Zero-commission brokers selling order flow are the new intermediaries. Who will disrupt them?

In October the US market witnessed the Robinhood effect. Schwab slashed its stock commissions to zero, which in turn forced TD Ameritrade, E-trade, Interactive Brokers, Ally Invest, and Fidelity to follow suit over the next few days. Schwab called this the zero-commission brokerage war, on CNN. A week or two later, after Bank of America reported better than expected earnings, they also announced the expansion of their online zero-commission program through the Merrill Edge Self-Directed program.

One private Fintech, Robinhood, has managed to drag along all these publicly traded companies. Some of them are pure brokerage businesses and others are much broader financial services providers. They are all however public and disclose their business practices and their revenue sources. Robinhood, despite being a native Fintech, has been relatively opaque about the way it makes money and its revenues.

Now that one private company and half a dozen publicly traded providers have all zero stock commissions, let’s look at how things are working behind the scenes. How are they making money from the happy clients that trade stocks for free? The happiest ones being those that actively trade, the high turnover DIY individuals or smaller money managers. There are only two ways…