Brokerage Firms - Discount Brokers

Discount Brokers

A discount broker or an online broker is a firm that charges a relatively small commission by having its clients perform trades via automated, computerized trading systems rather than by having an actual stockbroker assist with the trade. Most traditional brokerage firms offer discount options and compete heavily for client volume due to a shift towards this method of trading.

Other ways to lower costs for these brokers is by executing orders only a few times a day by aggregating orders from a large number of small investors into one or more block trades which are made at certain specific times during the day. They help lower costs in two ways:

• By matching buy and sell orders within the firm's order book, the overall quantity of stock to be traded can be reduced thus reducing commissions.
• The broker can split the bid-ask spread with the investor when matching buy and sell orders - a win-win situation in most cases

Since investor money is pooled before stocks are bought or sold, it enables investors to contribute small amounts of cash using which fractional shares of specific stocks can be purchased. This is usually not possible with a regular stockbroker.