How TD Ameritrade makes money without commissions

How Does TD Ameritrade Make Money?

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

How Does TD Ameritrade Make Money?

TD Ameritrade has been in business for almost 50 years and currently brings in billions of dollars of revenue every year. When they implemented $0 commissions in 2019, their revenue may have taken a hit however, their business is still intact today. We are going to discuss how all of this is possible and exactly how TD Ameritrade makes money, even without commissions.

Payment for Order Flow

One of the main ways TD Ameritrade makes money is through the practice of receiving payment for order flow. In short, TD Ameritrade gets paid by certain market makers for sending their orders to them versus other market makers. TD Ameritrade has made hundreds of millions of dollars through payment of order flow alone in the past few years with the extreme rise in stock market trading volume from retail traders.

Payment for order flow has become a very controversial topic in recent years. However, brokers like TD Ameritrade making money by receiving payment for order flow is a completely legal and highly regulated practice.

How does TD Ameritrade make money

Investing Idle Client Cash

Banks make money by using their client’s cash for investments, then paying clients a small percentage of the returns from the investments in the form of interest, and then keeping the rest of the returns as profit. Like banks, brokers do the same thing, including TD Ameritrade. Brokers are highly regulated so; TD Ameritrade has a fiduciary responsibility to keep client cash separate from its own cash. Despite this fact, brokers like TD Ameritrade find creative ways to satisfy their fiduciary duty of properly handling idle customer cash while also investing it and using it to make money for themselves.

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Commissions on Stock & ETF Trades

Even though TD Ameritrade doesn’t charge commissions on many online stock and ETF trades, they do still charge commissions on certain trades. When you analyze their commission schedule, you will see that they are most certainly bringing in revenue from traders using their platform.

The fine print of the $0 commission trades states that the $0 commission only applies to trades on U.S. exchange-listed stocks and ETFs placed online. Over-the-counter stocks (OTC stocks), which many people trade, have a commission of $6.95 per trade.

In addition to the online commissions, TD Ameritrade charges fees for Broker-assisted trades. A Broker-assisted trade is when TD Ameritrade places a trade for you instead of you placing it yourself online. Their Broker-assisted commissions include a $25 commission on all stock trades, ETF trades, and options trades.

TD Ameritrade Makes Money on Fixed Income Fees

Unless you are buying new issue treasuries at auction, expect to run into either transparent or hidden fees on fixed income trades. TD Ameritrade charges a $1 fee per bond or CD for online trades placed on the secondary market. If you have one of TD Ameritrade’s Fixed Income Specialists place a fixed income trade for you, that has additional costs not published on their website.

For fixed income transactions, TD Ameritrade may act as the principal, meaning they are trading with you from their own inventory. In this case, purchases may be marked up and sales may be marked down so that TD Ameritrade is making money from the transactions. These markups and markdowns are more of a hidden fee because you won’t see them as a commission however, they are included in the prices quoted to you.

Other Trading Fees

TD Ameritrade offers trading in over 6,000 mutual funds with over half of them having no transaction fee on the buy-side. Depending on the fund, the other half of the funds may have a transaction fee of either $49.95 or $74.95 per purchase. Even the funds that are free to buy carry a conditional short-term redemption fee of $49.99 per sale if you sell the fund within 180 days of purchase.

You won’t be charged a per trade commission for online options trades however, TD Ameritrade charges a fee of $.65 per option contract on both buys and sells. On futures and options on futures, TD Ameritrade charges a $2.25 fee per contract. You won’t pay any commissions on forex trades; however, TD Ameritrade charges a transaction fee on every forex trade, which is built into the bid/ask spread.

TD Ameritrade Makes Money on Margin Interest

Revenue from margin interest can be extremely profitable for TD Ameritrade because of the relatively low costs of simply loaning out money to investors. TD Ameritrade’s published margin rates currently range from 8.25% to 10.25%. All margin loans to clients are collateralized by their cash and securities so, for TD Ameritrade, margin loans are a source of revenue with potentially high returns and fairly low risk.

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Collateral Lending Program

Margin loans are generally used by clients for trading but there are other forms of loans that TD Ameritrade makes money from that they offer to clients as well. Through their collateral lending program, TD Ameritrade offers lines of credit and fixed-rate loans. These loans cannot be used for trading, but they work the same way as a margin loan by collateralizing the debt against a client’s portfolio.

A line of credit with TD Ameritrade allows the borrower to borrow against their portfolio whenever needed and carries an interest rate of around 2.5% - 5.0%, depending on the amount borrowed. A fixed-rate loan with TD Ameritrade gives a borrower a lump sum that has to be paid back on a schedule of monthly payments. TD Ameritrade works with clients on a case-by-case basis for providing fixed-rate loans. They don’t have their fixed-rate loan interest rates published on their website but, you can bet that they set the interest rates to include enough margin for putting profits in their pocket.

TD Ameritrade Makes Money on Market Data Subscriptions

How TD Ameritrade makes money

TD Ameritrade has an excellent offering of free market data for clients such as free real-time quotes and free level-2 quotes. In addition, they make money by offering two different subscriptions that provide clients with tons of market research and analysis of stocks. The subscriptions cost $9.99 per month and $19.99 per month. Even if TD Ameritrade only has 10,000 subscribers to the $9.99 per month subscription, they would be making over $1 million a year on this offering.

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TD Ameritrade Makes Money on Miscellaneous Fees

TD Ameritrade has a long list of miscellaneous fees that they make money from. The list includes fees such as a $38 voluntary tender offer fee, a $2 per month paper statement fee, a $75 outbound full account transfer fee, and a $25 returned check fee. Some of the fees are much more profitable than others but when they are charging these seemingly small fees thousands or millions of times every year, the overall profits can add up greatly in the end.

How Does TD Ameritrade Make Money Conclusion

There are even more ways that TD Ameritrade makes money but hopefully, you were able to gain some interesting insights into how TD Ameritrade makes its money with the ways we discussed. Between everything that TD Ameritrade offers relative to the fees charged, TD Ameritrade provides a great value for clients overall. At the end of the day, they manage to provide value for clients while at the same time making incredible amounts of money.

Updated on 5/10/2022.

About the Author
Paul Johnson is a Licensed Stockbroker with 7+ years of experience in the financial services industry. Paul enjoys teaching about investing and writing about financial topics. He is a husband and father of twin boys.