How do commission-free brokers make money?

They often use payment for order flow, selling your orders to market makers. This can result in worse execution prices, and some brokers fill orders near the extreme ends of the bid-ask spread.

Why do options and futures have high hidden costs?

These instruments usually have per-contract fees that accumulate rapidly as your trading volume increases. A futures contract can cost several dollars round trip, which adds up fast.

How can i reduce the impact of trading fees?

Compare brokers to find low commissions for your specific assets, review your statements to track all charges, and hold positions longer so fees become a smaller percentage of your overall gains.

Hidden Trading Fees That Eat Your Profits

Hidden fees can take a large bite out of your profits, especially if you trade often or deal with small margins. Scrutinize your broker's fee structure because many costs are not obvious.

Common fees include foreign exchange fees on international assets, the bid-ask spread, and payment for order flow where brokers sell your orders to market makers for less favorable execution prices.

Even small percentage fees add up fast. A 0.1% fee on both ends of a trade takes 20 percent of a 1 percent profit, and commission-free brokers often make up the cost elsewhere with wider spreads.

Hidden Trading Fees That Eat Your Profits — infographic

Hidden fees in trading can significantly erode profits, especially for frequent traders. Always scrutinize your broker's fee structure, as many common costs are not immediately obvious.

Common Hidden Fees

Foreign Exchange (FX) Fees: When trading international assets, conversion fees can be substantial, often disguised within the exchange rate or as a small percentage that adds up quickly. "FX Fees are where they get you"

Bid-Ask Spread: This is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. "I consider spread as a fee too. A +1% move might be a +0.9% move after fees"

Payment for Order Flow (PFOF): Some "commission-free" brokers earn revenue by selling your orders to market makers, potentially leading to less favorable execution prices. "They have to get their money somehow and it’s the ridiculous payment for order flow they have."

Impact of Fees

Eroding Small Profits: For scalpers or those making many small trades, even seemingly small fees can consume a large percentage of gains. "0.1% trading fee when buying and selling would be 0.2%. If you scalp for 1% you will incur 0.2% trading fees. That is 20% of your profit!"

Hidden Costs in "Free" Trading: Brokers advertising free trades often have other ways of charging, such as wider bid-ask spreads or higher FX fees. "The study found that Robinhood was more likely than other brokers to fill orders near the extreme ends of the bid-ask spread."

Options and Futures are Particularly Susceptible: These instruments can have per-contract fees that accumulate rapidly with higher volumes. "Futures cost like 4 dollars round trip for one contract. That adds up FAST especially if you have any decent volume."

Strategies to Mitigate Fees

Choose the Right Broker: Research and compare brokers that offer low or no commissions for your specific trading style and assets. "Fees can vary quite a lot. Most brokers these days don't charge commissions for stock trades at all, and that includes ETFs and ETNs."

Understand Your Statements: Regularly review your trading statements to identify all charges. "I ended up building a simple way to estimate it because I couldn’t find anything decent"

Adjust Trading Frequency and Strategy: Consider longer-term trades or higher profit targets to make fees a smaller percentage of your overall gains. "If fee worries you, then you're playing at too low of a time frame with very fast holding time."

Are you currently with a broker that makes it difficult to see all your trading costs?

Best for: frequent traders and investors looking to understand and reduce the hidden costs of their trades.