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A typical commission on a typical stock trade these days is $8. I don't understood how it can cost this much. It looks like the entire process is happening in software, electronically, and so the actual cost to the parties that supply this service should be near zero.

So I'm wondering, where does that money go? Is someone making a profit? Are they protecting that profit with exclusive dealing, collusion, or some other anti-competitive practice?

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The money goes to banks/brokers. In fact most of the revenue in the financial sector comes from fees like that.

This is to compensate the bank/broker from taking the risk of carrying the opposite position on their books for a while, and the labor put into actually trading for you. A part of it is probably also profit. Since there are large entry costs, one would expect the financial sector to earn profits.

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  • $\begingroup$ I didn't know they had to carry the opposite position. When I buy say 100 shares of something, I figured I was being matched to sellers by software at the NYSE or Nasdaq or whatever exchange. That's not so? I'm actually buying it from my brokerage? $\endgroup$
    – Rob N
    Commented Jan 14, 2017 at 16:39
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    $\begingroup$ Details may vary by institution. Usually large banks act as market makers. A trader will buy stuff, sell it and keep the spread. This process takes a while and for this period the bank carries risk, and this is what part of the fee is for. The markets for many smaller equities or more exotic derivates are not that liquid and there's large fees/spreads in these markets. A brokerage may not actually carry risk if they just buy stuff on your behalf, but then they'll have to pay fees themselves to someone doing trades. $\endgroup$
    – Tobias
    Commented Jan 14, 2017 at 16:47

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