Unveiling the Mystery: How Do Online Brokers Make Money with Zero Commissions?

Have you ever wondered about how online brokers make money with zero commissions? It seems like an unusual business model – how can a company survive without making any money off their services? However, with the rise of fintech, online brokers have become increasingly popular, to the point where some of them are now worth billions of dollars. So, how do they do it?

To put it simply, online brokers make money through other means than charging commissions. While they may not be taking a cut of your trades, they still have a few tricks up their sleeves that allow them to turn a profit. These can include interest on cash balances, routing fees, and even selling order flow to high-frequency traders. It’s a complex business, but for many brokers, it’s been highly successful.

Of course, not all online brokers operate in the same way, and some may have slightly different money-making strategies. But overall, the industry has shifted away from commission-based models and towards offering free trades as a way to attract and retain customers. It’s an interesting development in the world of finance, and one that’s worth exploring further. So, let’s dive in and take a closer look at how online brokers make money with zero commissions.

The Online Brokerage Industry

Online brokerages are revolutionizing the financial industry, allowing millions of people to easily invest in stocks, bonds, and other securities from their computer or mobile device.

As the industry grows, many of these brokerages are offering zero commissions for trades. But how do they make money? Let’s take a closer look at the business models of online brokerages:

Revenue Sources for Online Brokerages

  • Interest income: When you invest in a security, the brokerage generally retains the cash in your account until you invest it. They use this cash to fund other investments, earning interest in the process.
  • Margin lending: Many brokerages allow investors to borrow money to invest, known as margin trading. This generates interest for the brokerage, but also comes with added risks for the investor.
  • Asset management: Some brokerages offer managed accounts, where a professional manages your investments for you. This generates fees for the brokerage based on a percentage of the assets under management.
  • Payment for order flow: Some brokerages sell their customers’ order flow to market makers, who execute the trades. In exchange, the market maker pays the brokerage a fee. This practice has been criticized for potentially leading to less favorable prices for investors.
  • Membership fees: Some brokerages offer premium services for a monthly or annual fee, such as access to additional research or advanced trading tools.
  • Other revenue streams: Some brokerages earn revenue from other sources, such as securities lending or referrals to other financial services companies.

The Importance of Zero Commissions

Zero commissions have become a battleground for online brokerages, with many companies now offering free trading to attract customers. While this may seem too good to be true, it is a real business model that can be sustainable. By eliminating the cost of trading commissions, brokerages can attract more customers and generate revenue from other sources. It’s a win-win for investors and brokerages alike.

The Future of Online Brokerages

The online brokerage industry is constantly evolving and changing. As technology improves and new players enter the market, we can expect to see even more innovation and disruption. The trend towards zero commissions is likely to continue, and we may see new revenue models emerge as well. As a result, investors should stay informed and choose a brokerage that aligns with their specific needs and goals.

RobinhoodYesMargin lending, gold subscription, order flow payment
FidelityYesInterest income, asset management, membership fees
E*TRADEYesInterest income, asset management, order flow payment
TD AmeritradeYesInterest income, asset management, order flow payment
Charles SchwabYesInterest income, asset management, membership fees

Examples of online brokerages that offer zero commission trades with other revenue streams include Robinhood, Fidelity, E*TRADE, TD Ameritrade, and Charles Schwab.

Zero Commission Trading

Zero commission trading has become a popular trend in recent years, with online brokers offering commission-free trading to attract more customers. But how do these brokers make money if they are not charging any fees to investors? There are a few ways online brokers make money while offering zero commission trading.

  • Interest on cash balances: When investors deposit cash into their brokerage accounts, the broker can invest that cash and earn interest on it. This is one way brokers can make money without charging commissions.
  • Spread: When investors buy or sell stocks, the broker can earn a spread, which is the difference between the bid and ask price of a stock. Brokers can earn a small profit on each stock trade.
  • Margin trading: Many brokerage firms allow investors to borrow money to buy stocks, known as margin trading. The broker charges interest on the borrowed money, which can be a significant revenue stream for the company.

While zero commission trading may sound like a win-win for investors and brokers, it’s important to note that there are still risks involved. Investors should review a broker’s trading platform, security measures, and other services provided before choosing to use that broker. It’s also important to note that brokers may enforce other fees, such as transfer or withdrawal fees, to offset the lack of commission fees.

