Forum: Are zero-commission trades too good to be true?
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The report “ Online brokers in Singapore cut trading costs to woo investors
It said that online brokerages and share trading platforms are slashing fees and offering a range of perks to attract customers amid intense competition in the sector. Some online brokerages even go as far as to provide zero-commission trades for a certain period of time.
A rational person might ask: How, then, do these online brokerages survive as a business? As we all know, there is no such thing as a free lunch.
It has been reported in the United States that some online brokerages receive a substantial portion of their income from the sale of customer order flows to market makers.
What this means is that the customer could end up with higher buy prices and lower sell prices, as the market maker would offer to buy from customers at the lower bid price and sell to them at a slightly higher offer or ask price.
The difference between bid and ask spreads is normally quite small and not noticeable to the customer due to the rapidly changing prices.
However, it is so profitable to the market makers that they are willing to pay hundreds of millions of dollars to online brokerages for the order flows.
The loser in this scenario is, unfortunately, the customer. Hopefully, this is not the practice in Singapore.
Traditional brokers engage the services of remisiers and dealers, who provide customers with personalised services. They not only execute trades for customers, but also provide value-added services like keeping them updated on corporate actions and initial public offers, reviewing general market conditions and handling any post-trade issues.
Quality research is also provided so that the customer can make an informed investment decision.
Online brokers do not normally provide such services, and are thus able to charge lower commissions.
At the end of the day, the customer has to decide what is more important – lower trading costs, or receiving the services of experienced remisiers and dealers who can help him in his investment journey in the long term.
S. Nallakaruppan
President
The Society of Remisiers (Singapore)
