• There's no such thing as free brokers
  • IB lite, Charles Schwab, Robinhood, Trading 212

No fees brokers

  • completion of buy/sell order for a security (stock, etf...)
  • happens when it gets fulfilled (!= when investor places it)
  • brokers obligation by law: best execution possible
    • or report execution "quality"

Trade Order Execution

Trade Order Execution

Execution ways

  • manner in which your orders are filled
  • Factor 1: Number of exchanges brokers trades at/has access to
    • price of security differ slightly from exchange to exchange
  • Example
    • buy AMZN
    • NASDAQ: $2045, Tradegate: $2040
    • Broker buys it for $2040, charges you $2045
    • $5 "loss" per share

Trade Execution Quality

  • Factor 2: executing order in house

Trade Execution Quality

  • Factor 3: broker's "preferred" market maker
  • PFOF - payment for order flow
    • market makers offer compensations to client A & B's brokers

Trade Execution Quality

  • client A ask price: $190
  • client B bid price: $200
  • market maker PFOF: $1
  • Result:
    • (PFOF) market maker=>client A broker: $1
    • (PFOF) market maker=>client B broker: $1
    • market maker fee: $2
    • Total fees: $4
    • client A sells for $193
    • client B buys for $197

PFOF example

  • Ponzi scheme
    • fraudulent investing scam promising high rates of return with little risk to investors
    • generates returns for early investors by acquiring new investors
  • Bernie Madoff executed largest Ponzi scheme in history
    • PFOF author

Fun Fact