In addition, some critics argue that zero commission trading may encourage investors to trade more frequently, potentially leading to poor investment decisions and higher risk. Investors should always research and carefully consider their investment strategies and goals before making any trades.


Zero commission trading is a unique concept that has transformed the investment industry. While it can be easy to get caught up in the excitement of commission-free trading, it’s important to remember that online brokers still need to make money to operate. By understanding how online brokers earn profits from zero commission trading, investors can make informed decisions about their investing strategies and choose the best broker for their needs.

Lower costs for investorsPotential for risky investment behavior
Increased access to investing for the general publicOther fees may still be enforced by brokers
Increased competition among brokersLong-term profitability for brokers may be uncertain

Overall, zero commission trading has revolutionized the investment industry and offers a new way for investors to enter the market. By understanding the pros and cons of this type of trading and selecting a reputable online broker, investors can make informed decisions about their investments and potentially save on costs.

Business Model of Online Brokers

If you’re new to the world of investing, online brokers are a great place to start. They make it easy and affordable to buy and sell stocks, ETFs, and other securities. But have you ever wondered how online brokers make money when they offer zero commissions? Here’s a breakdown of their business model:

Order Flow Payment

  • When you place an order through an online broker, they route your order to a market maker, who executes the transaction on their behalf.
  • The market maker pays the online broker a fee for each order they route to them.
  • While this fee may be small, it can add up quickly for high-volume brokers.

Interest on Cash Balances

When you open an account with an online broker, you often have the option to keep cash in the account. The broker will then invest your cash balance in low-risk instruments like Treasury bonds or money market funds.

The online broker earns interest on your cash balance while it sits in your account. This interest is minimal, but again, it can add up over time.

Lending Securities

Online brokers lend your securities to other investors who want to short-sell them. Short-selling is when an investor borrows shares and sells them with the hope of buying them back at a lower price, profiting from the difference.

Benefits for the broker:Benefits for the investor borrowing the security:
– Earns income from the interest on the loan.– Access to hard-to-borrow securities.
– Can use the lent securities to hedge against losses.– Can sell the security at a higher price and buy it back at a lower price, profiting from the difference.
– No credit risk because the borrower must post collateral.– Can avoid buying the security at a higher price, saving money.

While online brokers may not be making a large profit on each individual transaction, they make up for it in volume. With millions of users and billions of dollars in assets, every little bit adds up.

Revenue Streams for Online Brokerages

Online brokerage firms have shaken up the investment industry by offering zero commission trading to retail investors. However, the question that arises is how these firms make money since they are not charging their customers any commission fees? The answer to this question lies in the various revenue streams that online brokers utilize to generate profits. Here are the four primary revenue streams for online brokerages:

  • Interest Income: Online brokers earn interest income on cash deposits held in customer accounts. These funds are invested in short-term and safe interest-bearing instruments, such as treasury bills or certificates of deposit. The average rate of return for these investments is around 2% per year. Although this income stream is not as substantial as others, it still accounts for a significant portion of online brokerage firms’ revenue.
  • Lending Securities: Another way online brokerage firms make money is by lending securities held in customers’ accounts to other investors, such as short-sellers. This practice generates substantial revenue, particularly during times when short sellers are in high demand. Typically, brokerage firms charge a fee for borrowing the securities, and the interest rate on the loan is based on market conditions.
  • Payment for Order Flow (PFOF): This type of revenue stream is the most controversial as it has been criticized for creating a potential conflict of interest between the broker and client. PFOF occurs when online brokers sell customer orders to high-frequency trading firms that execute trades at a slightly better price. In turn, the trading firms pay a fee to the brokerage. This tactic generates significant revenue for online brokers, but some argue that it ultimately harms the client as their orders may not be executed at the best available price.
  • Margin Loans: Finally, online brokerage firms generate income by offering margin loans or lines of credit to their clients. These loans allow investors to borrow funds against the value of securities held in their accounts. The broker earns interest on the loan, which is typically at a higher rate than that of interest earned on cash deposits.


