Most brokerage firms pay little to nothing for idle cash sitting in an account.
But like a bank, a broker can use that cash for other purposes. And they do. Brokers lend this money out and invest it, earning much higher rates than they pay their customers for it.
For example, TD Ameritrade currently offers a 0.01% APY on free cash balances in its FDIC-sweep program. The broker’s margin rates vary from 8.25% to 10.25%. That’s a huge profit margin on what the company pays for cash versus what it earns by lending it out.
Broker-dealers also earn money by charging for investment-advisory services. Fidelity customers, for example, pay anywhere from 35 basis points up to 150 basis points per year for the company’s portfolio management.
And then there’s order flow. Trading firms purchase orders from retail brokers. They in turn make money off of the bid-ask spread. So both companies make money from orders without charging any commissions.