How the Zero-Commission Era is a Boon for Traders and Investors

Mainstream online brokers have (reluctantly) entered the zero-commission era. While trading commission rates have been falling, the major online brokers took a momentous leap to zero-commission stock trading in 2019 causing an industry-wide paradigm shift forcing literally all online brokers to adopt the zero-commission model to remain relevant. This movement was to stave off-market share losses to nimble fintech players like Robinhood and WeBull. This has been a boon for traders and investors. The benefits of commission-free trading can widely offset the drawbacks.

Intraday Scalpers Rejoice

Active intraday traders that adopt a scalping strategy stand to reap the most benefits from commission-free stock trades. Instead of paying a $5-per trade or a per-share schedule averaging $0.005-per share with $1-minimum per trade, they are keeping all profits. More importantly, this enables scalpers to improve their pricing by administering more scaling into and out of trades, rather than a one-shot entry and exit. In fact, the true edge or evening of the playing field is the ability to scale into and out of positions just like market makers.

Liberating the Psyche

Trading is mostly psychological and requires clear thought and quick reaction. With no commissions, traders and even investors have the luxury of scaling into a position in the smallest increments with no cost restrictions from commissions. This is a liberating psychologically as well as financially. Commission-free trading enables traders to scale into positions more effectively and improve their average price. Trading 100 to 200 shares with a per-trade commission meant having to buy larger shares to offset the fixed expense of commissions inadvertently forcing traders to take on larger size which entails more risk for the trade to make sense.

For example: Buying 500 shares at 60.50 means selling above 60.60 for at least a $0.10-profit to breakeven on commissions at $5-per trade. Psychologically, this is a terrible way to start a trade and can potentially hinder proper decision-making and reaction especially if the trade turns sour requiring a stop-loss. Knowing that any trade taken starts the trader in the red and having to make up the commission first before seeing any profits can hamper actions when a set-up fails. Paying commissions on top of taking a loss feels like pouring salt in the wound any way you slice it.

Scaling Levels the Playing Field

With commissions no longer a factor, traders can and should administer scaling into and out of positions to refine their trades. Rather than buying 1,000 shares at a single price point and sitting through wiggles, scaling into a position in 100 to 300-share lots enable better fills and improve average share price. Most importantly, it also enables the ability to scale down and out of a position for stops or profits.

Scaling Scenario

Let’s take a scenario utilizing the long scalp strategy composed of a market structure low (MSL) trigger combined with a stochastic 20-band crossover long trade. This is a trend reversal trade that utilizes trading a near-term bottom off an MSL and stochastic trigger. Scaling into the long position starts with testing the leans with 100-200 shares as the stochastic %K and $D cross each other under the 20-band around 20.70s-20.60s. As the stochastic crossover rises through the 20-band, the largest size around 500-shares to taken in the 20.90s to average 1,000 shares long around 20.85 with five-entries. As the stochastic oscillation rises towards the 80-band, 600-share are scaled out at 21.60 into the spike as a potential market structure high (MSH) forms under the five-period SMA as stochastic pauses at the 80-band. If the stochastic crossover down forms, then the rest of the shares are stopped out at 21.50.

However, the stochastic stalls and forms a “mini pup” squeeze that surges shares higher through the 80-band enabling a flush of liquidity to scale-out 200-shares at 21.90 then 100-shares at 22.20 and the final 100-shares at 22.40 into the ‘stinky 2.50s’ price level. The ability to scale into and out of position enabled the trader to capture upwards of 1.50 of price movement, whereas a straight one-shot scalp at the MSL trigger to the first 80-band stochastic test resulted in playing only 0.60 to 0.75 of the price range.

This trade consisted of a total of 10-trades or $50 in commissions under the traditional per-trade schedule, which goes into the trader’s wallet. This is important but more important is how scaling enables a trader to ease into the sizing within the thresholds of their comfort zone. It enables the trader to ‘flow’ with the price action, rather than the rigid one-shot entry and exit approach.

Scaling Offsets Downfalls of Order Flow Traps

The one drawback of commission-free trades is the lack of hiding any transparency. Your order flow is sold to various third-party participants and market makers. There are no reserve or hidden orders and you are at the mercy of how they will fill your orders. This sounds dreadful, but, it’s not bad. The key is to keep sizes small and incremental to fly under the radar. If you are placing 5,000 share block orders, you’re asking to get preyed upon, but 500 share increments are less noticeable.

Zero-Commissions not Zero-Fees

This distinction must be remembered. Read the fine print with your brokerage platform of just what qualifies for zero-commission trades. While stock trades are standard, not every broker is offering zero-commission on options trades. Some brokers offer zero-commission on just their browser-based platforms while the standalone platform has traditional commissions. Regulatory fees, data, and software fees are unavoidable but also pay attention to any maintenance fees. Overall, this new era of commission-free trading is a win for retail traders and investors.