By Nichola Saminather

TORONTO (Reuters) - Stock brokers in Canada cannot use marketmakers to execute trades for a fee, under a government rule that has restricted the growth of zero-commission trading platforms like Robinhood, whose booming business in United States was linked to wild swings in GameStop Corp and other "Reddit rally" stocks.

U.S. zero-commission platforms sell orders to wholesale marketmakers and generate revenue. Canadian brokers are required to fulfill trades on exchanges because it makes the stock market more transparent than splitting trades among market makers.

"Canadian regulators require brokers to go with best execution... for all orders to meet at the market," rather than through a wholesale marketmaker, said Marius Zoican, assistant professor of finance at the University of Toronto.

"As long as payment for order flow is not allowed in Canada, it would be difficult to have full-fledged zero-commission trading," he added.

In the United States, 10 million new retail brokerage accounts opened in 2020, according to JMP Securities, driven by the growth of zero-commission trading, versus 2.4 million in Canada, based on Investor Economics' retail brokerage research.

In Canada, most online trading platforms still charge commissions, even as they add new revenue sources to overcome pressure from declining trading fees. That has left Canadian retail investors with limited choices for commission-free trading.

"They're like gyms that rely on only 5% of members showing up; when 40% show up on the same day, they've got problems," said Glenn LaCoste, chief executive at Surviscor, which analyses online services including Canadian discount brokerages.

"Everybody wants to talk zero commission, but there's no free lunch."

Questrade, one of Canada's biggest non-bank online brokerages with C$20 billion ($15.7 billion) of client assets, has had about 200,000 account openings annually in its 21 years of operation. Robinhood has amassed over 13 million accounts in seven years.

WHAT NEXT AFTER FREE?

While Robinhood's zero-commission trades have pushed bigger rivals including Charles Schwab and Fidelity to follow suit, most major Canadian trading platforms, including the biggest banks, Questrade and Aviso Wealth's Qtrade, still charge for trades, and show no inclination to change.

Regulators Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada have not announced any changes to regulations, and did not respond to requests for comment about plans for payments for order flows.

"We have a very strong regulatory system in Canada... and we're not even close to the model of the firms" that experienced capital shortfalls in the U.S., said Stephen Graham, chief operating officer at Questrade.

"Where does your pricing strategy go after free?"

Qtrade's new account openings spiked 60% in the last week of January from previous weeks, and trade volumes doubled in the month from a year earlier, more than half of these coming from Blackberry, AMC Entertainment Holdings and GameStop, according to Aviso data.

"Charging for the trades helps to cover our costs," said Christine Zalzal, head of online brokerage and digital wealth at Aviso. "Others who have zero commission may not have the robust information, education and support that we provide."

The only major zero-commission trading platform in Canada is Wealthsimple, owned by Power Corp of Canada,. It charges 1.5% in exchange fees on U.S. trades and funds Canadian trades with local deposits, Chief Executive Michael Katchen told Reuters. About 20% of its trades are in U.S. dollars.

Wealthsimple, which has about 700,000 trading clients and C$3 billion of assets, plans to grow revenues by adding premium features for more sophisticated clients, he added.

The firm, which has seen 70% growth in new clients since the beginning of 2021, is more open than some rivals to introducing payment for order flows.

"There are great ways to introduce payment for order flows, in particular if the broker decides to share revenue with clients, enabling better price execution," Katchen said. "In the U.S., because of a lack of transparency, and a misunderstanding of the business model, there was a huge backlash against this."

(Reporting By Nichola Saminather; Editing by Denny Thomas and David Gregorio)