Zero-Commission Trading
Zero-commission trading refers to brokerage platforms that charge no explicit per-trade commission for executing equity, ETF, or options transactions, having eliminated the transaction fees that were the standard revenue model of U.S. retail brokerages for most of the 20th century. The shift to zero commissions was pioneered by Robinhood and adopted industry-wide by major U.S. brokerages in October 2019.
For most of the history of U.S. retail brokerage, the cost to execute a stock trade was a meaningful barrier to active investing and portfolio management. In the pre-discount brokerage era, full-service brokers charged commissions of 1% or more of the transaction value. The deregulation of commission rates on May 1, 1975 — a date known as May Day in financial history — opened competition on pricing and led to the emergence of discount brokerages like Charles Schwab and TD Ameritrade, which charged flat per-trade commissions rather than percentages. By the early 2000s, online discount brokerage commissions had declined to roughly $10 per trade, and by the mid-2010s, competitive pressure had pushed typical rates to $5-$7 per trade.
Robinhood, founded in 2013, disrupted this model by offering zero-commission trading from launch, targeting millennial and first-time investors who were deterred by per-trade costs. The platform grew rapidly, and in October 2019, Charles Schwab announced the elimination of commissions on online equity, ETF, and options trades. Within days, TD Ameritrade, E*TRADE, and Fidelity followed, effectively ending the per-trade commission model across the mainstream U.S. retail brokerage industry.
The economic model underlying zero-commission trading relies primarily on payment for order flow (PFOF), a practice in which brokerages route customer orders to market makers — firms like Citadel Securities and Virtu Financial — in exchange for a per-share payment. The market maker profits from the bid-ask spread (the difference between the price at which they buy and the price at which they sell), and shares a portion of this revenue with the broker. Critics of PFOF argue that it creates a conflict of interest in which brokers have an incentive to route orders to the highest-paying market maker rather than to the venue offering the best execution price. The SEC has studied PFOF extensively and proposed rules that would require more competitive order routing, though major regulatory changes to the practice remained ongoing through the mid-2020s.
Zero-commission trading also generates revenue through securities lending (lending shares held in customer accounts to short sellers), cash sweep income (earning interest on uninvested cash balances), margin lending, and premium subscription tiers. Understanding the revenue model of a brokerage is important for evaluating the quality of order execution and the alignment of interests between the platform and its customers.