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How do brokers make money? 7 ways, even on "free" trades
Brokers make money from spreads, payment for order flow, interest on your cash, margin loans and fees, even when the trade itself says $0. Knowing which ones apply to you shows what each trade really costs.
The short answer
Brokers make money in several quiet ways: the spread on each trade, payments from firms that fill your orders, interest on cash and loans, and fees. A "$0 commission" trade still has costs. They're just not on the receipt.
None of this is a scam. It's a business model. But it's worth knowing, because costs add up fast on small, frequent trades.
1. Commissions
The simplest one. You pay a fee per trade, per share or per contract.
- Most big US stock apps charge $0 for online stock and ETF trades.
- Options usually have a per-contract fee.
- Futures have a commission plus exchange and regulatory fees on every contract.
See Commission for the basics.
2. The spread
Every market has two prices: the bid (what buyers pay) and the ask (what sellers want). The gap is the Spread.
When you buy at the ask and sell at the bid, the spread is a cost to you. In forex, many dealers earn mainly from the spread, sometimes with a small mark-up added on top of the market price.
Example: EUR/USD shows 1.1000 bid / 1.1001 ask. That's a 1-pip spread. On a micro lot (1,000 units), 1 pip is about $0.10. Ten round trips a day is about $1 in spread alone. A math example, not a promise.
3. Payment for order flow
This is how many US stock apps can offer $0 commissions. The broker sends your order to a market maker (a firm that buys and sells all day), and that firm pays the broker a tiny amount, often a fraction of a cent per share.
The market maker earns from the spread. Supporters say customers often get a price as good as or better than the public quote. Critics say it creates a conflict of interest. The SEC requires brokers to publish reports on where they route orders (called Rule 606 reports), so you can look up yours. See Market maker.
4. Interest on your cash
Cash sitting in your account earns interest for the broker. Many brokers "sweep" it into a bank or fund and pass you only part of the interest, sometimes very little.
When interest rates are high, this can be one of a broker's biggest income sources. Check what rate your idle cash earns.
5. Margin loans
A margin account lets you borrow from the broker. You pay interest on what you borrow, often at a higher rate than you'd earn on cash. See cash vs margin account.
Brokers can also lend out shares held in margin accounts to short sellers, and earn a fee for it.
6. Fees
Read the fee page. Common ones:
- monthly platform or market-data fees,
- wire, transfer-out and paper-statement fees,
- inactivity fees at some brokers,
- currency conversion fees when you trade foreign stocks,
- overnight financing (called Swap (rollover)) on forex positions held past the daily rollover.
7. Being on the other side (some forex and crypto firms)
Some forex dealers and crypto platforms are the counterparty to your trade. When you buy, they sell to you. This is called a dealing desk or market-maker model. It's legal and regulated in the US for forex dealers, but it means the firm can gain when customers lose.
Other firms pass orders on to outside liquidity and earn from spreads or commissions. Ask your broker which model it uses. See Dealing desk broker and ECN broker.
How to see what you really pay
| Cost | Where to find it |
|---|---|
| Commission | the broker's pricing page |
| Spread | the bid and ask on your trade ticket, at the time you trade |
| Order-routing payments | the broker's Rule 606 report |
| Interest on cash | the cash or sweep rate page |
| Margin rate | the margin rates page |
| Other fees | the fee schedule (usually a PDF) |
Why this matters for a beginner
Costs hit small, frequent trades the hardest. If you risk $10 per trade and pay $1 in spread and fees, that's 10% of your risk gone before price moves.
Three habits help:
- Trade fewer, better setups. See how to stop overtrading.
- Use limit orders when it fits. A limit order sets the price you'll accept. See market vs limit order.
- Trade the busy hours, when spreads are usually tighter.
Try it today: open your broker's fee schedule and its Rule 606 report. Write down your real cost for one round trip in the market you trade. Put that number in your trading plan.
Questions
How do brokers make money with zero commissions?
Mostly from payment for order flow, the spread, interest on customer cash, margin loans and other fees. The trade is free, but the business still earns around it.
Is payment for order flow bad for me?
It's debated. Your order may still get a price at or better than the public quote, but the broker has a reason to route orders to whoever pays. Check your broker's Rule 606 report.
Do forex brokers make money when I lose?
Some forex dealers take the other side of customer trades, so they can. Others earn mainly from spreads or commissions. Ask your broker which model it uses.
What is the cheapest way to trade?
Trade less often, use limit orders where it fits, trade when the market is busy and spreads are tight, and keep cash where it earns a fair rate.
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