How ETRADE makes money without commissions

How Does ETRADE Make Money?


How does ETRADE make money with zero commissions and on cash balances? How ETRADE gets revenue from with free trades, no commission products, brokerage fees?


How Does E*Trade Make Money?


With $0 commissions on stocks and ETFs, you may be wondering how in the world E*Trade is able to make any money at all. As we shall see, equity commissions only represent a small portion of a brokerage firm’s total revenue. E*Trade has a lot of smart people behind the scenes figuring out how to make money in several other ways. We have the details you seek.


$0 Stock Commissions Still Make Money For E*Trade


Despite lowering its ETF and stock commission all the way to $0, E*Trade is still able to make money off of these transactions. It does so with something called payment for order flow.

This is how payment for order flow works: E*Trade sends its customers’ orders to specific market makers, who are the parties on Wall Street responsible for matching up buyers and sellers and getting orders filled. These market makers want to do this so badly that they actually pay E*Trade for sending orders to them. Usually, the payment is fractions of a penny per share. That’s not a lot of money on one small trade, but in a single market day there are usually hundreds of millions of shares traded, so a few pennies can really add up.

The market makers need to make money, too. They do this by selling to buyers at a high price and buying from sellers at a low price. This is why there’s a bid-ask spread on every stock and ETF. It’s a built-in payment that compensates the parties behind the scenes who are responsible for filling orders.

Despite the $0 advertised price, there are all sorts of situations where E*Trade still charges for equity commissions. For example, E*Trade’s $0 commission only applies to online trades. Trades placed over the phone with a live agent cost $25 each.

Furthermore, trades of OTC stocks are not commission-free. The charge there is $6.95, although active traders do get a $2 discount. Large block transactions that require special handling could have surcharges as well.

A stock or ETF trade placed on E*Trade’s desktop program Pro that is directly routed to an Electronic Communication Network has a surcharge of 0.5¢ per share.


How Does ETRADE Make Money


E*Trade Makes Money on Mutual Funds


Notice that we said “stock and ETF” commissions. E*Trade still charges commissions on some mutual funds. Using E*Trade’s fund screener, we found 2,038 funds with a transaction fee. It is $19.99. The fee is applied to both the sell side and buy side, which gives E*Trade double the income compared to just charging for purchases, which some brokerage firms will do. To compare, Ally Invest in charging $9.95 for the same mutual funds and JP Morgan Chase is at $0.

For mutual funds that don’t have a transaction fee or a load, E*Trade has a short-term redemption fee anytime shares of these funds are sold within 90 days. The fee is $49.99.

When brokerage firms have preferred lists of mutual funds, they often are compensated by the fund companies who appear on these lists. E*Trade’s website does advertise an All-Star List of mutual funds, so most likely it’s being compensated by the fund companies on this list.

In fact, E*Trade’s parent company Morgan Stanley publicly stated in 2004 that it was receiving up to 0.05% of assets and 0.20% of sales each year from multiple fund families, including PIMCO and Franklin Templeton. This came after a $50 million settlement that claimed Morgan Stanley failed to inform clients that it gave preferential treatment to some fund families in return for cash payments. Morgan Stanley neither confirmed nor denied the allegations.


E*Trade Makes Money on Option Fees


Mutual funds aren’t the only asset class that still has trading fees at E*Trade. The brokerage house charges 50¢ per contract on every option trade. There is a 15¢ per-contract surcharge on accounts that have less than 30 trades per quarter.

Although E*Trade assesses no base charge on option trades, the 65¢ per-contract fee could really add up. For example, an option spread with 4 legs would cost $2.60 to enter. A round trip would be $5.20.


E*Trade Makes Money on Futures


Next is futures. Contracts are even more expensive than options. E*Trade charges $1.50 per contract, per side. There is a $1.00 surcharge if a contract is a cryptocurrency contract.


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E*Trade Makes Money on Fixed Income


Fixed-income securities have all sorts of commissions. Online secondary trades are $1 per bond with a $10 minimum commission and a $250 maximum. New issues of bonds excluding Treasury bonds include a selling concession. E*Trade states in its fine print that it can “act as principal or agent on any bond transaction,” which pretty much sums up this section.


E*Trade Makes Money on Investment Advice


So far, we have only looked at self-directed accounts. In all likelihood, managed accounts create a very significant stream of revenue for E*Trade.

The brokerage house charges 0.30% of account assets per year for its robo service. This will be at least $1.50 per account as there is a $500 minimum starting balance.

This stream of income is just for the robo accounts. E*Trade also has traditionally-managed accounts with a variety of minimums and fees. One package is called Blend Portfolios. The cost ranges anywhere from 65 basis points per year up to 90 basis points. Because there is a $25,000 minimum deposit requirement, each account provides a decent amount of annual income.

Bond portfolios have lower annual expenses but a much higher minimum ($250,000).


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Net Interest Margin (NIM)


Net interest margin is a major source of revenue for banks and brokerage firms. Because E*Trade has both investment and banking arms, this is in all probability a huge cash cow for the financial conglomerate.

Net interest margin works the same way the bid-ask spread works described above. The financial institution buys money at a low rate of interest and sells at a much higher rate. For cash, the buy rate is the interest rate paid on deposits. The sell rate is the rate customers pay on loans.

Let’s take a look at E*Trade’s buy and sell rates for money:

E*Trade Bank currently pays 0.00% on its regular checking account and 0.05% on its Max-Rate checking account (which itself has a $15 monthly fee). E*Trade takes money from these deposits and loans it out to other customers. Lines of credit with the bank are currently as high as 4.9%. Margin rates on the brokerage side range from 6.95% to 10.45%. So there’s a huge bid-ask spread on the interest rates.


Miscellaneous Account Fees


E*Trade has a lot of general account fees. Paper statements are $2 each, although large accounts can get them for free. Full outgoing transfers are $75. Early withdrawals from an IRA cost $25, and a recharacterization is another $25. An outgoing wire transfer is $25. A stock certificate request is a very steep $500.

No doubt that E*Trade earns a decent amount of revenue from these and other fees.

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Updated on 4/16/2022.


About the Author
Chad Morris is a financial writer with more than 20 years experience as both an English teacher and an avid trader. When he isn’t writing expert content for Brokerage-Review.com, Chad can usually be found managing his portfolio or building a new home computer.