2019-10-14 Bloomberg Businessweek-Europe Edition

◼ FINANCE Bloomberg Businessweek October 14, 2019

27

ILLUSTRATION BY PATRIK MOLLWING; DATA: COMPANY FILINGS

THEBOTTOMLINE Brokeragescanmakemoneyfromsimply

lendingoutthecashyouaren’tusing.Andonceyousignupforfree

trades,theyhavea chancetosellyouotherservices.

thelatestnumbersasoftheendofAugust,with

anaverageofabout$265billionofit earninginter-

estforthecompany.ThemoneySchwabmakes

fromloaningoutitscustomers’cashsurgedto

57%ofits$10.1billionnetrevenuelastyear.For

TDAmeritradeHoldingCorp.,thefigurelastyear

was23%ofitstotal$5.4billioninnetrevenue.At

ETradeFinancialCorp.it was64%of$2.8billion in

net revenue.

Schwab says he expects his company also will

make up for lost commission revenue with new

clients, who may want services the company still

charges for, such as investment advice. Brokerages

also make money by catering to investment advis-

ers, loaning customers cash to buy stocks on mar-

gin, and lending out securities to short sellers

hoping to profit on a decline in prices.

And while these companies are no longer

charging commissions, that doesn’t mean they

aren’t making money from clients’ stock trades.

A chunk of their revenue is what’s known as

“payment for order flow.” Basically, the broker-

ages get fees for sending their customers’ buy and

sell orders to computerized trading firms such as

Citadel Securities and Virtu Financial Corp. Those

firms then match buyers with sellers themselves.

(The trading firms can make money by picking

up the tiny spreads between the prices offered

by buyers and sellers, or by trading on any gap

between the futures market and stock prices.)

Brokers and the trading firms say this process

results in a better deal for retail investors.

Some financial advisers worry that free trades

will encourage regular investors to trade more—

and trip themselves up in the process. “I would

anticipate those that were on the fence with regard

to excessive trading might now be pushed over the

edge,” says Charles Sachs, director of planning at

Kaufman Rossin, a CPA and advisory firm in Miami.

“One thing is for certain in my mind, and that is

the game for the retail investor has changed—and

not necessarily for the better.” �Annie Massa, with

Michael P. Regan and Suzanne Woolley

● 2018netrevenue

◼Netinterestincome

◼Commissions

◼ Other

Charles Schwab

$10.1b

TD Ameritrade

$5.4b

ETrade

$2.8b