Zero-Fee Brokerage Model
Robinhood pioneered commission-free stock trading in 2015, and by 2020 every major brokerage had followed. The pitch was democratization — remove the $7-10 per trade barrier and let everyone participate in markets. Trading volumes exploded. Millions of new retail investors opened accounts. But free trading isn't free. The revenue shifted from commissions to payment for order flow (PFOF), where brokerages sell customer orders to market makers like Citadel Securities. This creates a structural conflict of interest: the brokerage's customer is the market maker, not the retail investor. Worse, zero friction encourages overtrading. Retail investors who would have thought twice about a $7 trade now execute dozens of speculative trades daily. The gamification of trading — confetti animations, push notifications, fractional shares — turned investing into entertainment, and entertainment into losses.
What people believe
“Free trading democratizes markets and helps retail investors build wealth.”
| Metric | Before | After | Delta |
|---|---|---|---|
| Retail trading volume | Baseline | +300% | +300% |
| Average retail investor returns vs index | -2%/yr (with commissions) | -4-6%/yr (overtrading) | -3% |
| New brokerage accounts | Baseline | +150M accounts (2020-2024) | Massive increase |
| Options trading by retail | 5% of volume | 25% of volume | +400% |
Don't If
- •You're building a trading platform and your primary revenue is payment for order flow
- •Your app design encourages frequent trading through gamification mechanics
If You Must
- 1.Disclose payment for order flow prominently, not buried in terms of service
- 2.Show users their total trading costs including spread, not just commissions
- 3.Add friction to high-risk trades like options and margin
- 4.Display long-term performance comparisons against index funds
Alternatives
- Low-cost index investing — Vanguard model — low fees, long-term focus, no gamification
- Subscription-based brokerages — Flat monthly fee aligns incentives with investor outcomes
- Direct indexing — Custom index portfolios without trading temptation
This analysis is wrong if:
- Retail investors using zero-commission platforms achieve returns matching or exceeding index funds over 5+ years
- Payment for order flow provides better execution quality for retail investors than commission-based models
- Increased trading frequency correlates with improved financial outcomes for retail investors
- 1.SEC Report on Payment for Order Flow
SEC analysis showing PFOF creates conflicts of interest and may reduce execution quality for retail investors
- 2.FINRA: Retail Trading Activity During COVID
Data showing 300% increase in retail trading volume correlated with zero-commission adoption
- 3.Barber & Odean: Trading Is Hazardous to Your Wealth
Seminal research showing individual investors who trade most earn the lowest returns
- 4.Massachusetts Securities Division: Robinhood Complaint
Regulatory complaint documenting gamification strategies and their impact on investor behavior
This is a mirror — it shows what's already true.
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