How brokers make money from you

Your broker is a business. When the app says "commission-free", the business has not stopped making money; it has moved the meter somewhere you are less likely to look. Knowing where the meter is does not make brokers villains. It makes you a customer who understands the bill.

The old model: commissions

Until around 2019, US stock brokers charged a fee per trade, typically $5 to $10, and before that much more. Commissions are transparent: you see them on every confirmation. They still exist for futures (per contract, per side), for options at many brokers (per contract), for most brokers outside the US, and at brokers that offer direct market access.

A commission is a cost you can calculate before trading. That is its virtue. Its vice is that it adds up fast for active traders and can quietly turn a marginally profitable strategy into a losing one.

Payment for order flow

Most "free" US stock and options brokers are paid by market makers to send them your orders. This is payment for order flow (PFOF). The mechanism:

1. You send a market order to buy 100 shares.
2. Instead of routing to an exchange, your broker sends it to a wholesale market maker.
3. The market maker fills you at a price equal to or slightly better than the public best ask (they are legally required to at least match it in the US).
4. The market maker pays your broker a fraction of a cent per share for the privilege.

Why would a market maker pay for that? Because retail orders are, on average, uninformed and small. A market maker filling a mix of retail orders faces far less risk than one quoting on a public exchange against hedge funds. Retail flow is valuable because it is not dangerous.

Is PFOF bad for you? The honest answer is: it depends what you compare it to.

• Compared to paying $7 a trade, most small retail traders are clearly better off.
• Compared to a broker that routes to the best venue for a small commission, a PFOF broker may give you slightly worse fills on average, especially in options where PFOF payments are much larger and price improvement is harder to measure.
• The conflict of interest is real: a broker paid per share has an incentive to encourage you to trade more, which is why free apps are built to be engaging.

PFOF for stocks is banned in the UK, Canada, Australia and (as of 2026) the EU. If you are outside the US, your broker probably charges a small commission or a spread markup instead.

Spread markup

Forex, CFD and many crypto brokers make their money by widening the spread. The interbank price on EUR/USD might be 1.08500 / 1.08505; your broker shows 1.08495 / 1.08510 and keeps the difference on every trade. Some crypto platforms bury a percentage fee inside the quoted price and call it "no commission".

A spread markup is a commission you cannot see on a statement. Measure it by comparing your broker's spread to a reference quote during liquid hours.

Interest: the quiet giant

For the largest brokers, the biggest revenue line is often not trading at all. It is interest.

• Margin lending. If you borrow to buy stock, you pay interest, often 6 to 13% per year at retail brokers. This is enormously profitable for them and expensive for you.
• Your cash. Uninvested cash in your account earns the broker interest at money-market rates. Some pass most of it to you; some pass almost none. On a $20,000 balance at 4%, that is $800 a year that either goes to you or to them.
• Stock lending. Brokers lend out shares held in margin accounts to short sellers and collect a fee. Some share it with you; many do not.

The full menu

What to actually do about it

1. Read the fee schedule once, in full. It is boring and it will save you money.
2. Check what your cash earns. If it is near zero, either move it or accept that you are paying a hidden fee.
3. Compare spreads if you trade forex or crypto, during the London/New York overlap for forex and on a weekday for crypto.
4. Use limit orders so that the fill quality of PFOF routing matters less.
5. Trade less. Every revenue line above scales with activity. The cheapest trade is one you did not need to make.

Key idea: "Commission-free" means the broker is paid by market makers, by spreads, by interest on your cash, or by lending your shares. None of those are scandalous; all of them scale with how much you trade and how much you leave lying around. Know your bill.

A note on incentives

A broker whose main revenue is per-trade payments wants you active. A broker whose main revenue is interest wants you to hold cash and borrow. A broker whose main revenue is subscriptions wants you to stay. None of these are aligned with you making money, and none are necessarily against it either. The one incentive you should be wary of is a broker who is your counterparty (common in forex and CFDs) and therefore profits directly when you lose. Ask, in writing if necessary, whether your broker takes the other side of your trades.

Try it: Find your broker's fee schedule and their order-routing disclosure (in the US, look for "Rule 606 report"). Write down three ways this broker makes money from an account like yours. If you cannot find the answer for one of them, that is your answer.

Recap

• Brokers earn from commissions, payment for order flow, spread markups, margin interest, interest on idle cash, stock lending and fees.
• PFOF pays US brokers to route retail orders to market makers; fills are usually fine for small stock orders and murkier in options.
• Forex, CFD and many crypto brokers charge through a wider spread you can only see by comparing quotes.
• Interest on your cash and margin borrowing is often the broker's largest revenue line.
• Every revenue source scales with activity; trading less is the biggest cost cut available.