By utilizing these four revenue streams, online brokerage firms can offer commission-free trading while still generating ample profits. However, as with any investment, investors should be aware of the risks associated with these practices and should carefully consider their individual investment strategy and goals.

Revenue StreamDescriptionPercentage of Total Revenue
Interest IncomeEarning interest on cash deposits held in customer accounts10%
Lending SecuritiesLending securities held in customers’ accounts for a fee25%
Payment for Order FlowSelling customer orders to high-frequency trading firms for a fee50%
Margin LoansOffering margin loans or lines of credit to clients and earning interest on the loans15%

The above table showcases the percentage of revenue each revenue stream accounts for in the online brokerage firm’s total revenue. As the table shows, payment for order flow is the most significant revenue stream, accounting for half of the revenue generated by online brokerage firms.

The Impact of Zero Commissions on Brokerages

With the rise of zero-commission trading, online brokerages have had to make significant changes in their business models to stay afloat. Even though commissions were once a primary revenue stream for brokerages, innovative disruptors such as Robinhood have forced the industry to recognize the importance of providing commission-free trading. In this article, we will explore the impact of zero commissions on brokerages and how they make money in this new reality.

  • Reduction in Revenue: The most apparent impact of zero commissions is that brokerages have lost a significant portion of their revenue. Without commissions, they are no longer collecting the fees that made them profitable. For example, TD Ameritrade reported a 15% decrease in revenue in 2020 after eliminating trading commissions. The reduction in revenue has led to cost-cutting measures such as staff reductions and closing branches.
  • Increased Trading Volume: While brokerages have lost revenue from commissions, they have seen a surge in trading volume due to a broader audience now engaging in investing. With more people trading, brokerages generate returns on the cash balances of traders. Additionally, they may be able to sell order flow, a practice that compensates brokerages for sending trades to market makers to execute.
  • New Revenue Streams: The reduction in commissions has led brokerages to explore new revenue streams. One such stream is interest income generated from margin loans. These loans allow traders to invest using borrowed money, and brokerages charge interest on that loan. Some brokerages also generate revenue from premium subscriptions that offer additional features or research tools.

Overall, the impact of zero commissions on brokerages has been significant, pushing them to evolve their business models and find new ways to generate revenue. While commissions will likely never return, the shift to commission-free trading has opened up new opportunities for brokerages to pursue.

It is essential to note that while zero-commission trading has become popular, investors must remain vigilant in understanding the costs of their trades. Even though they may not pay a direct commission, other costs such as bid-ask spreads, market impact costs, and payment for order flow can impact the total cost of trading. As investors, we must ensure that we understand these costs and how they impact our bottom line before placing a trade.

Pros of Zero-Commission Trading:Cons of Zero-Commission Trading:
Access to a broader audience of tradersReduced revenue for brokerages
Increased trading volumeCost-cutting measures such as staff reductions
Opportunities to explore new revenue streamsRisk of hidden costs such as bid-ask spreads or payment for order flow

The impact of zero commissions on brokerages has been significant, forcing them to explore new ways to generate revenue. While it will take time for some brokerages to adjust to this new reality, there is no doubt that zero-commission trading is here to stay and will continue to shape the investing landscape.

How to Choose the Right Online Brokerage

When it comes to choosing an online brokerage, it’s important to consider a variety of factors. With so many options to choose from, it can be overwhelming to determine which one is right for you. Below are some key considerations to keep in mind:

Key Considerations

  • Commissions and Fees – While some brokers offer zero commissions on trades, others may charge for additional services, such as account maintenance or data fees. It’s important to take a comprehensive look at the fees associated with each brokerage before making a decision.
  • Investment Offerings – Different brokerages offer varying levels of investment options. For example, some may only offer stocks and ETFs, while others may provide access to a wider range of investment vehicles such as mutual funds or options trading.
  • User Interface and Tools – The user experience can vary significantly between brokerages. Consider the design and ease of use for trading and research tools, as well as mobile app functionality.

Bonus Features

While not necessary, some brokerages offer additional features that may be of interest, such as:

  • Education Resources – Many brokerages offer courses, webinars, and other resources to help investors learn more about trading and investing.
  • Social Trading – Some platforms offer the ability to share and copy the trades of other investors, which can be useful for those who are newer to trading.
  • Automated Investing – Automated investing platforms can take the work out of managing a portfolio by using algorithms to make trading decisions based on your goals and risk tolerance.

