Is commission-free retail trading net-positive or net-negative?

Technology drives speculation in public markets. Removal of barriers amplify speculative behavior. Commissions were that barrier in retail trading. 

A long time ago, back in 2019 to be exact, several electronic brokers jumped on the train of “commission-free” trades. Robinhood’s primary customer acquisition tactic since inception was commission-free trading. And then all online brokers joined them.

Mobile phones and commission-free trading increases market participation. Millions of people have opened up new online brokerage accounts since the advent of COVID-19. This is a good thing. The issue, however, is that many rookie retail traders are reaching for yield. Daily. And some are indulging in sophisticated financials products like options. Speculative trading vs. investing is the ultimate clash of classes. The former is craving yields and short term wins; the latter cares for long term growth, value creation, dividends and more. 

Here’s a quick glance at increase in day trades since the commission barrier was removed:

So, is commission-free trading a net-positive or net-negative? It depends on who you ask. Having direct access to your trading accounts on a mobile phone is likely a net-positive. Commission-free trading, however, removes intent before buying or selling anything and will only increase speculative activity that will drive market volatility. And we will continue to see random spikes in companies like Fangdd that was randomly mistaken to be FANG stocks.

Date of original publication: June 19, 2020. Link to Substack.

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