If you thought fee competition was fierce among ETF providers, think again. Trading platforms have taken things to a whole new level.

UK-based trading platform IG Markets announced $0 commissions on international shares trading to the market on Monday, following the lead of Israeli-born platform eToro, which launched a similar deal for US trades only two weeks ago.

The only cost for investors looking to buy and sell international shares on the IG platform, including US and UK shares, is a 0.7 per cent currency conversion fee.

IG Markets head of Asia Pacific and Africa Kevin Algeo says the platform's move to $0 commissions has been customer-led, with clients demanding better pricing on Australian and international shares trading.

He adds the writing is on the wall following the move by the big four US brokerage houses - Charles Schwab, Fidelity Investments, E*TRADE, and TD Ameritrade - to dump commissions late last year.

"This is the direction the market is travelling with pricing," he says. "And our clients just keep telling us they want lower fees and access to international markets.

"We think zero commission brokerage will be that next big step to help clients diversify and get international exposure at cheap rates."

IG Markets and eToro join Australian start-up Stake, which pioneered $0 commission for US shares trading on the Australian market in 2017.

Since its launch, the platform has grown its customer base to 95,000 globally, with between US$11 million and US$15 million ($16 million to $22 million) traded on its platform every day.

Bryan Wilmot, global head of marketing for Stake, says he's surprised it took so long for zero commission to reach Australian consumers. He agrees the shift in the US brokerage landscape to zero has forced the Australian market to react.

"Certainty the announcements over the past six months that brokers are going to zero has woken up the entire global category," he says.

"It's a snowball effect; the more players that start to do it, the more pressure there is on everyone to deliver. With the amount of competition in the market, and the opportunity for brokerages to make money in other ways, there's no reason Australians should be strung with high fees."

Zero-fee trading is not new to the US. Silicon Valley start-up Robinhood pioneered commission-free stock trading in 2013, helping it gain a staggering 10 million accounts in 2019 - up from 1 million subscribers in 2016. It's the free-trading ethos turned the US online brokerage industry on its head, forcing established players to re-write their business models.

Six years on, major brokerage houses have caught up, with Charles Schwab (SCHW) kicking off a price war in October last year. Charles Schwab has since signed a merger with TD Ameritrade (AMTD), and E*Trade (ETFC) and Fidelity have scrapped commissions on US stocks, ETFs and options.

Pressure on the big four

In Australia, international shares trading platforms such as IG are giving the big four bank trading platforms a run for their money. While CommSec and nabtrade have had the international shares trading market locked up for years, smaller local and international players have been nipping at their heels with rock-bottom prices, fast sign-ups and product innovation.

eToro and Stake both offer fractional investing, which allows investors to buy as little as 0.001 per cent of a share. This way, Australian investors can gain access to some of the world’s largest companies, whose share prices would have otherwise been prohibitively priced. One example is Amazon, which trades at about US$2440 a share.

eToro, which launched in Australia in 2019, is also known globally among its 13 million customer base for its “social trading” tool, which allows users to copy leading traders on the platform.

At the other end of the cost spectrum, to buy and sell stocks listed on the New York Stock Exchange or tech-heavy Nasdaq, CommSec users must pay minimum $19.95 per trade for trades up to US$5000. Trades above US$10,000 incur a brokerage rate of 0.31 per cent.

CommSec does charge a marginally lower FX fee (foreign exchange conversion spread) of 0.60 per cent and offers access to more global exchanges.

The big four bank trading platforms have won customers over with name brand recognition, trust and the ease of linking an existing bank account to a shares trading account. Customers are considered “sticky” because of the effort it takes to change and get comfortable with a new platform.

"Once you're with a broker and it's worked well for you, it's sticky," Wilmot says. "Changing who you work with, transferring your portfolio over - we've made it super simple but there is a perception out there that it can be quite complex."

The race to $0 brokerage for ASX-listed stocks

As part of its new fee regime, IG has also reduced brokerage on trading ASX-listed stocks to $5. However, customers must have traded shares three on more times in the previous month to get this rate.

Regular trades cost $8 – putting IG's prices below rivals SelfWealth ($9.50) and CMC Markets ($11).

Algeo says IG markets are still making money from $5 trades, calling into question the fees charged by other higher frequency brokerage houses.

IG's focus is on investors who aim to trade regularly – a few trades every month or quarter – with strong conviction in their trades.

Wilmot says that while fees on Australian shares trading are falling, they're unlikely to hit zero because competition in the exchange market is limited.

"The reason that you can drop brokerage to zero on US stocks is because there's a lot of different ways to make money on the back end of the trade on things like payments for order flows and securities lending," he says.

"Brokers make money because of the level of competition. In the US, there are around 13 different exchanges – NASDAQ, NYSE, AMEX, BATS etc.

"Those exchanges make money the more trades are executed on their floors, which incentivises them to pass on rebates to brokers to funnel the flow of their customers through those exchanges.

"Because of that competition, there's ways to make money on the trades that isn't brokerage fees, whereas in Australia there's one stock exchange, so that level of competition doesn't exist.

"A lot of the money needs to be made off the front of the trade."

The ASX Ltd (ASX) has secured an effective monopoly in the Australian listed equity market, generating initial and annual listing fees from companies on the exchange. The sole viable alternative is Chi-X, which is only licensed to operate a secondary equities market and therefore generates no fee income from companies listed on its exchange. Chi-X launched its rival exchange in October 2011.

Morningstar equity analysts Gareth James says a barrier to competition in the segment is switching costs of integrating local-market participants, such as stockbrokers.