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.

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.

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.

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