Charles Schwab also dropping trading commissions to 0!

That didn’t take long. Great news for high turnover strategies and for P123.

https://www.usatoday.com/story/money/investing/2019/10/01/charles-schwab-stock-drops-after-online-trading-commissions-eliminated/3829394002/

Hooray!

My employer let’s me put my 401k contributions into a self directed brokerage account at Schwab. Pretty nice to not have to worry about commissions or taxes.

Not familiar with 401k self directed accounts. Looks like they are called “brokerage windows” and may have completely different rules , limitations, and costs. All the brokers are scrambling now and not all the details are public or may change. Let us know what you learn. Being able to manage even a part of a 401K is great news for P123 as it opens up a new customer base.

I think it’s specifically called a PCRA Account. I said 401k, but in my case it’s a 457 deferred compensation plan (the public sector equivalent of a Roth 401k). But I think some employers set them up with in 401ks too as an employee benefit. Nationwide is my employer’s retirement plan sponsor, and I had to set up the Schwab PCRA through them and that’s who I have to move money through to fund my Schwab PCRA. Schwab does not charge a fee for PCRA. Nationwide charges me $25 a year for an account maintenance fee, even though I just funnel money through them into Schwab.

https://www.schwab.com/public/schwab/investing/accounts_products/accounts/pcra

In my case, I’ve had this set up for a few months now and have traded ETFs and individual US stocks with no restrictions. I haven’t tried an OTC stock yet, though, as I typically screen them out of my universes. Commissions were free for the Schwab OneUniverse ETFs and the typical $4.95 standard fee for stocks. Obviously, as a retirement account, there’s no margin. I also have a regular taxable brokerage account, a traditional IRA and Roth IRA with Schwab. The PCRA is right there aggregated in the Schwab portal with all my other accounts for easy access. I can conduct all my trades through the portal, no different than my other accounts.

I know at one time that Schwab had an API for 3rd parties, but I’m not sure how seriously they were looked into by P123 and folding into the platform.

https://advisorservices.schwab.com/managing-your-business/tech-integration/api-integration

This is going to put a ton of pressure on Fidelity.

We’ll take another look at Schwab API, thanks

Add Ameritrade to the mix! Love it, win-win for self directed investors:
Better chance to outperform
More options in what strategies are economically feasible
Ability to allocate small monthly amounts to an existing portfolio of stocks
And more disposable income for tools like P123!

What’s amazing is is Vanguard, I believe still charges $7 for a small limit of transactions a year on non-Vanguard products and then bumps it up to $20(!!!) after that limit is breached. And they’re still regarded as the beloved consumer friendly, “low cost” brokerage. Who says brands are dead?

I have a question. A writer at Forbes named Simon Moore wrote last night, “There are other risks from free trading—namely, that brokerages may recoup the costs in less transparent ways. The first is by widening the bid/ask spread. . . . Of course, a brokerage may provide an unattractive spread for you regardless of fees, but the absence of trading commissions means that less efficient trading could be a way for brokerages to capture revenue from trades in a way that’s less obvious to the customer, such as routing trades in a way that leads to wider spreads.”

This doesn’t seem credible, but I am definitely no expert. How would a broker benefit from a wider bid-ask spread? I always thought that the market makers (who manage the order books) were largely independent from the brokers. If a broker had a wider bid-ask spread than another broker, wouldn’t it go out of business pretty quickly? Aren’t the bid-ask spreads set by the market makers at the exchanges? Can a broker actually alter the order book to make the spread larger? If anyone has any insight into this, I’d appreciate learning about how this works.

Thanks!

Yep, got an email from TD Ameritrade about their changes listed on this web page:
TD Ameritrade
Makes me wonder just how much they are able to make from order routing! Brokers aren’t in business to see who goes bankrupt first!

Now my urge to switch to Tradier is lessened. Would love to make use of P123’s order generation and submission, especially if it used current bid/ask pricing and algos to set limits.

