How Does E-Trade Make Money? The E-Trade Business Model In A Nutshell

E-Trade is a trading platform, allowing investors to trade common and preferred stocks, exchange-traded funds (ETFs), options, bonds, mutual funds, and futures contracts, acquired by Morgan Stanley in 2020 for $13 billion. E-Trade makes money through interest income, order flow, margin interests, options, future and bonds trading, and through other fees and service charges.

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Origin Story

E-Trade is a North American trading platform founded in 1991 by William A. Porter and Bernard A. Newcomb.

Before the internet became mainstream, E-Trade offered its trading services via CompuServe and America Online.

After global expansion via many mergers and acquisitions, E-Trade expanded its product range to include student loan benefit administration, margin lending, online banking, and cash management services.

The E-Trade trading platform is also multi-faceted, allowing investors to trade common and preferred stocks, exchange-traded funds (ETFs), options, bonds, mutual funds, and futures contracts.

In popular culture, the platform is famous for its promotional campaigns featuring an infant talking about finance during high-profile events such as Super Bowl.

E-Trade was acquired by Morgan Stanley in 2020 for $13 billion.

E-Trade revenue generation

In line with other popular trading platforms, E-Trade no longer charges commissions.

Instead, it has several other ways of driving revenue.

Interest income

E-Trade makes money on the interest that sits in user accounts, otherwise known as the float. Free trading is offered to retail investors in particular since they are less likely to actively trade.

Here, it’s important to note that interest is defined as money E-Trade generates by investing in money market funds.

Order flow

When E-Trade receives an order from a user, it sends that order to a market maker (or another interested party) who fills it. This party then compensates the company for the order flow it sends by earning a small amount from the bid-ask spread.

Typically E-Trade makes less than 1 cent per share, which seems an insignificant amount of money. But with hundreds of thousands of trades processed daily, it grows into something substantial.

Margin interest

Margin interest is also a significant source of income for E-Trade. This is collected when a customer borrows money to buy or short a stock. Rates start at 8.95% for amounts below $10,000 and decrease to 5.45% if the amount borrowed exceeds $1 million.

Options, futures, and bonds trading

E-Trade also makes money from active traders via several fees:

Options fees – $0.65 per contract, reduced to $0.50 if more than 30 contracts are traded per quarter.
Futures trading charges – charged at $1.50 per futures contract.
Bonds trading fees – or $1 per bond for a minimum of $10, capped at $250.

Fees and service charges

E-Trade also makes money on portfolio and retirement account management.

The E-Trade Personalized Investment service offers four portfolio management options. Each offers a different level of personalized support and investment advice:

Core Portfolios – charged at 0.30% of account market value (minimum $500).
Blend Portfolios – charged at 0.90% for the first $100,000 and then on a sliding scale as account value increases. A 0.65% fee is charged for balances over $1 million.
Dedicated Portfolios – charged at 1.25% for the first $1 million on a similar sliding scale. Balances of $5 million or more are charged a 0.95% fee.
Fixed Income Portfolios – for those interested in bond portfolios, E-Trade charges 0.75% for actively managed portfolios and 0.45% for laddered portfolios. These amounts decrease for every additional $1 million added.

Value Proposition:

Diverse Asset Classes: E-Trade enables users to trade a wide range of financial instruments, including common and preferred stocks, ETFs, options, bonds, mutual funds, and futures contracts. This diverse selection caters to various investment preferences.
User-Friendly Interface: The platform offers an intuitive and easy-to-use interface that appeals to both novice and experienced traders. Users can access real-time market data, research tools, and trading resources.
Commission-Free Trading: E-Trade eliminated commissions for stock and ETF trades, making it cost-effective for retail investors to execute trades without incurring per-trade fees.
Interest Earnings: Users can earn interest income on the uninvested funds in their E-Trade accounts, enhancing the overall return on their investments.
Margin Trading: E-Trade provides margin trading services, allowing users to borrow money to buy or short stocks, offering potential leverage and profit opportunities.
Educational Resources: E-Trade offers a variety of educational resources, including research reports, market analysis, webinars, and educational articles, to help users make informed investment decisions.
Portfolio Management Options: The E-Trade Personalized Investment service offers portfolio management options with varying levels of support, catering to different investor needs and preferences.

Customer Segments:

Retail Investors: E-Trade’s commission-free trading and user-friendly interface make it attractive to individual investors who want to manage their portfolios, whether they are beginners or experienced traders.
Active Traders: The platform appeals to active traders who engage in frequent trading of stocks, options, futures, and other financial instruments. E-Trade offers competitive pricing for active traders.
Investors Seeking Diversification: E-Trade caters to investors looking to diversify their portfolios by offering access to a wide range of asset classes, including bonds, mutual funds, and ETFs.
Self-Directed Investors: E-Trade’s platform is suitable for self-directed investors who prefer to make their investment decisions and execute trades independently.

Distribution Strategy:

Online Platform: E-Trade offers its trading and investment services through a web-based platform, allowing users to access their accounts, trade, research, and manage their investments online.
Mobile Apps: The company provides mobile apps for both iOS and Android devices, enabling users to trade and manage their portfolios on the go.
Customer Support: E-Trade offers customer support through various channels, including phone, email, and live chat, to assist users with account-related inquiries and technical support.

