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How Does TD Ameritrade Make Money?

TD Ameritrade is a broker and online trading platform for common and preferred stocks, forex, options, cryptocurrency, mutual funds, and futures contracts. It also offers a range of cash management services. The investing platform gains commissions by selling various type of assets. With over $1 trillion in assets, TD Ameritrade also makes a significant amount of money from funds sitting idle in customer accounts. Payment for order flow (PFOF) is compensation TD Ameritrade earns for facilitating the execution of trades.

History of TD Ameritrade

TD Ameritrade is a broker and online trading platform for common and preferred stocks, forex, options, cryptocurrency, mutual funds, and futures contracts. It also offers a range of cash management services.

TD Ameritrade was founded in 1971 by now billionaire philanthropist John Joseph Ricketts. During the 1970s, the Securities and Exchange Commission eliminated the practice of fixed brokerage commissions. TD Ameritrade – then operating as Omaha Securities – was one of the first major brokerage firms to break the mold and offer discounted commissions.

The firm would continue its pioneering culture in the following decades. It was the first to offer touch-tone phone trading in 1988. Six years later, it was involved in executing the first online trade after acquiring K. Aufhauser & Co. TD Ameritrade then helped grow and improve online trading for self-directed investors in the late 1990s. It started to offer features modern investors take for granted, including online options order entry, extended trading hours, and electronic, email-based trade confirmations.

In the modern era, TD Ameritrade continues to be a beacon of success. It now manages over 11 million client accounts representing more than $1 trillion in assets.

TD Ameritrade revenue generation

As the provider of multiple financial services, TD Ameritrade has an extremely diverse revenue generation model. This is particularly impressive considering the company offers a commission-free investment option with no platform fees, data fees, or trade minimums.

Here is a very general look at some of the main sources of revenue.

Investment platform

  • Stocks – the online trading of stocks is free, while trades made via a phone system are $5 and broker-assisted trades are $25.
  • Exchange-traded funds (ETFs) – as above, with commission-free ETFs also being free to trade.
  • Options – online options trading is subject to a 65 cent fee per contract. Trades made via the interactive phone system are $5 plus 65 cents per contract, while the broker-assisted option is available for $25 plus 65 cents per contract.
  • Futures – futures trading is available for $2.25 per contract. Exchange and regulatory fees are also applicable.
  • Forex – TD Ameritrade offers Forex currency pair trading in 10,000 unit increments. While there is no commission, the cost of the trade depends on the bid/ask spread.

Interest

With over $1 trillion in assets, TD Ameritrade also makes a significant amount of money from funds sitting idle in customer accounts. 

It does this by lending it out to other financial institutions and then making a profit on the net interest margin. This occurs when the amount of interest collected from borrowers is more than the amount of interest paid out to consumers who have funds in a checking account.

Recent figures show that 28% of company revenue comes from net interest margin.

Cash management

A cash management account allows users to manage their savings, investment, and retirement funds from a single interface.

Since TD Ameritrade is not a bank, it has partnered with certified institutions such as TD Bank to hold customers’ funds on its behalf.

Here, the company earns money through the net interest margin we mentioned in the previous section. Through its relationship with TD Bank, it also earns affiliate income for referring business to the bank. Depending on the account selected, customers may also have to pay a monthly maintenance fee. This fee may or may not be shared with TD Ameritrade.

Payment for order flow

Payment for order flow (PFOF) is compensation TD Ameritrade earns for facilitating the execution of trades.

Essentially, the company earns a referral fee for directing order flow to a specific market maker. This fee is a mere fraction of 1%, but revenue multiplies quickly as millions of trades may be facilitated daily.

Key takeaways:

  • TD Ameritrade is an established online investment platform and a broker. It was founded by John Joseph Ricketts in 1971 and is seen as a pioneer in providing investment services for individuals. It was the first to offer commission-free trading and was involved in the first online trade in 1994.
  • TD Ameritrade operates on a commission-free trading model. Therefore, it generates revenue through phone or broker-assisted trades in various types of securities. It also earns over a quarter of total revenue in net interest margin.
  • TD Ameritrade offers a checking account in partnership with banks such as TD Bank where it earns affiliate income for referring businesses. Lastly, the company generates revenue via payment for order flow.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"