I feel I need to chime in. Commissions are being reduced because they are transparent fees – exhibit A, all the talk about commissions in this thread. Brokers are agents and dealers are on the other side of your trades. Dealers pay brokers now for trades and now Brokers now make money by selling order flow.

Dealers like the flow cause they make money by trading against the uninformed, and avoiding trading against the informed. Therefore, reducing commissions alone do not ensure you are getting a better deal. Measuring slippage requires measuring both adverse selection and market impact. Another area where P123 can improve. I would regard this an improvement in the area of technology.

I agree, all else equal, reducing commissions is a win but all else is not equal.

Yuval,

This is a great question. I believe we (all of us) can get some answers with a little research. But I do not think we can find all of the answers—with me being the last to learn everything. Much of this you already know.

First, there is some limit to how far they can extend beyond the BID/ASK spread on your order. They are required to fill your order within the BID/ASK spread (NBBO)—for the amount on the order book at the time of the order. As you know NBBO stands for the National Best Bid and Offer. I think they meet this obligation (as far as I know). Of course, if the book has only 100 orders at the prevailing ASK (for a buy order) then only the first 100 stock are bought at the prevailing ASK under the regulations. Your next 100 (or whatever number) can then be filled at the new ASK according to the regulations.

As far as I can tell we can do a little better (sometimes) in the following ways (probably not an exhaustive list).

  1. Some brokers have access to (and give you access to) dark pools and some part of your order can be filled between the bid and the ask.

  2. Fidelity (as an example) has market makers who will fill at the prevailing BID or ASK beyond what is required by NBBO (will fill at the BID or the ASK for more than the number stocks on the book at that that price). They are nimble enough with enough access to dark pools and multiple exchanges (with computer assistance) that they can still profit by doing this.

  3. For VWAP orders the market maker will try to “Make” liquidity. When they do you get a savings and they keep the rebate for being a “Maker” and not a “Taker” (of liquidity). Many exchanges offer a rebate (which is usually not passed onto the trader) for “making liquidity.”

There was publication of results of price improvement in the past (IB did not participate). Charles Schwab has done well regarding price improvement historically (as has Fidelity).

For limit orders: try routing through NASD. This is anecdotal so try it is my only recommendation. See this link for a limited (and old) reference of the NASD routing of limit orders for retail investors: https://www.finra.org/rules-guidance/notices/94-58. While old it does show that NASD has made efforts to protect the retail investor.

Finally, I think IB charges a commission and makes a profit from your trades in other ways too. IMHO, you have to get the high volume discounts, get some of the rebates (“Maker” of liquity) and be savvy regarding routing and ALGOs for IB to work for you.

I think SUPirate1081 is savvy and makes IB work for him: he tries to be a “Maker” and collects a rebate for doing this when possible. Maybe he will comment again (updating and correcting some of my impressions).

Would love any corrections or additional information. For now I like Charles Schwab for simple orders.

It goes without saying that whatever I think I know now could change with the commissions war.

As far as how brokers can profit through payment for routing, that takes no imagination. They just pocket the payment. How do the people who pay for routing profit? It would take a lot of imagination to figure out how they wouldn’t if they have access to enough dark pools and large block orders that are to be filled over an extended period.

-Jim

This is a good point, but do the large brokerages even really care about trading generated revenue anymore? In 2018 8% of Schwab’s total revenue came from trading activity, 57% came from “Net Interst Revenue”. From their 2018 annual report "Schwab’s primary source of funds is cash generated by client activity which includes bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients. " Trading seems to be just a dangling carrot to get their hands on their client’s idle cash in other to use it for loans and buying bonds and higher yielding assets.

Cary,

This is an interesting point. I do not know the answer to this question. But are they acting a little like a bank? A bank making at least some risky loans (e.g., margin loans). Is there a concern?

What part of our account is insured? Will we be looking for a bailout in the next crisis? I guess Goldman Sachs got a bailout in the last one. But also MFGlobal did not make all of their clients completely whole, I think.