Comparison Table

Here is a comparison table of some of the top online brokerages:

BrokerageCommissionsInvestment OfferingsUser Interface and Tools
RobinhoodZero CommissionsStocks, ETFs, CryptocurrencyUser-Friendly, Basic Research Tools
E-TradeZero CommissionsStocks, Options, Mutual FundsAdvanced Trading Tools, Mobile App
FidelityZero CommissionsStocks, Bonds, ETFs, Mutual FundsComprehensive Research Tools, Active Trader Pro

Choosing the right online brokerage is an important decision that can impact your financial future. By considering factors such as fees, investment offerings, and user interface, you can ensure that you select a platform that aligns with your needs and goals.

The Future of the Online Brokerage Industry

The digital revolution has made the world more accessible and convenient, and the financial industry is no exception. The online brokerage industry has experienced considerable growth and potential, and zero-commission models have made it easier for investors to trade at lower costs.

How do online brokers make money with zero commissions?

  • Interest income: Brokers earn interest income on cash balances held in customer accounts as part of their idle cash management process.
  • Margin lending: Brokers provide margin lending services where customers can borrow money to invest in stocks, and interest rates applied on the loans generate revenue for the brokers.
  • Payment for order flow: Brokers can sell customer data to market makers and receive payments in exchange for directing customer orders to those market makers.

The impact of zero commissions on the online brokerage industry

The introduction of zero commissions has made it easier for investors to trade, and has significantly lowered the barriers to entry for new investors. This has increased competition among brokers and led to lower trading costs for customers.

However, as more brokers adopt zero-commission models, it becomes challenging to differentiate among them, and brokers need to focus on value-added services to attract and retain customers.

The future of online brokerage industry

The online brokerage industry is evolving, and we can expect to see both consolidation and expansion. The acquisition of TD Ameritrade by Charles Schwab and E*TRADE by Morgan Stanley are examples of this consolidation trend, where bigger players get more significant market shares.

At the same time, new entrants are disrupting the industry with innovative offerings, such as fractional trading, social trading, and algorithmic portfolio management. These new market players aim to offer more personalized and accessible services to attract young investors with lower capital requirements.

Robo-advisorsAutomated investment advisory services
Cryptocurrency tradingNew investment products and services
Social tradingCollaborative investment platforms

The online brokerage industry is entering a new stage, where the focus is on offering more personalized and accessible services to investors. Brokers need to adapt to market trends and develop innovative solutions that meet their clients’ needs to stay competitive and thrive in the coming years.

FAQs About How Do Online Brokers Make Money with Zero Commissions

1. How can online brokers afford to offer zero commission trades?

Online brokers can earn interest on the cash and securities held in their customers’ accounts and also by offering additional services, such as margin lending, premium services, and research and analytics tools.

2. Will online brokers charge fees for other services to compensate for zero commissions?

Some online brokers may offer premium services, such as access to advanced research and trading tools for a fee. However, these services are optional, and users can still trade for free using the regular platform.

3. Do online brokers make profits by selling customer data to third parties?

No, reputable online brokers value customer privacy and do not sell customer data to third parties. They may aggregate data for analytical purposes, but such data is typically anonymized.

4. Can online brokers earn profits from payment for order flow?

Yes, online brokers can earn a small fee for routing trades to market makers that pay for order flow. However, reputable brokers prioritize best execution for their customers’ trades over payment for order flow.

5. Do online brokers make money from margin lending?

Yes, online brokers can earn interest on customers’ margin loans, which allows them to borrow money to invest and use stock holdings as collateral.

6. Are online brokers regulated to prevent them from exploiting clients?

Yes, online brokers are regulated by financial authorities to protect investors and ensure fair and transparent practices. They also adhere to strict compliance measures to prevent fraud and other forms of abuse.

Closing Thoughts

Thanks for reading about how online brokers make money with zero commissions. As you can see, there are various ways that online brokers can earn revenue while still offering commission-free trades. Remember to always consider the fees and services offered when choosing an online broker that’s right for you. Come back soon for more informative articles.