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Free Trades Aren’t Really Free, Study Finds

S.J. Steinhardt
Published Date:
Aug 29, 2022


Free stock trades not only aren’t free, but the process to buy and sell varies by brokerage, to the tune of $34 billion a year, a study by four University of California at Irvine business professors has found.

The study’s findings were reported by Bloomberg, among others.

The four academics used their own funds to execute 85,000 trades in 128 different stocks  over a five-month period. Over that period, they discovered that their trades yielded significantly different prices. Extrapolating based on those results, they estimated that the price differentials cost small-time investors $34 billion a year.

The hidden costs uncovered by the study are attributed to pricing variables in trades being executed by wholesale investors such as Citadel Securities and Virtu Financial Inc., adding up to that large overall cost to the investors.

While $34 billion is a great deal of money, one observer suggested that the amount may be overblown in an equity market valued at $53.8 trillion as of the end of 2021.

“(W)hat I think the researchers touched on is that there is a cost to execute a stock trade,” Jared Dillian wrote in Bloomberg Opinion. “It is not an explicit cost, but an implicit cost,” he added, noting that this came about as a result of the move away from commissions on stock trades in 2019.

It is important to note that the analysis was limited to the execution price only. As the Bloomberg article points out, “There are other qualities in a brokerage that customers may prioritize, such as the range of securities available, research and trading tools.”

Christopher Schwarz, a professor of finance at the university and the study’s lead author, said regulators should demand clearer disclosures about the costs investors pay and how the agreements between brokers and market makers affect them. 

“It should be easier to figure out the costs than for me and my friends to do this with our own money,” he told Bloomberg. “We’d never have been able to figure out these costs based on public disclosures, and this needs to change.”

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