Is commission-free share trading coming to Australia?
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It’s taken longer than expected, but zero commissions on share trades went mainstream in the US last week. And this could see it head Down Under sooner rather than later.
Up until now, punters had to pay the broker to buy or sell shares through an online share trading account — it could be a flat fee (~$10) or a percentage of the total transaction value (like 0.12 per cent for transactions over $25,000).
But about five years ago, US fin-tech Robinhood launched a zero-commission share trading app targeting millennials.
It was a stripped-down product with almost no bells and whistles — no research, for example — but it helped Robinhood get a foothold in the US market. It also made it hard for rivals to ignore.
This week, large US broker Charles Schwab cut its commissions on trades to zero; rivals Ameritrade and E-Trade followed suit almost immediately.
They are different markets, but this could — potentially — lead to Australian punters enjoying zero commissions across the board if they trade local shares through an online broker.
But for shareholders in one of the locally listed stockbrokers, such as Bell Potter (ASX:BFG) or Euroz Securities (ASX:EZL), the prospect of disappearing revenue from dealing commissions could be a reason to look again at these investments.
In the middle of a prolonged bull share market, Bell Potter, for example, is generating close $100 million a year from brokerage commissions.
Euroz doesn’t break out its commission income, which as a WA based broker would be far smaller.
But both companies are well diversified. Bell Potter, for example, has margin lending as well as its own online broking platform, while its size has given it a handy presence in ancillary fields such as underwriting initial public offerings along with handling placements for listed companies.
Euroz also has some listed investment companies in its stable, which provide an additional source of income.
For the US brokers, abandoning commissions doesn’t cut entirely their income from client trades, since they win a commission from the companies the brokers place their order with for trades to be executed.
This, for example, is how Robinhood makes money from its zero-commission trading platform.
This works a little like those zero commission forex shops, which make their money out of the lousy exchange rate they offer you.
Zero commissions on trades may make the headlines but whether it is all bad news for brokerage bottom lines is a harder call.