How can Google make so much money when their service is free? It took a while before people discovered what was going on. Tech companies were using all the information we were giving them and using it to allow companies to use targeted advertising. We were the product all along.
Now there is free trading apps. In the US, Robinhood has made online trading like a form of entertainment. You can trade as much as you want without paying any commissions. It’s free!! There are other low cost or free sites in Europe too that allow commission free trading. But as we have seen with Google and Facebook, if you aren’t paying for it, you are the product.
What these retails brokers are doing is selling the order flow to trading firms. Bloomberg data has shown that Wall Street firms paid almost $3 billion to manage these trades and $3.8 billion in 2021.
But if it is free and and companies are just paying to get those orders, so what? The Dutch Authority for the Financial Markets (AFM) published a report into where brokers sell customer’s orders. They found that customers were hit with a higher price in 70% – 85% of cases. In comparison, customers were better off when they placed trades at places open to bank and fund managers or on Euronext.
There are already rules in place in the EU about inducements so selling the order flow for money is already difficult to do. But now a formal ban is being looked at to ensure that no one in the EU allows this practice.
The Irish Regulator, the Central Bank, is also investigating the practice, where customers are missing out on the best price so the retail broker will receive a payment for passing on the trade.
Always remember, if you aren’t paying for it, you are the product
14 February 2022