Zero-Commission Trading and Hidden Spread Costs

Zero-commission trading reshaped how retail investors step into the market. Robinhood made it mainstream, traditional brokers followed, and before long the familiar per-trade fee was gone. The idea sounded simple enough: trading should be free.

It never was. The cost didn’t disappear; it just moved somewhere less obvious.

How Brokers Replaced Commissions

When brokers stopped charging $7 per trade, nothing about their business became less commercial. The revenue simply shifted away from visible fees toward the flow of retail orders.

The center of this system is payment for order flow. When you send a trade, many brokers don’t route it to an exchange. They sell it to a market maker. Firms such as Citadel Securities and Virtu Financial compete for these orders because they can earn money inside the bid–ask spread. The broker receives a small payment for directing the flow their way.

Other sources fill out the model. Idle cash earns interest that rarely finds its way back to the account holder. Borrowed funds generate margin interest. Shares in a margin account can be lent to short sellers. Some platforms sell premium tiers. The commission vanished, but nothing else became free.

The Spread Is the Cost

Every quote shows two numbers: the highest price buyers will pay and the lowest price sellers will accept. The distance between them is the spread, and for most retail traders that is where the cost of “free” trading lives.

A market buy lifts the ask. A market sell hits the bid. The difference is paid each time a position is opened or closed.

On liquid stocks, this cost is tiny. A penny-wide spread on Apple does not move the needle for most traders. On thin small caps, spreads can be large enough to feel like a toll. Options often carry spreads that matter on every contract. Retail crypto platforms can show spreads that dominate the entire transaction.

A $5,000 trade in a mega-cap stock barely registers. The same trade in a thinly traded name can cost far more, simply because fewer participants are quoting and market makers have to account for greater risk.

When Zero Commission Costs More

The assumption that zero commission is always the cheaper option only holds when spreads are tight and trade sizes are small. Once execution quality enters the picture, the story changes.

Some brokers route orders directly to exchanges. Others send everything to wholesalers. Wholesalers need to profit inside the spread to justify paying for your order. That difference is almost invisible on small, highly liquid trades, but it becomes noticeable when the trade size grows or the security is thinly traded.

A $1,000 order barely shows the effect. A $50,000 order can reveal several dollars of difference per share. Long-term investors rarely feel it. Active traders in illiquid names feel it immediately.

The Regulatory Pressure

Payment for order flow remains under scrutiny. Regulators continue to debate whether routing orders to the highest bidder serves traders or whether it creates a quiet conflict of interest. Some proposals aim to restrict the practice; others push for more transparent disclosures around execution quality.

Many brokers now publish fill statistics. They are rarely consulted, but they do exist.

Reducing What You Pay

Even inside the zero-commission world, how you trade shapes your cost.

Limit orders give you control over the execution price. Spreads tend to widen at the open and close, when volatility is highest and liquidity is still forming or winding down. Midday trading usually sits in a tighter range. Liquidity itself does most of the work: deep markets compress spreads; thin markets stretch them. Knowing where your order sits in that spectrum matters as much as choosing the platform.

The Actual Tradeoff

Zero-commission trading removed real friction for new investors. Someone buying a few shares or adding modest amounts to an ETF each month no longer faces a fixed fee that eats into the contribution. That is a genuine improvement.

The misconception is that zero commission means zero cost. The cost moved into the spread, into the fill, into the way orders are routed. Some traders barely notice it. Others pay more than they expect. Small, frequent trades in liquid securities still benefit. Large trades, thin names, and options can cost more than the old commission model ever did.

There is no “cheapest broker” in the abstract. The right choice depends on what you trade, how often you trade it, and how sensitive you are to the quiet costs that live inside the spread.