Brokerage firms make money in several ways that don’t show up as a commission on your trade confirmation. The biggest sources are interest, both on the uninvested cash in your account and on margin loans they extend to you; payments they receive from market makers for routing your orders; fees for lending out your shares to short sellers; management fees baked into mutual funds and ETFs; advisory fees on managed accounts; and a range of transaction and administrative charges on everything from options contracts to outgoing wire transfers. Free stock trading didn’t remove the cost of investing. It moved the cost to places most customers never look.
Interest on Your Cash and Margin Loans
Interest income is often the single largest revenue line for a major brokerage, and it flows from two directions: the cash you haven’t invested, and the money you borrow against your portfolio.
Cash Sweeps
When you sell a stock or deposit money you haven’t put to work yet, that cash gets automatically swept into a program the brokerage runs. It might be a money market fund, a deposit account at an affiliated bank, or a multi-bank sweep arrangement.1U.S. Securities and Exchange Commission. Cash Sweep Programs for Uninvested Cash in Your Investment Accounts – Investor Bulletin The firm earns interest on those deposits at or near prevailing market rates and pays you a fraction of what it earns. The spread is the profit.
Many firms use tiered schedules that pay smaller accounts less. One mid-size brokerage’s sweep program pays 0.05% on balances under $250,000 and 1.00% on balances over $1 million. Across millions of accounts, even a modest spread produces hundreds of millions in annual revenue.
Margin Loans
Margin loans let you borrow from the brokerage using your portfolio as collateral, and the firm charges interest at tiered rates keyed to a base rate that moves with the broader rate environment. At Fidelity, margin rates currently run from 7.50% on balances above $1 million to 11.825% on balances under $25,000, based on a base rate of 10.575%.2Fidelity Investments. Margin Loans Schwab’s schedule is nearly identical, with an 11.825% rate on small balances and a 10.00% base rate.3Charles Schwab. Rates and Requirements
Federal Regulation T caps the amount a brokerage can lend at 50% of the purchase price for most equity securities.4eCFR. 12 CFR Part 220 – Credit by Brokers and Dealers (Regulation T) – Section: Supplement Margin Requirements After the purchase, FINRA Rule 4210 requires you to maintain equity equal to at least 25% of your holdings’ current market value, and many firms set higher house requirements.5FINRA. FINRA Rule 4210 – Margin Requirements If your equity drops below the threshold, the firm can issue a margin call and, if you don’t respond quickly, liquidate positions without asking you first.
Margin interest you pay is treated as investment interest expense for tax purposes and can be deducted, but only up to your net investment income for the year. Any excess carries forward.6Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest
Payment for Order Flow
When you place a stock or options order, the brokerage usually doesn’t execute it directly on an exchange. It routes the order to a market maker (also called a wholesaler), and the wholesaler pays the brokerage a small amount per share for the privilege of filling it. That’s payment for order flow. Retail broker-dealers took in roughly $953 million from it in the second quarter of 2025 alone. The per-share payments are fractions of a cent; the volume is what makes them enormous.
The arrangement carries a built-in conflict. A firm has a financial incentive to route your order to whoever pays the highest rebate rather than to whoever offers the best price. FINRA Rule 5310 requires broker-dealers to use reasonable diligence to find the best market and execute trades at the most favorable price reasonably available.7FINRA. 2023 Report on FINRAs Examination and Risk Monitoring Program – Best Execution
SEC Rule 606 requires every brokerage to publish quarterly reports naming the venues it routes orders to, the percentage sent to each, and the rebate arrangements involved.8eCFR. 17 CFR 242.606 – Disclosure of Order Routing Information These reports live on each firm’s website, and they’re worth pulling up if you want to see who’s actually filling your trades.
The Bid-Ask Spread
Market makers profit from the gap between the bid and ask price. When you buy, you pay the ask; when you sell, you receive the bid; the market maker keeps the difference. Brokerages sometimes share in this spread revenue through their routing agreements. In liquid stocks the spread is usually a penny or less. In thinly traded stocks or options it can be much wider.
Lending Out Your Shares
Short sellers need shares to borrow, and brokerages supply them. Firms often lend shares out of customer margin accounts (the margin agreement permits it) or through fully paid securities lending programs, where you voluntarily let the firm lend out shares you own outright in exchange for a cut of the fee. A typical split is 50/50, though each firm structures it differently. The brokerage’s share is steady income that doesn’t depend on which way markets move.
Hard-to-borrow stocks command much higher fees. Borrow rates are annualized percentages charged daily for as long as the short position stays open. A stock that’s easy to borrow might carry a 0.25% annual fee; a name under heavy short interest can spike to 50%, 100%, or higher. During short squeezes, borrow fees can jump overnight, and securities lending becomes a windfall for the firm.