I am probably missing something and I am not going to start worrying just yet. Just a thought

Anyway, very interesting.

-Jim

Yes, they really are like banks now. Aside from utlizing their clients cash for higher yield, they have other revenue streams that are typical to large banks. They offer a FDIC Insured Checking account with online bill pay and mobile deposits through their app. An official Schwab American Express credit card with cash back rewards. A partnership with Quicken Loans so that you can apply for a home mortgage through the Schwab Portal. I would be surprised if Fidelity, TD and all the big brokerages aren’t the same.

E*TRADE Announces $0 Base Rate Commissions for Online Stock, ETF, and Options Trades effective Oct-7.

Here is a link from Bloomberg that expands on Cary’s post: [url=https://www.bloomberg.com/opinion/articles/2019-10-03/schwab-commission-free-trading-means-disruption-for-advisers]https://www.bloomberg.com/opinion/articles/2019-10-03/schwab-commission-free-trading-means-disruption-for-advisers[/url]

One reason for adding this is that the article talks about the relationship between discount brokers and advisors.

Would P123 be an advisor as defined by the authors of the article?

If so, looks like Schwab would not mind if the average retail investor bypassed P123 and went directly to Schwab.

On a deeper level it is like game (in the mathematical sense): a cooperation/competition game. Here is an example of a similar and real game. Physician needs the hospital for the operating room (unless the surgeon builds its own ambulatory surgery center) and to admit sick patients. The hospital needs the physicians to refer patients to their hospital (and not another hospital in the community).

In a move similar to Schwab’s decision (as per the article), the hospitals have decided to hire their own physicians. Actually most cooperation with the non-employed physicians is illegal (anti-kickback laws) but that is another story.

Anyway, Schwab would like to bypass P123 and move any advisors people may need into Schwab, if the article is to be believed.

On the other hand. Tradier does not have a lot of in-house advisors. IB, not so much either I think. So, they probably still want to cooperate with P123.

IB is hit much harder than Schwab by the loss of commissions, I think. Tradier, is built on the idea of no commissions, so it may be well suited to this environment.

“Fascinating, Jim. Any useful information in this long post?”

Yea. IB needs P123 more than we could have realized: their advisor base is being threatened. P123 should try to negotiate the reduced high volume discount on commissions (and the market maker rebates) with IB. P123 probably does provide the volume required (aggregated) for the discount. It would be in their interest, I think, as the they still make money on the trades and the increased flow would more than make up for the discount in the long run.

-Jim

I tried with IB… They think they are smarter than all , and get offended if told their platform is hard to use.

A question by Jim: [quote]
Would P123 be an advisor as defined by the authors of the article?
[/quote]
The article suggests advisors will be courted/bought by the brokers, to capture the advisory fees. A parallel desire by brokers would be to attract more investors by adding tools that provide capabilities they do not currently market. TD Ameritrade, for one, focuses heavily on technical traders. They and other brokers lack the kind of analytical tools provided by Portfolio123.

I can’t help but think that Portfolio123’s analytical tools and techniques would add value for brokers as they search for new sources of income, thereby making Portfolio123 an asset to pursue. I hope that this company can remain independent and grow, for my own selfish reasons!

To further expand on Cary’s post: Schwab really does want to use your money.

From Schwab’s site:

"Schwab has eliminated sweep money market funds as a cash feature for most new and existing accounts."

Fidelity (for now) has the option of an FDIC insured cash sweep or SPAXX which is a “Fidelity Government Money Market.” The seven day yield was 1.62% on SPAXX.

BTW, SIPC insures your account for $500,000 if the brokerage goes broke. SIPC would not insure SPAXX if the government bonds became worthless (not likely) but there is the FDIC insured option for worriers—e.g., those who become concerned when the impeachment civil war begins and the red states issue their own currency;-)

Free commissions could cost you if you keep a lot of cash in your account assuming you are not like Marco (and are more like me) and do not put your cash into MINT each day after your trading of stocks is done—or you cannot buy MINT commission free.

-Jim