Trading Up

Absent fees, retail traders do better

Illustration of woman breaking through a cinder block wall to reach a large dollar sign.The advent of no-fee trading on platforms such as Robinhood has helped fuel an explosion in retail investing—and raised concerns that novices would be tempted to trade too often and lose more money.

But new research co-authored by Assistant Professor Omri Even-Tov shows this fear may be exaggerated: While average investors trade more when fees are removed, they also earn more.

“We show that portfolios don’t underperform just because of greater activity,” Even-Tov says. “In fact, net performance improves by about 11% annually, and this improvement is driven by savings from the removal of fees rather than changes in the returns of trades.”

In a new working paper, co-authored by doctoral student Kimberlyn Munevar, PhD 24, and professors from the University of Pennsylvania and MIT, the researchers analyzed a natural experiment by international trading platform eToro, which dropped fees on certain trades in different countries at different times over the past several years.

The staggered removal of trading fees allowed the researchers to compare investors’ behavior before and after fees were gone. Even-Tov and his co-authors looked at these patterns for over 40,000 investors between 2018 and 2019. They found that the removal of fees increased trading frequency by an average of about 30%. Having no fees also drew people to the eToro platform: New users grew by 172% in countries without fees and only 18% in countries where fees remained in place. The removal of fees also led people to hold significantly more diverse portfolios.

Though this study investigated non-U.S. markets, the researchers ran an analysis to demonstrate that the kind of retail trading conducted by their subjects corresponds with trading on American platforms.

These results come at a time when the U.S. Securities and Exchange Commission is considering whether to regulate one of the main ways that retail brokerage firms make revenue outside of commission, a process called payment for order flow. “Now regulators are looking at whether or not these new methods need to be reined in,” says Even-Tov. But regulatory bodies should be wary of pushing online trading platforms back toward a commission model when putting new policies in place, he says.