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Business Operations Business Models

How Does ETrade Make Money (Business and Revenue Model)

The ETrade business model

How Does ETrade Make Money?
Here’s what you should know:
  • What is ETrade, and how does it work?
  • How does ETrade make money?
  • Interest Income (From Interest Earning Assets)
  • Payment for order flow (PFOF)
  • Commission Fees
  • Money Market Funds and Sweep Deposits Revenue
  • Advisor Management and Custody Fees
  • Other Revenue
  • ETrade’s Subsidiaries, Acquisitions, and Exits
  • What is the ETrade business and revenue model?
  • ETrade’s profit and revenue
  • ETrade’s funding and valuation

How does ETrade make money with $0 commissions and free services? Well, here is a full, in-depth, breakdown of their six (6) revenue streams and the different products and services they offer, as well as the ETrade business model, their year-over-year revenue, and how ETrade works.

What is ETrade, and how does it work?

ETrade, a subsidiary of Morgan Stanley, is a financial services company that provides a trading platform for trading financial assets such as common stocks, preferred stocks, options, mutual funds, etc.

Founded in 1982 by William A. Porter and Bernard A. Newcomb, ETrade grew to have more than 5.2 million customer accounts and $360 billion in assets before getting acquired by Morgan Stanley on October 2, 2020, for $13 billion.

How does ETrade make money?

Before being acquired by Morgan Stanley in October 2020, Etrade had 5.2 million customer accounts with $360 billion in assets.

As laid out in ETrade’s Form 10-K on Page 32, ETrade says “Our net revenue is generated primarily from net interest income, commissions and fees and service charges.”

Etrade Revenue Model | ETrade Form 10-K
Source: ETrade Form 10-K | Page 32

Below is an in-depth breakdown into how much money ETrade makes and its revenue model. Including all revenue streams listed above and other services not mentioned above that also earn them money. As well as including how much of their total revenue each service accounts for.

Here are the 6 ways of how ETrade makes money (in 2021):

ETrade generates revenue for the company in six (6) ways.

#1. Interest Income (From Interest Earning Assets)

ETrade’s largest source of revenue is making money through their interest earning assets, which make up roughly 64% of ETrade’s total net revenue.

As described by ETrade, “Interest income is recognized as earned through holding interest-earning assets.” Below is a list of Etrade’s Interest earning assets along with revenues earned from each.

ETrade’s Interest Earning Assets and Revenue:

  • Available-for-sale and held-to-maturity securities: $41.4 million
  • Margin receivables: $9.6 million
  • Loans:
  • Cash:
  • Securities lending transactions:

Note: Interest Income resulted in $1.85 billion or 64% of Etrade’s total revenue, according to ETrade’s latest public 10-K Form released in 2019, before being acquired by Morgan Stanley.*

#2. Payment for order flow (PFOF)

ETrade makes $188 million (6.5%) of its total net revenue from Order Flow revenue.

Order Flow revenue is “compensation and benefits a brokerage firm receives for directing orders to different parties for trade execution”, as described by Investopedia.

ETrade’s Order Flow revenue is part of their “Fees and Service Charges” revenue which earned $588 million or 20.3% of ETrade’s total revenue in 2019. Within that, ETrade’s Order Flow revenue was responsible for roughly 32% or $188 million of the $588 million made from Fees and Service Charges.

How Does ETrade Make Money? | Form 10-K
Source: ETrade Form 10-K | Page 46

Note: You can take a look at ETrade’s Order Flow and “Fees and Service Charges” revenue on Page 46 of ETrade’s Form 10-K.

#3. Commission Fees

ETrade’s second largest source of revenue is receiving commission fees, earning $421 million in 2019.*

Even though ETrade advertises their $0 commissions trading fees – while this is true – it only applies to very basic self traded, US Exchange listed stocks and options only. Anything other than this ETrade will have its own set of commission fees per trade.

ETrade Commission Fees:

  • Broker fee: $25 per transaction
  • Fee per Options contracts: $0.65 per contract ($0.50 for customers who perform at least 30 trades per quarter)
  • Fee per Futures contracts: $1.50
  • Broker fee: $25 per transaction
  • Trading Bonds: $1 per bond (minimum $10, maximum $250) (Broker assisted additional $20 commission)

Note: Commission revenue resulted in $421 million or 14.6% of Etrade’s total revenue, according to ETrade’s latest public 10-K Form released in 2019, before being acquired by Morgan Stanley.*

#4. Money Market Funds and Sweep Deposits Revenue

ETrade makes $175 million (6%) of its total net revenue from Money Market Funds and Sweep Deposits revenue.

Money Market Funds and Sweep Deposits revenue, as described by ETrade, are fees earned from off-balance sheet customer cash.

#5. Advisor Management and Custody Fees

ETrade Capital Management offers a wide section of portfolios for clients – from fully managed accounts to automated investment portfolios.

How it works is ETrade handles portfolios that fit the client’s needs and receives a percentage of the clients assets under management (advisor fee) for their portfolio management services.

Managed Portfolio Advisory Fees:

  • Core Portfolios: 0.30% of assets with a $500 account minimum
  • Blend Portfolios: 0.65% to 0.90% of assets with a $25,000 account minimum
  • Dedicated Portfolios: 0.95% to 1.25% of assets with a $150,000 account minimum
  • Fixed Income Portfolios: 0.35% to 0.75% of assets with a $250,000 account minimum
ETrade Managed Portfolios | Advisor Management and Custody Fees
Source: ETrade’s Managed Portfolios

Note: Advisor Management and Custody Fees resulted in about $77 million (2.7%) of ETrade’s total revenue in 2019.

#6. Other Revenue

As described by ETrade, “Other revenue includes fees from stock plan administration software and services provided to the Company’s corporate services clients.”

This added Etrade revenue brought in an additional $48 million for the company in 2019.*

ETrade’s Subsidiaries, Acquisitions, and Exits

ETrade Financial Corporation has made a total of 10 acquisitions. To add to that, ETrade has also had 5 investments and 4 successful exits.

ETrade’s Subsidiaries, Acquisitions, and Exits
Source: Crunchbase

What is the ETrade business and revenue model?

ETrade makes money through a few revenue models that they combine within their company, they are:

  • Interest revenue model
  • Commission based business model
  • Freemium (upselling) business model
  • Fee-for-service (FFS) business model
  • Mergers & acquisitions (M&A) business model

ETrade’s profit and revenue

In 2019, ETrade reported a net revenue of $2.9 billion. You can see this on Page 34 of ETrade’s 10-K Form.

Note: Because E-Trade Financial Corporation, the parent company to Morgan Stanley, is a publicly traded company, under the Securities Exchange Act of 1934, they must file continuous financial filings with the U.S. Securities and Exchange Commission (SEC). You can find all of E-Trade’s publicly released financial reports through E-Trade’s Investor Relations section on their website.

ETrade’s funding and valuation

Morgan Stanley acquired Etrade back on October 2, 2020 for $13 billion.