From Commission Fees to Zero-Commission Trading
The elimination of brokerage commissions is one of the most significant structural changes in the history of retail investing. For more than two centuries, buying and selling stocks cost money in the form of commissions paid to brokers. In October 2019, the major U.S. brokerages eliminated those commissions entirely. The cost of executing a stock trade for a retail investor went from hundreds of dollars in the 1970s to zero in less than fifty years. This transformation reshaped who invests, how they invest, and how the brokerage industry makes money. The path from fixed commissions to free trading involved regulatory battles, business model innovation, technological change, and a startup that forced the hand of an entire industry.
The Fixed Commission Era
From the Buttonwood Agreement of 1792 through May 1975, brokerage commissions on the New York Stock Exchange were fixed. Every member firm charged the same rates, set by the exchange. There was no price competition. A customer buying 100 shares of any stock paid the same commission at Merrill Lynch as at any other member firm.
These fixed rates were high by modern standards. In the early 1970s, a round-trip trade (buying and then selling) on a few hundred shares of stock might cost $100-$200 or more. For institutional investors trading large blocks, the commissions were enormous. A pension fund buying 10,000 shares of a $50 stock paid fixed commissions that bore no relationship to the actual cost of executing the trade.
The fixed commission system served the interests of brokerage firms, which earned guaranteed revenues regardless of the quality of their service or the efficiency of their execution. It did not serve the interests of investors, who paid above-market rates for a commodity service.
Institutional investors found workarounds. "Soft dollar" arrangements allowed institutional managers to direct trades to brokerages that provided research, data services, or other benefits in exchange for commission flow. Regional exchanges and the over-the-counter market offered somewhat lower rates. But the fixed commission system on the NYSE remained intact.
May Day: The End of Fixed Commissions
The SEC abolished fixed commissions on May 1, 1975, a date known on Wall Street as "May Day." The change was driven by years of pressure from institutional investors, academic economists who argued that fixed prices in competitive markets were economically inefficient, and congressional scrutiny of the securities industry.
The immediate effect was a decline in commission rates for institutional investors, who could now negotiate volume discounts. Rates for small retail trades initially fell less dramatically, as the full-service brokerages maintained their pricing for individual clients who valued research and advice.
But May Day created the opening for a new type of brokerage. If commissions were negotiable, a firm could offer bare-bones execution at a fraction of the full-service price.
The Discount Brokerage Revolution
Charles R. Schwab founded his brokerage in San Francisco in 1971 but began aggressive marketing after May Day made discounted commissions legal. Schwab's model was simple: eliminate the research departments, the branch offices, and the account executives that full-service firms maintained, and pass the cost savings on to customers in the form of lower commissions.
A trade that might cost $100 at Merrill Lynch could be executed at Schwab for $30-$50. The trade-off was that Schwab customers received no advice and no research. They made their own investment decisions and used Schwab purely for execution.
Other discount brokers followed. Quick and Reilly, launched in 1974, was among the first. Olde Discount (later absorbed into Ameritrade) offered similar low-cost execution. By the early 1980s, the discount brokerage category was established, though it remained a small fraction of the overall market. Most retail investors continued to use full-service brokers who provided advice alongside execution.
The Internet Takes Commission Costs Lower
The internet transformed the brokerage business in the late 1990s. Online execution was cheaper to provide than telephone-based execution, and the savings were passed on to customers. E*Trade, which had existed since 1982 as a service for early personal computer users, relaunched as an internet brokerage in 1996. Ameritrade, DLJdirect, and Datek followed.
Commission rates fell sharply. By the late 1990s, online brokers offered trades for $8-$30, down from $50-$100 a few years earlier. The price war intensified through the 2000s. By 2010, the major online brokers (Schwab, TD Ameritrade, E*Trade, Fidelity, Interactive Brokers) were charging $5-$10 per trade.
The decline in per-trade commissions was partially offset by increased trading volume. Lower costs encouraged more frequent trading, particularly during the dot-com boom. Online brokers also diversified their revenue streams, earning money from interest on margin loans, cash sweeps (investing customers' idle cash and keeping the spread), and payment for order flow.
Payment for Order Flow
Payment for order flow (PFOF) is the practice in which a brokerage routes its customers' orders to a market maker, and the market maker pays the brokerage a small fee for each order. The market maker profits by executing the orders at prices slightly better than the public market quotes (pocketing the difference), while the brokerage earns revenue without charging the customer a commission.
PFOF was pioneered by Bernard Madoff in the 1980s (in his legitimate market-making business, separate from his later Ponzi scheme). Madoff paid brokerages to route their order flow to his firm, Madoff Securities. He was able to do this profitably because retail order flow is valuable: retail orders are less likely to be driven by information (as opposed to institutional orders, which may reflect research or insider knowledge), making them less risky to trade against.
The practice was controversial from the beginning. Critics argued that PFOF created a conflict of interest: the brokerage was paid to send orders to the market maker that paid the most, not necessarily the one that provided the best execution for the customer. The SEC studied PFOF multiple times and allowed it to continue, requiring only that brokerages disclose the practice and that execution quality remain competitive.