Fees on Trades That Aren’t Free
Most large brokerages stopped charging commissions on U.S. stock and ETF trades years ago. Plenty of other transactions still carry fees.
Options contracts come with a per-contract charge at nearly every major firm. Schwab and Fidelity both charge $0.65 per contract, and E-Trade drops to $0.50 per contract once you make 30 or more trades in a quarter.9Fidelity. Trading Commissions and Margin Rates10Charles Schwab. Charles Schwab Pricing Guide for Individual Investors A 10-contract trade costs $5 to $6.50 in fees alone, and active options traders accumulate real money over a year.
Futures trades typically run $1.50 to $2.25 per side depending on the exchange and product. Mutual fund purchases carry a charge if the fund isn’t on the brokerage’s no-transaction-fee list. Schwab charges up to $74.95 per purchase for funds outside its preferred lineup, and competitors charge similar amounts.11Charles Schwab. Mutual Fund Fees, Costs and Expense Ratios
Regulatory Pass-Through Fees
The SEC charges a Section 31 transaction fee on sales of exchange-listed securities, which the brokerage collects from you and forwards. For fiscal year 2026, the rate is $20.60 per million dollars of sale proceeds.12GovInfo. Order Making Fiscal Year 2026 Annual Adjustments to Transaction Fee Rates On a $10,000 sale, you’d owe roughly two-tenths of a cent. Trivial on any one trade, but rounding across millions of orders becomes operating revenue before the pass-through reaches the SEC.
Fund Fees and Advisory Fees
Brokerages build their own mutual funds and ETFs, and every dollar invested in those products generates an ongoing management fee through the fund’s expense ratio. The charge is deducted from fund assets each day, so you never see a line item on your statement. The average expense ratio for equity mutual funds was 0.40% in 2024; equity ETFs averaged 0.14%.13Fidelity Investments. What Is an Expense Ratio Proprietary index funds from large brokerages can run under 0.05%, but at scale even tiny ratios are profitable.
Some mutual funds also charge a 12b-1 fee that covers distribution and marketing, including compensation to the brokerage that sold the fund. FINRA rules cap asset-based sales charges at 0.75% of average annual net assets and cap service fees at an additional 0.25%.14FINRA. FINRA Rule 2830 – Investment Company Securities These are embedded in the expense ratio and paid continuously for as long as you hold the shares.
On managed accounts, brokerages charge advisory or wrap fees, typically 1.00% to 1.50% of assets per year, bundling investment advice, portfolio management, and trade execution into one recurring charge.15Edward Jones. Financial Advisor Costs and Fees On a $500,000 account, that’s $5,000 to $7,500 a year regardless of how much you trade. Recommendations made in these accounts must comply with the SEC’s Regulation Best Interest, which requires that a recommendation be in the retail customer’s best interest and that the firm not place its financial interests ahead of the customer’s.16U.S. Securities and Exchange Commission. Regulation Best Interest – The Broker-Dealer Standard of Conduct That standard matters because firms have a direct financial incentive to steer you toward their own proprietary funds.
Administrative and Service Fees
Fixed charges for specific account actions add up to real revenue across millions of customers. The common ones:
- Outgoing wire transfers. Schwab charges $25 per transfer, or $15 online. Some firms including Fidelity have eliminated outgoing wire fees entirely.17Charles Schwab. Charles Schwab Pricing Guide for Individual Investors – Section: Cashiering and Administrative Services Fees18Fidelity. How to Choose Between an EFT or a Bank Wire
- Full account transfers through the ACAT system. Typically around $75, though some firms charge as much as $150.19FINRA. Customer Account Transfers
- Paper statements. Opting out of electronic delivery usually runs $2 to $5 per mailing.
- Corporate actions. When a stock you hold goes through a voluntary event like a tender or exchange offer, some firms charge a reorganization fee. Morgan Stanley charges $25 per transaction.20Morgan Stanley. Information About Fees and Other Compensation
Inactivity fees were once standard but have largely disappeared at the major online brokerages. Smaller or specialized firms may still charge them, so read the fee schedule before opening an account.
What This Means for What You Actually Pay
The visible price of a stock trade is one small piece of the cost of holding a brokerage account. The yield your firm pays on uninvested cash, the margin rate you’re quoted, the expense ratios on the funds you own, and the execution quality on your orders all move your returns more than a per-trade commission ever did. Reading your brokerage’s Rule 606 report, comparing sweep yields to what money market funds pay directly, and checking expense ratios on any proprietary products in your account will show you far more about what you’re paying than the trade confirmation will.