Brokers Profit From You Even If They Don’t Charge for Trading

From sharing pictures to sending email to streaming videos, we’re all used to the idea that many of the things we do online are free. We also know that none of those things are really free—Facebook Inc., Google, and other internet companies have plenty of ways to make money off of us once we sign up. Now another industry has adopted this business model: online stockbrokers.

On Oct. 1, Schwab said it would cut commissions on trades for stocks and exchange-traded funds to zero, followed on the same day by TD Ameritrade and ETrade the day after. It was the logical endpoint of a decades-long brokerage price war that began when the U.S. Securities Acts Amendments of 1975 ended fixed trade commissions. Some brokerages took that opportunity to increase their fees, but a former newsletter writer named Charles Schwab charged a comparatively affordable $70 a trade. The discount brokerage business was born, and as technology got better and competition grew more fierce, the common price points kept falling—to about $13 a trade in 2005, then $5 by this year.