How Do Brokerages Make Money With Free Trades?

Have you ever wondered how brokerages make money with free trades? In this blog article, I will share with you the answers to this intriguing question. As a Business Research guru with a passion for helping people find answers, I have delved deep into the world of brokerages and their revenue models. Through my experience in this field, I have gained valuable insights into the strategies employed by brokerages to generate profits while offering free trades.

In my opinion, the concept of free trades may seem contradictory when it comes to making money. However, brokerages have devised clever ways to monetize their services while still providing free trades to their customers. It is important to understand that although the trades themselves may be free, there are other avenues through which brokerages generate revenue.

Through extensive research and analysis, I have uncovered the various methods brokerages use to make money with free trades. From earning interest on uninvested cash balances to selling order flow and offering premium services, brokerages have developed a range of strategies to ensure their profitability. In this article, you can expect to find the best-researched analysis, providing you with a comprehensive understanding of how brokerages manage to generate revenue despite offering free trades.

So, if you’re curious to explore the inner workings of brokerages and uncover the secrets behind their profitability with free trades, join me on this insightful journey. Together, we will unravel the strategies and tactics employed by brokerages in the pursuit of financial success. Get ready to gain a deeper understanding of the fascinating world of brokerages and how they make money while seemingly giving away their services for free.

How Do Brokerages Make Money With Free Trades?


Have you ever wondered how brokerages manage to offer free trades to their customers? It may seem counterintuitive, but these companies have found clever ways to generate income while providing commission-free trading. In this article, we will explore the strategies brokerages employ to make money in the era of zero-commission trades.

Payment for Order Flow

One of the primary ways brokerages make money with free trades is through a practice known as payment for order flow (PFOF). When you place a trade, the brokerage may route your order to a market maker or a high-frequency trading firm. In return, these firms pay the brokerage for the opportunity to execute the trade on their own platforms. While this may raise concerns about potential conflicts of interest, it allows brokerages to profit by selling order flow without charging customers commissions.

Interest on Cash Balances

Another source of revenue for brokerages is the interest earned on cash balances held in customer accounts. When you deposit funds into your brokerage account, they may be held in a money market fund or a similar vehicle that generates interest. Brokerages can earn a spread by investing these cash balances in higher-yielding assets while still providing customers with the convenience of instant access to their funds.

Premium Features and Services

While basic trades may be free, brokerages often offer premium features and services that come at an additional cost. These may include advanced trading tools, access to research reports, or personalized investment advice. By charging fees for these value-added services, brokerages can cater to different customer segments and generate revenue beyond the free trades they offer.

Margins and Borrowing Fees

Brokerages also profit from margin trading, where customers borrow funds to amplify their trading positions. Margin trading involves interest charges on the borrowed funds, providing a revenue stream for brokerages. Additionally, brokerages may charge borrowing fees to customers who wish to short sell stocks, further contributing to their income.

Asset Management and Robo-Advisory

Many brokerages have expanded their offerings to include asset management services and robo-advisory platforms. These services allow customers to invest in professionally managed portfolios or utilize algorithm-based investment strategies. Brokerages charge management fees based on the assets under management, providing a steady income stream in addition to free trades.

Securities Lending

Brokerages can also generate income by lending securities held in customer accounts to other market participants, such as short sellers or institutional investors. In exchange for borrowing these securities, the borrowers pay fees or interest to the brokerage. This practice allows brokerages to monetize idle assets and generate additional revenue.


While it may seem puzzling at first, brokerages have devised various methods to make money despite offering free trades. Through payment for order flow, interest on cash balances, premium features, margin trading, asset management, securities lending, and more, these companies have built sustainable business models that benefit both themselves and their customers. So, the next time you enjoy commission-free trading, remember that brokerages have found innovative ways to ensure their profitability while

Frequently Asked Questions – How Do Brokerages Make Money With Free Trades?

As a market research expert, I have compiled the most frequently asked questions regarding how brokerages make money with free trades. Below, you will find the answers to these questions:

1. How do brokerages offer free trades?

Brokerages can offer free trades by generating revenue through various alternative means. While they may not charge a commission fee for executing trades, they can earn money through other sources such as interest on cash balances, payment for order flow, margin lending, and premium services.

2. What is payment for order flow and how does it work?

Payment for order flow is a practice where brokerages receive compensation from market makers or trading firms for routing their clients’ orders to them. These market makers then execute the trades at a slightly better price than the prevailing market price, allowing them to profit from the spread. Brokerages earn a small fee for directing orders to these market makers, which helps them generate revenue even with free trades.

3. Do brokerages earn interest on cash balances?

Yes, brokerages can earn interest on the cash balances held in their clients’ accounts. When investors deposit money into their brokerage accounts, it is often held in cash until it is used to purchase securities. During this time, brokerages can invest these cash balances in short-term instruments such as Treasury bills or money market funds, earning interest on the funds. This interest income contributes to their overall revenue.

4. Can brokerages make money through margin lending?

Indeed, brokerages can generate income through margin lending. Margin accounts allow investors to borrow funds from the brokerage to purchase securities. The brokerage charges interest on the borrowed amount, which becomes a source of revenue. Additionally, if the investor fails to meet margin requirements or repay the borrowed funds, the brokerage may liquidate their positions, potentially earning profits from the sale.

5. What are premium services offered by brokerages?

Premium services offered by brokerages are additional features or tools that come at a cost. These services often provide advanced trading platforms, research reports, access to exclusive investment opportunities, or personalized support from financial advisors. While the basic trades may be free, brokerages earn money by charging fees for these premium services, catering to investors who require more sophisticated tools or assistance.


I hope you found this article insightful as we delved into the secret business model behind how brokerages make money with free trades. We discussed various ways in which these companies generate revenue, such as through order flow, interest on cash balances, and premium services. By understanding these strategies, we can better comprehend the underlying mechanisms that allow brokerages to offer commission-free trades.

As I reflect on the information shared, I can’t help but feel inspired by the ingenuity and adaptability of these brokerages. They have found innovative ways to monetize their services while still providing free trades to their customers. This entrepreneurial spirit is something we can all learn from, whether we are in the financial industry or pursuing our own ventures. It reminds us to constantly seek new opportunities and think outside the box to achieve success.

Lastly, I encourage you to consider investing early and gaining experience in the world of finance. As you embark on your investment journey, you will not only have the potential to accumulate wealth but also develop a deeper understanding of the market. Investing early allows you to learn from both successes and failures, building a solid foundation of knowledge and experience. So, take that first step, start investing, and watch your financial acumen grow over time.

Remember, the world of finance is ever-evolving, and by staying informed and embracing new opportunities, you can navigate the complexities of the market and potentially reap the rewards. Happy investing!

How Do Private Equity Firms Make Money