1. What your broker really is, and what it lives off

Costs 3: Where your order really goes

Your broker is not a neutral pipe. It is a company with an income statement, and that income statement fills up with money that comes, directly or indirectly, out of your trades and your balance. Working out where it comes in is not distrust: it is the only way to compare two providers that advertise the same thing and charge in different places.

Three roles hiding behind one word

European regulation does not regulate 'brokers': it regulates investment services. Three roles are worth keeping apart, because the advertising runs them together:

• Reception and transmission of orders. It takes your order and passes it to another firm that does the executing. It never touches the market: what it supplies is access, the platform and custody. Plenty of European digital brokers work this way, leaning on an executing partner their advertisements never mention.
• Execution on behalf of clients. The broker acts as an agent: it hunts for the other side of your trade on the venues it has access to and charges you for the work. This is the role with the cleanest incentives, because its revenue depends on your trading at all, not on how the trade turns out for you.
• Dealing on own account. It places itself on the other side: what you buy, it sells you out of its own inventory. It has stopped being an intermediary and has become your counterparty. It dominates contracts for difference and retail foreign exchange, and it turns up in equities whenever the house closes the trade internally.

There is a fourth variant: the broker that belongs to a group with a market maker of its own, a subsidiary that lives off quoting bid and offer prices. Formally they are two separate companies; materially, the group earns on both sides. It is neither illegal nor necessarily abusive, but it changes the question: no longer just how much am I being charged, but who profits from the price I buy at.

Where the money comes from when there is no commission

A commission-free broker has not given up on revenue: it has chosen to charge where the figure does not show up on the contract note. There are five main routes:

• Explicit commissions. Dealing, custody, maintenance, dividend collection. This is the only part you see itemized by name, and it counts for less every year.
• The currency conversion spread. Every time you buy a dollar-denominated security with euros, somebody applies an exchange rate worse than the market's and keeps the difference.
• Interest on uninvested cash. Your balance sits somewhere that pays a rate. If the broker collects that rate and pays you less, the difference is its own.
• Lending out your shares. The securities in your portfolio are lent to whoever wants to sell short, in exchange for a fee paid by the borrower.
• Margin loan interest. The money it lends you to buy more than you own accrues a rate, almost always well above the official one.

A sixth is missing, payment for order flow, which by dint of its size and its notoriety takes up the whole of the third module.

Idle cash and lending out your shares

Of the five, the one that has grown fastest is cash. With rates near zero, paying nothing on the client's balance attracted nobody's attention. With rates somewhere around 3% or 4%, a broker sitting on a thousand million euros of unremunerated balances takes in tens of millions a year without charging a single commission. That is a banking business, not a brokerage one, and it explains a good deal of the industry's generosity on tariffs.

Securities lending is subtler. When you lend your shares you stop being the registered holder and are left with a right to have them returned, backed by collateral. Two things change: you lose the vote for as long as the loan lasts, and the dividend reaches you as a compensatory payment, possibly with a different tax treatment. In exchange, the fee paid by the borrower is split, in the programs that disclose it, in proportions close to half and half. In the ones that do not disclose it, the broker keeps the lot.

Margin credit and currency conversion

Margin is the most profitable product a retail broker has: the gap between what it costs the firm to fund itself and what it charges the client can run to several percentage points, and the balance renews itself for as long as the position stays open. Currency works by accumulation: a 0.5% spread on the way in and another on the way out eat a full percentage point before the market has done anything at all, against the tenths of a basis point plus a flat charge applied by those who actually compete on this front. On 10,000 euros the difference comes to around a hundred euros per round trip.

How to tell which role you are dealing with

Three checks, without having to ring anybody: if the contract says the firm may act as counterparty, it deals on own account; if the pre-contractual documentation carries an execution policy with a list of venues, it executes; if a third party appears as the executing firm, it is transmission of orders. None of them is bad in itself; what is serious is not knowing which one you have.

A real case: the income statement of a commission-free broker

In 2023, Robinhood, the broker that popularized commission-free trading in the United States, took in more from net interest than from its transaction business: more than nine hundred million dollars against a little under eight hundred, out of a total close to 1,900 million. At Charles Schwab, which abolished equity commissions in October 2019, net interest has for years accounted for around half of revenue. The commission disappeared; the revenue did not.

In late 2023 the British regulator wrote to the platforms about a practice it christened double dipping: keeping the interest on the client's cash and charging a fee on that same balance as well. It gave them until the first quarter of 2024. The conclusion is not that brokers are predators, but something duller and more useful: when a service advertises itself as free, the question is not whether it charges, but where.