How ETRADE makes money without commissions

How Does E*TRADE Make Money in 2025?


How does E*TRADE make money with zero commissions and no fees? E*TRADE business model to generate revenue without commissions.


How Does E*Trade Make Money?


You might be wondering how E*Trade manages to make money despite offering $0 commissions on stocks and ETFs. Equity commissions are just a small part of a brokerage firm's overall revenue, and E*Trade employs various strategies to generate income. Let's dive into the details.


$0 Stock Commissions Still Make Money For E*Trade


Even with the elimination of ETF and stock commissions, E*Trade continues to generate revenue from these transactions through a practice called payment for order flow.

Payment for order flow operates as follows: E*Trade sends its customers' orders to specific market makers, who are responsible for matching buyers and sellers in the market. These market makers are willing to pay E*Trade for the privilege of receiving these orders. The payment is typically fractions of a penny per share. While this may seem small on an individual trade, the total adds up significantly due to the high volume of shares traded on any given market day.

Market makers also need to make money. They accomplish this by buying from sellers at a lower price and selling to buyers at a higher price, creating a bid-ask spread for every stock and ETF. This spread serves as a built-in payment to compensate the parties involved in executing the orders.

Despite the advertised $0 commission, E*Trade still charges equity commissions in certain situations. For instance, the $0 commission only applies to online trades, while trades conducted over the phone with a live agent incur a $25 fee each.

Additionally, OTC stock trades are not commission-free and carry a charge of $6.95, although active traders receive a $2 discount. Special handling requirements for large block transactions may also result in additional surcharges.

Stock or ETF trades placed on E*Trade's Pro desktop program, which are directly routed to an Electronic Communication Network, carry a surcharge of 0.5¢ per share.


How Does ETRADE Make Money


E*Trade Makes Money on Mutual Funds


For mutual funds without transaction fees or loads, E*Trade enforces a short-term redemption fee of $49.99 whenever shares of these funds are sold within 90 days.

When brokerage firms have preferred lists of mutual funds, they often receive compensation from the fund companies featured on those lists. E*Trade's website advertises an All-Star List of mutual funds, indicating that it is likely being compensated by the fund companies included.

In fact, E*Trade's parent company, Morgan Stanley, publicly disclosed in 2004 that it received up to 0.05% of assets and 0.20% of sales annually from multiple fund families, including PIMCO and Franklin Templeton. This disclosure followed a $50 million settlement claiming that Morgan Stanley had failed to inform clients about providing preferential treatment to certain fund families in exchange for cash payments. Morgan Stanley neither confirmed nor denied the allegations.


how does e*trade make money with no fees


E*Trade Makes Money on Option Fees


Moving on, E*Trade generates revenue from option fees as well. It charges 50¢ per contract for every option trade, with an additional 15¢ per-contract surcharge on accounts that have less than 30 trades per quarter.

Although E*Trade does not impose a base charge on option trades, the 65¢ per-contract fee can accumulate. For example, entering an option spread with four legs would cost $2.60, and a round trip would amount to $5.20.


E*Trade Makes Money on Futures


E*Trade also generates revenue from futures trading. Contracts in this asset class are even more costly than options. E*Trade charges $1.50 per contract, per side, and applies a $1.00 surcharge for cryptocurrency contracts.


E*Trade Makes Money on Fixed Income


Fixed-income securities come with various commissions. For online secondary trades, E*Trade charges $1 per bond, with a minimum commission of $10 and a maximum of $250. Selling concessions apply to new bond issues, excluding Treasury bonds. E*Trade's ability to act as principal or agent on any bond transaction summarizes this aspect.


E*Trade Makes Money on Investment Advice


E*Trade generates revenue through investment advice as well. Managed accounts likely contribute significantly to their income.

For the robo service, E*Trade charges 0.30% of account assets per year. With a minimum starting balance of $500, this translates to at least $1.50 per account.

This revenue stream specifically pertains to robo accounts. Additionally, E*Trade offers traditionally-managed accounts with various minimums and fees. One such package is called Blend Portfolios, which costs between 65 and 90 basis points per year. Each account requires a minimum deposit, starting at $25,000, contributing to a substantial annual income.

Bond portfolios have lower annual expenses but require a higher minimum deposit of $250,000.


Net Interest Margin (NIM)


Net interest margin serves as a significant revenue source for both banks and brokerage firms. Given that E*Trade operates in both the investment and banking sectors, it is highly likely that this is a substantial cash cow for the financial conglomerate.

The concept of net interest margin functions similarly to the bid-ask spread described earlier. Financial institutions acquire funds at a low interest rate and lend them out at higher rates. In the case of cash, the buy rate refers to the interest paid on deposits, while the sell rate represents the interest customers pay on loans.

Let's examine E*Trade's buy and sell rates for money:

E*Trade Bank currently offers a 0.00% interest rate on its regular checking account and a 0.05% rate on its Max-Rate checking account (which comes with a $15 monthly fee). E*Trade utilizes the funds deposited in these accounts to provide loans to its customers. The bank's lines of credit currently have interest rates as high as 4.9%. On the brokerage side, margin rates range from 11.95% to 13.95%. As a result, there is a significant bid-ask spread in terms of interest rates.


how does e-trade make money


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.

See all E*Trade fees.


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E*Trade Review


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Updated on 12/22/2024.


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.