Commissions and Fees

Commissions and fees are the explicit costs of trading: the amounts your broker, the exchange, the clearing house and regulators charge for each trade. Since many US brokers moved to zero commission stock trading in 2019, it is easy to assume trading is free. It is not. Fees still apply in most markets, and for active traders the difference between fee structures can add up to thousands a year.

Commission structures#

The fees behind each trade#

Beyond the broker's commission, a trade can include:

• Exchange fees: charged by the trading venue; in US stocks, venues often charge takers and pay makers small rebates.
• Clearing fees: for clearing and settling the trade.
• Regulatory fees: in the US, the SEC's Section 31 fee and FINRA's trading activity fee apply to stock sales, and the NFA charges a small fee on futures.
• Options contract fees: per contract charges from the broker and the options clearing system.
• Transaction taxes: such as UK stamp duty on share purchases or financial transaction taxes in some European countries.

Maker and taker fees#

Many exchanges, especially in crypto and futures, charge different fees to orders that add liquidity (makers) and orders that take it (takers).

Fees often drop with higher monthly volume. Using limit or post-only orders can cut costs significantly. See Post-Only and Reduce-Only Orders.

"Free" trading is not free#

Zero commission brokers earn money in other ways: payment for order flow, the interest on cash balances, margin lending, securities lending and spreads on currency conversion. None of these is necessarily bad, but they mean the cheapest headline commission is not always the cheapest total cost. Compare execution quality as well. See Best Execution and Execution Quality and Order Routing and Smart Order Routing.

Other account fees#

• Platform and data fees for advanced tools and real time data. See Market Data Fees.
• Inactivity fees at some brokers.
• Withdrawal and transfer fees.
• Currency conversion fees when trading foreign markets.
• Margin interest on borrowed money. See Margin.

Comparing brokers on cost#

1. Estimate how many trades you make a month, in which markets and what size.
2. Calculate commissions and all pass through fees for that activity.
3. Add expected spread and slippage differences, which can outweigh commissions.
4. Add fixed costs: platform, data and inactivity fees.
5. Compare the total, not the headline. See All-In Trading Cost and How to Choose a Broker.

Frequently asked questions#

Is commission free trading really free?#

No. You still pay spreads and regulatory fees, and brokers earn from order flow, interest and other services.

What is a maker fee?#

A fee, often lower or even negative (a rebate), charged when your order adds liquidity by resting in the order book.

Do commissions matter for long term investors?#

Much less than for active traders, because they trade rarely. Fund expense ratios and taxes usually matter more.

Sources#

• Wikipedia, Broker
• Wikipedia, Transaction cost