Marketing Strategy:

Advertising Campaigns: E-Trade is known for its advertising campaigns, including the iconic commercials featuring the “E-Trade Baby.” These campaigns raise brand awareness and capture the attention of potential investors.
Educational Content: The platform provides educational content such as research reports, market insights, webinars, and articles to help users make informed investment decisions. This content positions E-Trade as an educational resource.
Commission-Free Trading Promotion: E-Trade’s elimination of commissions for stock and ETF trades is a key marketing point, appealing to cost-conscious investors.
Targeted Promotions: E-Trade may run targeted promotions and offers to attract new customers or encourage existing users to explore additional services.
Social Media Presence: E-Trade maintains an active presence on social media platforms to engage with users, share market updates, and promote its services.
Partnerships and Sponsorships: The company may enter partnerships or sponsorships to expand its brand reach and engage with a broader audience.

Key takeaways:

E-Trade is an investment and financial services platform founded in 1991 by William A. Porter and Bernard A. Newcomb.
E-Trade offers a free trade platform for retail investors so that it can make money on the funds sitting in their accounts.
Like many similar platforms, E-Trade is also compensated for sending order flow to market makers. The company also charges a fee for options, bonds, and futures trading.

Element	Description
Value Proposition	ETRADE offers a compelling value proposition* for its users, including: – Online Trading: Providing a user-friendly online platform for stock and securities trading. – Educational Resources: Offering a wealth of educational materials, webinars, and tools to help users make informed investment decisions. – Robust Research: Providing access to extensive research and analysis tools for market insights. – Low-Cost Trading: Offering competitive commission rates and fee structures. – Variety of Investment Options: Enabling users to invest in stocks, bonds, mutual funds, ETFs, options, and more. – User-Friendly Interface: Delivering a user-friendly and intuitive trading platform. – Mobile App: Offering a mobile app for on-the-go trading and account management. – Retirement Planning: Supporting retirement planning and investment accounts. – Financial Planning Tools: Providing financial planning and portfolio management tools. – Customer Support: Offering responsive customer support for account inquiries and assistance.
Core Products/Services	ETRADE’s core products and services encompass: – Online Brokerage: Providing online brokerage services for trading stocks, options, and other securities. – ETRADE Platform: Offering a trading platform accessible via web and mobile app. – Investment Accounts: Enabling users to open various types of investment accounts, including individual, joint, retirement, and custodial accounts. – Research and Analysis Tools: Providing research tools, stock screeners, and market analysis resources. – Education Center: Offering educational content, webinars, and courses on investing and trading. – Options Trading: Supporting options trading with advanced options tools. – Managed Portfolios: Offering managed portfolio solutions for automated investing. – Retirement Accounts: Providing retirement accounts such as IRAs and 401(k)s. – Margin Trading: Allowing users to trade on margin, borrowing funds to amplify trading potential. – Customer Support: Offering responsive customer support through various channels.
Customer Segments	ETRADE serves a range of customer segments, including: – Individual Investors: Targeting individuals who want to manage their own investments and trading. – Active Traders: Attracting active traders who engage in frequent buying and selling of securities. – Retirement Savers: Catering to users looking to plan and invest for their retirement. – Financial Planners: Appealing to financial planners and advisors who use ETRADE’s tools and platform for client management. – Novice Investors: Supporting novice investors with educational resources and guidance. – Options Traders: Serving users interested in options trading strategies. – Self-Directed Investors: Targeting investors who prefer a DIY approach to managing their portfolios. – Small Business Owners: Offering solutions for small business owners and their employee retirement plans. – Institutional Investors: Providing services for institutional clients and professional money managers. – Active Mobile Traders: Attracting users who prefer trading via the mobile app.
Revenue Streams	ETRADE generates revenue through various revenue streams: – Commission Fees: Earning fees from users based on trading commissions, options contracts, and other transaction-related charges. – Interest Income: Earning interest income from cash balances held in users’ brokerage accounts. – Managed Portfolio Fees: Charging fees for managed portfolio services and robo-advisory solutions. – Margin Interest: Earning interest income from margin loans to users. – Account Fees: Charging account maintenance fees for specific account types. – Data and Research Sales: Selling premium research and data products to users. – Financial Planning Fees: Charging fees for financial planning services and advisory fees for managed accounts. – IRA Custodial Fees: Collecting custodial fees for retirement accounts. – Asset Management Fees: Earning fees from asset management services and advisory fees on managed portfolios. – Margin Trading Interest*: Charging interest on margin balances.
Distribution Strategy	ETRADE employs a strategic distribution strategy to reach users and promote its services: – Online Platform: Offering an online trading platform accessible via web and mobile app. – Mobile App: Providing a user-friendly mobile app for on-the-go trading and account management. – Educational Resources: Offering a comprehensive educational center with articles, videos, webinars, and courses. – Marketing Campaigns: Running marketing campaigns to attract new users and promote special offers. – Customer Referrals: Encouraging users to refer friends and earn referral bonuses. – Customer Support: Providing responsive customer support through phone, email, and chat for inquiries and assistance. – In-Person Branches: Maintaining physical branch locations for in-person support and consultation. – Social Media: Engaging with users on social media platforms to share market insights and updates. – Third-Party Integrations: Integrating with third-party financial tools and platforms. – Financial Advisor Network: Collaborating with financial advisors who use ETRADE’s platform for client management.