Long time HN member, but as a courtesy to some of my clients, this needs to be on a throwaway account.

Free retail brokerage is something that needs to happen, and I applaud the effort. Brokerages provide a real value add for some services. Offering trading technology, market data, margin, dealing with block trades/portfolio trades, access to OTC, dealing with regulations/back office -- those are real services. Charging me to route an unleveraged, vanilla equity buy order to an exchange and pass the exchange's execution report back to me just because, by convention, exchanges don't want to deal with retail clients directly -- that's just introducing inefficiency and being a middle man.

That said, I don't like the fact that they have a "How We Make Money" section without more extensive disclosure. In my mind, either don't have one (I challenge you to find a single large brokerage that does), or have a more detailed explanation of how the modern brokerage business works. The truth, given the value proposition of free trading, is one that I'm happy to embrace.

I can't say with any certainty what they're actually doing; I can only speak to the industry on the whole, but most retail brokerages make money from:

1. Retail market making
2. Netting across client order flow (probably not applicable here)
3. Asymmetric exchange fees/rebates

The rules on all three are highly country/exchange dependent, but here's an abridged version.

1. Retail market making involves selling order flow to third parties who are able to execute it at a price better than anything that's currently showing on a lit exchange. I've included more details on this below the fold since a) it helps explain their estimated cost graphic, and b) it's one of the most hyped and misunderstood practices in finance, so people should at least decide how they feel about the practice based on correct information.

2. Netting comes about when you're dealing with lots of order flow at a bank/brokerage with multiple lines of business. Your clients might be, on average, and across some time horizon, buying and selling roughly the same amount of a security. You can fill your client at market price, taking the inventory down on your own book, or cross it immediately against an existing position. Most countries/exchanges still require you to 1) pay taxes and exchange fees and 2) print the trades on a market venue for disclosure/price discovery purposes, but there's still some benefit to be had as you can avoid market impact (moving the market when transacting a large order), crossing the spread (paying the differential between the buy price and the sell price), and "long sell" short restricted securities (many countries have regulations on short selling, some banning it all together, so having natural long inventory to sell against is valuable).

3. Asymmetric fees are the most straight forward. Many U.S equity exchanges charge a fee for taking liquidity (crossing the spread) and offer a rebate for posting it (submitting limit orders that don't cross the spread). By charging people this fee when their order does cross the spread and not giving them the rebate when it doesn't there's an easy differential to capture. Also, as noted in their fee structure, they're passing along all regulatory fees to the customer.

It's important to note that no matter what a brokerage does, the net effect is always a price that's better than or equal to what's showing on any public exchange, and what you as a client could get otherwise. In my mind at least, arguing that "I could have gotten a better price on my own if I had access to the same unfair advantages (read: technology/scale)" makes about as much sense as begrudging Google/AWS for buying hardware in bulk, spending billions on data centers that make more efficient use of power and bandwidth, and subsequently undercutting you in a web services platform pricing war. Anyone who wants to come along and usurp the throne is free to spend the money and hire the right people to do so. For me, I'm happy to let my broker engage in these activities if it gets me a better price than I could get for myself otherwise, after fees. I pay Google/AWS/Linode/Heroku to do things cheaper than I could practically speaking do them for myself.

Taking the above points into account, the feasibility of a free or nearly free brokerage (again, note the reg fees) is very real. I'm excited to see how this plays out.

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Details on retail market making

U.S equities exchanges are highly fragmented compared to those in most other countries. It's common to have a single name trade on several lit venues, and when you count dark pools/other forms of liquidity, that number can easily approach twenty or thirty. As an investor you have a regulatory right to specify how your order gets routed. However, most people just want the best price (this sounds like a truism, but sometimes other considerations outweigh saving a millionth of a cent per share), and access to private dark pools isn't a god given right. There are thousands of pages of regulations regarding order routing, right down to what type of client account it is (is this pension fund money? is this an IRA account?) but the redux is -- you can never fill a client at a price worse than what's being offered on any public exchange.

Enter the retail market maker. For certain types of orders/accounts (back to the thousands of pages of regs...), if the client doesn't explicitly specify an exchange, the order can be routed to a retail market maker. Said market maker can fill the order at a price better than what the market has to offer, or immediately pass it along to the exchange. Surprisingly, they'll actually pay the brokerage for the privilege of doing so. Why would they do that? The name of your game as a market maker is netting. If you have a large, unbiased stream of order flow, statistically speaking you hope to see it balance out with market indices/other correlated equities (hedging) or itself (crossing) over a short time frame. Until it does so you have risk exposure, so from an economics/efficient market standpoint your job as a market maker is to provide liquidity and price risk premium.

These groups have access to good technology and are well integrated with all of the lit venues/dark pools. Their volumes are huge so they get exchange discounts and dark pool fees (as any individual trader who dealt in those volumes would). They also have good credit and large account balances, so their clearing/margin/and funding costs are lower. As such, the brokerage makes money (risk free), the retail market maker might or might not make money (depending on how good they are at their job, and the space is competitive enough that only the good ones are left), and the client gets a better fill price than they would have on the exchange. Ironically the only people hurt by this are the HFT guys who now have highly refined (read, directionally correct over a few second time span) orders hitting the exchange.