PFOF became the economic foundation of commission-free trading. If a brokerage could earn enough revenue from PFOF, margin lending, and cash sweeps, it did not need to charge commissions. This was the insight that Robinhood would exploit.
Robinhood: The Catalyst
Robinhood Markets, founded in 2013 by Vladimir Tenev and Baiju Bhatt, launched its trading app to the public in March 2015. The app offered commission-free stock trading with a sleek mobile interface designed for a generation of users accustomed to consumer apps like Instagram and Uber.
Robinhood's business model relied heavily on PFOF. The company routed customer orders to market makers including Citadel Securities and Virtu Financial, which paid Robinhood for the order flow. Robinhood also earned revenue from margin lending (Robinhood Gold subscribers could borrow money to trade) and from interest on uninvested cash. The app played a central role in the growth of retail investing.
The app attracted millions of young, first-time investors. Its design emphasized simplicity: a few taps to buy a stock. It introduced fractional shares, allowing users to buy $1 worth of Amazon stock. It made options trading accessible to users who might not have understood the risks involved.
Robinhood grew rapidly. By 2020, the company had more than 13 million funded accounts. Its users were younger and less wealthy than the customers of established brokerages, representing a new demographic of market participant.
The Industry Responds
For years, the established brokerages could afford to ignore Robinhood. Its customers were small. The average account balance was a fraction of what Schwab or Fidelity customers held. But by 2019, Robinhood's growth was impossible to dismiss.
On October 1, 2019, Charles Schwab announced that it was eliminating commissions on online stock and ETF trades. TD Ameritrade matched the move the same day. E*Trade followed the next day. Fidelity dropped commissions shortly after. Within a week, the commission, which had been the primary revenue source for retail brokerages for over two centuries, was effectively zero across the industry.
The established brokerages could absorb the lost commission revenue because commissions had already become a small fraction of their total revenue. Schwab earned the bulk of its revenue from interest on margin loans and cash sweeps. TD Ameritrade had diversified into advisory services and derivatives trading. Fidelity had its massive mutual fund business. The commissions that had once defined their business model had been declining as a share of revenue for years.
The elimination of commissions accelerated a wave of industry consolidation. Schwab acquired TD Ameritrade in a $26 billion deal announced in November 2019. Morgan Stanley acquired E*Trade in 2020 for $13 billion. The number of independent retail brokerages shrank as the economics of the business shifted toward scale.
The True Cost of "Free"
Commission-free trading is not costless. The costs have shifted from explicit commissions to implicit revenue sources, some of which are less transparent.
PFOF means that retail orders are executed by market makers who profit from the spread between the price at which they buy and the price at which they sell. Studies have shown that retail investors generally receive execution prices that are as good as or slightly better than the best publicly quoted prices (a concept called "price improvement"). But the question of whether investors would receive even better prices without PFOF, if their orders were exposed to the full competitive marketplace, remains debated.
Cash sweeps generate revenue for brokerages by investing customers' uninvested cash in low-yielding vehicles while market interest rates may be significantly higher. The difference between what the cash earns and what the customer receives represents an implicit cost.
Options trading, which Robinhood and other brokerages have made easily accessible, generates PFOF at rates several times higher than stock trading. Critics argue that the economic incentive to promote options trading has led brokerages to make it too easy for unsophisticated investors to trade complex instruments they do not fully understand.
Securities lending, in which brokerages lend out customers' shares to short sellers in exchange for fees, is another revenue source. Customers may not receive any portion of the lending income, even though it is their shares being lent.
The Behavioral Consequences
The elimination of commissions has changed investor behavior in measurable ways. Trading frequency has increased. Retail investors as a group now account for roughly 20-25% of U.S. equity volume, up from less than 10% a decade earlier. Options trading by retail investors has surged, particularly in short-dated contracts.
The GameStop episode of January 2021, in which retail investors organized through social media to drive up the stock of heavily shorted companies, was facilitated by commission-free trading. Investors who might have thought twice about buying a speculative stock when each trade cost $10 had no such friction when trading was free.
The academic literature on transaction costs and investor behavior suggests that lower costs generally benefit investors, but the relationship is not straightforward. Some investors trade too much, and the elimination of commissions removes a friction that, for some people, served as a useful brake on impulsive behavior. The evidence on whether commission-free trading improves or worsens outcomes for the average retail investor is mixed and still accumulating.
Where Things Stand
Commission-free trading is now the standard for retail stock, ETF, and options trading in the United States. The revenue model has shifted from explicit per-trade charges to a combination of PFOF, interest income, cash management, options flow, and premium subscription services. The SEC has studied PFOF extensively and proposed regulations that could alter how it operates, but as of the mid-2020s, the practice continues.
The trajectory from fixed commissions to zero took 44 years, from May Day 1975 to October 2019. Each step along the way, from discount brokerages to online trading to mobile apps, reduced the cost of participating in the stock market. The barrier to entry for a new investor in 2026 is essentially zero: no commissions, no minimum balances at many firms, and the ability to buy fractional shares.
This democratization of access is the most positive legacy of the commission revolution. The most concerning legacy is the shift from transparent pricing (a known commission per trade) to opaque pricing (revenue generated from order flow, cash sweeps, and other sources that most investors do not fully understand). The cost of trading has not been eliminated. It has been made invisible.
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