E*TRADE's main revenue comes from three sources: spreads on trades, interest on cash balances, and fees for premium services

E*TRADE is a brokerage firm, which means it makes money by taking a cut from the financial transactions and services it provides. Unlike a bank that lends out deposits, E*TRADE profits when you trade stocks, bonds, or options; when you hold cash in your account; and when you pay for advisory services or margin borrowing. Understanding how the company gets paid helps you see where your costs come from and what services actually cost you money versus which ones don't.

The company operates under the same basic model as other brokerages like Fidelity or Charles Schwab. E*TRADE is owned by Morgan Stanley as of 2020, so it also benefits from being part of a larger financial institution. But from your perspective as a customer, the revenue streams are straightforward and worth understanding.

Key Takeaways

  • E*TRADE makes money on the bid-ask spread — the difference between what buyers pay and what sellers receive — every time you trade stocks or ETFs.
  • The company earns interest on cash sitting in your account, which is why they offer cash management features and money market funds.
  • Premium services like margin accounts, options trading, and advisory accounts generate fees or interest charges that go directly to E*TRADE.
  • E*TRADE also profits from routing your trades to market makers and from lending out shares you hold in margin accounts.

The bid-ask spread: how E*TRADE profits on every trade

When you buy or sell a stock on E*TRADE, you are not trading directly with another person. E*TRADE or a market maker it partners with sits in the middle. The bid-ask spread is the gap between the price someone will pay to buy (the bid) and the price someone will accept to sell (the ask). E*TRADE captures part of that spread on each trade.

For example, if a stock is bid at $50.00 and asked at $50.05, E*TRADE may execute your buy order at $50.02 and pocket the difference. You do not see a line-item fee, but you are paying it through the price you receive. On high-volume stocks with tight spreads, this cost is small. On less-traded stocks or during volatile markets, the spread widens and E*TRADE's take increases.

This is why E*TRADE advertises commission-free stock trading — there is no per-trade fee — but that does not mean trading is free. The spread is the hidden cost, and it exists whether you trade or not.

Interest income from your cash balance

Any cash sitting in your E*TRADE account earns interest, but E*TRADE keeps most of it. When you deposit money, E*TRADE lends it out or invests it in short-term securities. The company earns a return on that money, then pays you a smaller amount as interest on your cash balance. The difference is E*TRADE's profit.

E*TRADE advertises competitive cash rates, especially during periods of higher interest rates, but the rate you receive is always lower than what the company earns on your money. This is standard across all brokerages. If you hold $10,000 in cash and E*TRADE earns 4% on that money but pays you 3%, the company keeps 1% — $100 per year in this example.

The company also offers money market funds and sweep accounts that automatically move uninvested cash into interest-bearing products. These services generate revenue through the interest spread and sometimes through fund management fees.

Margin accounts and borrowing costs

If you open a margin account, E*TRADE lends you money to buy securities beyond what you have deposited. The company charges you interest on that borrowed amount, which is a direct revenue source. Margin interest rates vary based on how much you borrow and current market conditions, but E*TRADE sets the rate and keeps all of it.

Margin accounts also allow E*TRADE to lend out the securities you hold to short sellers. When E*TRADE lends your shares, it receives a fee from the borrower and keeps a portion of that fee. You may receive a small rebate, but the company takes the larger share.

Margin accounts are optional, and most new investors do not use them. But for active traders, margin borrowing is a significant revenue stream for E*TRADE.

Options trading and premium features

E*TRADE charges per-contract fees for options trading, even though stock trades are commission-free. A typical options contract costs $0.65 per contract to open or close. If you trade 10 contracts, that is $6.50 per trade. On a single options trade with multiple legs, the fees add up quickly.

The company also offers premium advisory services, such as managed accounts and financial planning consultations. These services charge either a flat fee or an assets-under-management percentage, both of which go to E*TRADE. Margin interest, options fees, and advisory charges are the most transparent revenue sources because you see them on your statements.

Payment for order flow and market maker relationships

When you place a trade, E*TRADE routes your order to a market maker or exchange. Market makers pay E*TRADE for the right to fill your order — this is called payment for order flow. E*TRADE receives cash for directing your trades to specific firms. This revenue is not passed to you, and you do not see it itemized, but it is a meaningful part of how E*TRADE profits.

The Securities and Exchange Commission requires brokerages to disclose payment for order flow, but the details are buried in regulatory filings. E*TRADE publishes quarterly reports showing which market makers pay the most and how much revenue the company receives. This arrangement is legal and standard across the industry, but it means E*TRADE has a financial incentive to route your order to the highest bidder, not necessarily to the best execution price for you.

Advertising and affiliate relationships

E*TRADE also generates revenue through advertising and affiliate partnerships. The company promotes financial products like credit cards, insurance, and banking services on its platform. When customers sign up for these products through E*TRADE's referrals, the company receives a commission.

This revenue stream is smaller than trading spreads or interest income, but it adds up across millions of customers. You may see ads for E*TRADE's own products or partner offerings when you log into your account.

Frequently Asked Questions

Does E*TRADE make money if I just hold stocks and do not trade?

Yes, primarily through interest on any cash in your account and through lending out shares if you have a margin account. If you hold only stocks with no cash balance and no margin, E*TRADE makes less from you, but the company still benefits from payment for order flow when you eventually sell.

Why does E*TRADE offer commission-free trading if that is how they made money before?

Commission-free trading shifted E*TRADE's revenue model toward spreads, interest income, and premium services. The company attracts more customers with lower trading costs, then profits from the other sources. Larger account balances also mean more interest income and more opportunities to sell premium services.

Can I avoid paying E*TRADE's hidden costs?

You cannot avoid the bid-ask spread entirely, but you can minimize it by trading high-volume stocks during market hours when spreads are tightest. You can also avoid margin interest by not borrowing, skip options fees by trading only stocks, and reduce interest-income loss by moving cash to a high-yield savings account outside E*TRADE if rates are better elsewhere.

Is E*TRADE's payment for order flow a conflict of interest?

It can be. E*TRADE is required to route orders to get the best execution, but payment for order flow creates an incentive to favor certain market makers. The SEC allows this practice, and E*TRADE discloses it, but you should know the company has a financial reason to route your order a particular way.