
On trend, there is no reason to think that brokerage rates can’t head even lower, and possibly towards zero.
However, the Australian and US markets are very different and brokers have direct transaction costs (called ASX fees) that are levied on every trade. While possible, I think it is unlikely.
So, how can the USA have zero commission or zero brokerage trades?
In the USA, orders don’t go into a fully transparent order book (like they do in Australia) where buyers and sellers receive exactly the same price. Rather, they are directed to professional market-making firms who take risk on the trade and effectively clip the ticket. The market makers’ quote a “bid” and “offer” spread, so typically retail clients who are selling transact at the market-maker’s “bid” price, while retail clients who are buying pay the market maker’s offer price. This spread between the “bid” and the “offer” price is how the market maker generates a profit. In absolute terms as a percentage of the overall stock price, it can be very small, but on volume it adds up.
It is not quite as simple as this because order flows are never even and the market maker takes on some risk, but this is the essence of how a market maker earns their keep.
Robinhood and eToro aren’t market makers, but they receive a share of the market-makers’ revenue for directing order flows. There are several market making firms and the brokers effectively auction their order flows in return for a slice of the action. They are not quite secret commissions, but they are not far off!
Another difference is that brokers in Australia cannot earn revenue by making stock loans of clients’ holdings to short sellers.
Former Prime Minister Malcolm Fraser was famous for saying that “there is no such thing as a free lunch” and this is exactly what the US market demonstrates. Retail customers “pay” by not receiving the best execution price. For brokers to not charge commission on share trades in Australia, they will need to think of other ways to recover their costs and the charges the ASX levies. Whether it is from subscription fees, product promotion and advertising, sale of data or another form of commission, you will pay.
But it will be a “brave” broker who makes trading free.
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