What’s the difference between the two?
You pay a brokerage commission to a broker.
You pay a bid-ask spread to a dealer.
Most of the time, you pay both!
If you buy a stock with a discount broker like eTrade, you pay something like 9 bucks a pop… that is the commission to the broker. The broker executes the trade for you from a dealer who sells it to you at the ask and buys it from you at the bid.
Why does liquidity have no effect on commission?
Thanks 125mph, that was my next question. But building on that… Who is the dealer in the case of the new electronic for example stock exchange? In other words, I don’t understand who the dealer is in this structure? The new stock exchange just has a computer that matches buyers and sellers, where’s the dealer?
There may not be a dealer involved.
Think of buying a car. You can buy from a private party, or you can buy from a car dealer. If you buy from a private party, there’s no dealer involved.
Similarly with stocks. The counterparty with whom the ECN matches you may be a dealer, and it may not be.
I think most mainstream investments, the liquidity factor is built into the bid/ask spread. When I was trading options spreads, the bid/ask was very high due to the lower trading volume.
When there is no bid/ask, the broker may get a higher fee for liquidity such as real estate transactions or alternatives.
I think I see.