Have you ever wondered how TD Ameritrade can offer commission-free trades while still running a profitable business? The answer might surprise you. While many of us enjoy placing “free” stock trades, this brokerage giant has cleverly engineered multiple revenue streams that keep their profits flowing, even without charging direct commissions on many trades.
I’ve been researching brokerage business models for years, and today I’m pulling back the curtain on exactly how TD Ameritrade makes its money. Some of these methods might make you rethink what “free” really means in the investment world.
The Evolution of TD Ameritrade’s Revenue Model
TD Ameritrade, established in 1975, built its brand as a leader in trading innovation and client experience For decades, the company charged commissions on trades as its primary revenue source However, the landscape changed dramatically when the industry shifted toward commission-free trading for stocks and ETFs.
In 2020, Charles Schwab acquired TD Ameritrade for $26 billion, but the broker continues to operate as a separate entity while integration continues. Despite offering “free” trades, TD Ameritrade remains highly profitable through several key revenue channels.
Primary Revenue Streams for TD Ameritrade
1. Payment for Order Flow (PFOF)
One of TD Ameritrade’s largest revenue sources comes from something most retail investors never see payment for order flow Here’s how it works
- When you place a trade, TD Ameritrade routes your order to market makers (large financial institutions)
- These market makers pay TD Ameritrade for sending them your orders
- TD Ameritrade receives approximately $0.001 per share for equities and $0.37 for non-marketable orders
This practice is perfectly legal but somewhat controversial. Some brokers like Vanguard and Fidelity don’t accept payment for order flow on equities but TD Ameritrade does.
The brokerage argues that this arrangement benefits customers through “price improvement,” reporting an average improvement of $0.0116 per share on orders between 1-1,999 shares. However, critics argue PFOF creates potential conflicts of interest since brokers might route orders to whoever pays them the most rather than who offers the best execution.
2. Margin Lending
TD Ameritrade makes substantial income by lending money to customers who want to trade on margin (borrowing to purchase securities). Their current margin rates range from:
- 14.50% for balances up to $10,000
- 12.50% for balances over $499,999
These rates are considerably higher than what TD Ameritrade pays to borrow money itself, creating a profitable spread. High-net-worth clients can negotiate lower rates based on account size, but for most customers, margin lending represents a significant revenue source for the broker.
For qualified investors with portfolios over $125,000, TD Ameritrade offers portfolio margining, which can increase buying power compared to standard margin accounts.
3. Interest on Cash Balances
Unlike some competitors, TD Ameritrade doesn’t automatically sweep idle cash into interest-bearing accounts. Clients must opt into their cash sweep program, which currently pays 0.35% interest. This creates two revenue opportunities:
- TD Ameritrade can invest uninvested cash at higher rates than what they pay clients
- Many clients never enable the cash sweep program, giving TD Ameritrade free use of their uninvested cash
This “inertia profit” is substantial when multiplied across millions of accounts with idle cash.
4. Fees on Certain Products and Services
While basic stock and ETF trades are commission-free, TD Ameritrade still charges fees for:
- Options contracts: $0.65 per contract
- Futures contracts: $2.25 per contract per side plus exchange fees
- OTCBB (penny stock) trades: $6.95 per transaction
- Mutual funds outside the No Transaction Fee program: $49.99 to $74.95
- Fixed income products sold on a “net yield” basis with marked-up prices
- Account transfer fees: $75 for full account transfers
- Wire transfers: $25
- Paper statements: $2 handling fee for accounts with low balances
- Live broker assistance: $25 per trade across asset classes
These fees add up across TD Ameritrade’s large customer base and contribute significantly to revenue.
5. Stock Lending Programs
TD Ameritrade participates in stock lending programs where they loan out shares held in customer accounts to short sellers. While clients can participate in this program, they cannot choose which stocks are loaned, and TD Ameritrade retains a portion of the lending fees.
Short sellers pay premium rates to borrow hard-to-find shares, creating another revenue stream for the broker.
