Trading Costs: What Zero Commission Does Not Cover

Commission-free trading was a good thing. It also created a widespread and expensive belief that trading is now free.

Commission was one line item, often the smallest, and it was the only one you could see on a statement. Everything that replaced it is embedded in prices rather than itemised, which makes it far easier to ignore and no less real.

The costs that survived

1. The bid-ask spread

The largest cost for most active traders, and the one they think about least.

Every stock has two prices at once: the bid (the highest a buyer will pay) and the ask (the lowest a seller will accept). You buy at the ask and sell at the bid, so you cross the spread twice on every round trip.

Instrument	Typical spread	Cost per round trip
Mega-cap (e.g. a $200 index heavyweight)	$0.01	~0.01%
Liquid mid-cap at $50	$0.02–0.05	~0.08%
Small-cap at $12	$0.05–0.15	~0.8%
Thin OTC stock at $0.30	$0.03	~10%

That bottom row is not a typo. A 10% round-trip cost means the stock must rise 10% before you break even, which is why penny stocks are a far harder game than the low share price suggests.

2. Slippage

The gap between the price you saw and the price you got. It appears when markets move fast, when liquidity is thin, and when your order is large relative to normal volume.

Market orders guarantee a fill, not a price. In a fast-moving stock the difference can be several percent. This is the main practical argument for using limit orders by default: missing an entry costs nothing, while a bad fill costs money immediately.

3. Payment for order flow

Zero-commission brokers are paid by market makers to route your orders to them. Whether this meaningfully worsens your execution is a live debate. The structure is not in dispute: the service is free because your order flow has value, and whatever you pay is embedded in your fill price rather than shown on a statement.

4. Tax

Frequently the largest cost of all for profitable active traders, and the one most often left out of strategy calculations. In the US, gains on positions held under a year are taxed as ordinary income, while longer holds qualify for lower long-term rates. The gap can be twenty percentage points or more.

A strategy returning 15% a year before tax may return considerably less after it, and that after-tax number is the only one that buys anything.

5. Currency conversion

If you trade in a currency other than your own, brokers typically charge a spread on the conversion, often 0.5% or more each way. On a US stock bought and sold from abroad, that can exceed every other cost combined.

What it does to an edge

Suppose you have a genuine edge worth 0.3% per trade before costs. That is respectable.

Trades a year	Gross	Cost at 0.1%	Net
20	6.0%	2.0%	4.0%
100	30%	10%	20%
500	150%	50%	100%
2,000	600%	200%	400%

On paper, more trading looks better. Now raise the cost to 0.35% per round trip, which is entirely normal for small caps or wide spreads, and the 2,000-trade row goes to zero. Same edge, same skill, wiped out by frequency.

Reducing costs, in order of impact

1. Trade less. This is by far the largest lever. Most traders would improve their net results by cutting trade count in half and changing nothing else.
2. Trade liquid instruments. Tighter spreads, less slippage, better fills.
3. Use limit orders. Control the price you pay instead of accepting whatever is there.
4. Hold longer where the strategy allows. Lower frequency and, often, better tax treatment.
5. Avoid trading the open. Spreads are widest in the first few minutes as the market establishes price.
6. Check currency and inactivity fees. Small, recurring, and easy to eliminate entirely.

Calculate what a trade netted after costs with the stock profit calculator, and read risk management for why net expectancy, rather than gross, is the number that decides whether a strategy works.