6. Premium Services and Subscriptions
While TD Ameritrade offers extensive free education and research tools, they also earn revenue through premium subscriptions:
- Market Edge premium tier: Real-time reports and commentary
- Market Edge second tier: $19.99 per month for full access to Market Edge’s platform, research, screeners, and tools
The Free Trading Revolution: What It Means For You
So what does this business model mean for you as an investor? Here are some important takeaways:
The True Cost of “Free”
Commission-free trading isn’t truly free—the costs are just less visible. Payment for order flow, margin interest, and uninvested cash management all represent indirect costs to you as an investor.
Advantages of TD Ameritrade’s Model
Despite these hidden revenue sources, TD Ameritrade offers substantial value:
- Powerful trading platforms like thinkorswim with professional-grade tools
- Extensive educational resources and research
- Excellent customer service with 24/7 phone support
- Well-designed mobile apps and website
- No account minimums for basic accounts
What’s Missing?
TD Ameritrade lacks some features offered by competitors:
- No fractional share trading (unlike Schwab)
- No direct cryptocurrency trading (only Bitcoin futures and funds)
- No automatic enrollment in cash sweep programs
- Higher margin rates than some competitors
The Future of TD Ameritrade’s Business Model
As TD Ameritrade continues integrating with Charles Schwab, we may see changes to their revenue model. Schwab offers fractional share trading, which could eventually come to TD Ameritrade. However, the merger also creates uncertainty about which features will survive in the combined platform.
The regulatory environment around payment for order flow also faces scrutiny, with the SEC periodically reviewing this practice. Any regulatory changes could significantly impact TD Ameritrade’s revenue model.
Making the Most of Your TD Ameritrade Account
To optimize your experience with TD Ameritrade and minimize indirect costs:
- Opt into the cash sweep program to earn interest on uninvested cash
- Be cautious with margin given the high interest rates
- Consider limit orders rather than market orders to potentially gain better execution
- Use TD Ameritrade’s free educational resources to improve your investing skills
- Take advantage of their screening tools to find investment opportunities
Is TD Ameritrade Right for You?
TD Ameritrade offers a comprehensive trading platform suitable for investors of all experience levels. Their business model supports an excellent user experience despite not charging commissions on many trades.
For beginners, TD Ameritrade’s educational content and intuitive platforms make it a good choice. Advanced traders will appreciate the thinkorswim platform’s sophisticated research tools, screening functions, and financial calculators.
However, if you’re particularly sensitive to the indirect costs discussed above, you might consider alternatives like Fidelity or Vanguard that don’t accept payment for order flow on equities.
Bottom Line: Understanding How Your Broker Makes Money Matters
We’ve explored how TD Ameritrade generates revenue despite offering commission-free trading on many products. The brokerage uses payment for order flow, margin lending, interest on cash balances, fees on certain products, stock lending, and premium subscriptions to remain profitable.
While this business model enables them to offer powerful trading platforms and extensive research without charging commissions on basic trades, it’s important to understand these indirect costs when evaluating your brokerage relationship.
In the end, TD Ameritrade provides a solid value proposition for most investors, but being aware of how they make money helps you make more informed decisions about where and how to invest.
Have you noticed any of these indirect costs in your own trading experience? I’d love to hear your thoughts on TD Ameritrade’s business model in the comments below!
FAQ About TD Ameritrade’s Revenue Model
Does TD Ameritrade make money when I place a trade with no commission?
Yes, TD Ameritrade earns revenue through payment for order flow, receiving approximately $0.001 per share for equities and $0.37 for non-marketable orders.
How much interest does TD Ameritrade pay on cash balances?
TD Ameritrade currently pays 0.35% interest on cash balances, but you must opt into their cash sweep program to receive this interest.
What are TD Ameritrade’s margin rates?
Margin rates range from 14.50% for balances up to $10,000 to 12.50% for balances over $499,999, though high-net-worth clients can negotiate lower rates.
Does TD Ameritrade charge for mutual fund trades?
While TD Ameritrade offers over 3,600 no-transaction-fee mutual funds, they charge between $49.99 and $74.95 for transactions involving funds outside this program.
Will TD Ameritrade’s business model change after the Schwab acquisition?
Possibly. As integration continues, TD Ameritrade’s revenue model may evolve to align more closely with Schwab’s offerings, but specific changes remain to be seen.
