How Stock Brokers Make Money, Including on "Commission-Free" Trades

Stock brokers make money from several sources at once: payments from trading firms for routing customer orders to them, interest earned on customers’ uninvested cash, interest on margin loans, fees from lending customers’ shares to short sellers, and commissions, currency conversion, and account fees. When a broker advertises “commission-free” trading, it has not stopped earning money from your trades. It has shifted where the money comes from.

In short: a brokerage is a business with a menu of revenue lines. The visible one is commissions. The less visible ones are payment for order flow (legal and disclosed in the US, effectively prohibited for Canadian-listed stocks), net interest on customer cash and margin balances, securities lending, and foreign exchange fees. Knowing which lines your broker relies on tells you where its incentives might differ from yours.

This article explains the mechanics. It does not rank or recommend firms.

Payment for order flow

When you send a market order to buy 100 shares through a US retail broker, the order often does not go to an exchange. Many brokers send retail orders to a small number of wholesale market makers, large trading firms that execute the orders themselves, buying from you or selling to you from their own inventory.

The wholesaler pays the broker for that order flow. This is payment for order flow (PFOF).

Why a trading firm pays for your order

Retail orders are, on average, small and not based on short-term information that will move the price against the market maker. Trading against them is lower risk than trading against professionals. The wholesaler earns a portion of the bid-ask spread on each trade, gives some of that back to the customer as price improvement (a fill slightly better than the national best bid or offer), pays some to the broker, and keeps the rest. The spread mechanics are explained in the bid-ask spread explained.

A worked example

Using hypothetical but realistic magnitudes:

NBBO for a stock: bid $49.99, ask $50.01. Spread: $0.02.
You send a market order to buy 100 shares.
The wholesaler fills you at $50.008, which is $0.002 per share better than the ask. Your price improvement: 100 x $0.002 = $0.20.
The wholesaler pays your broker the equivalent of 10 cents per hundred shares for the order: $0.10.

On one order, these numbers are tiny. Across hundreds of millions of orders a year, they become a large revenue line for brokers and wholesalers.

What the debate is about

Supporters say PFOF funds commission-free trading and that retail investors often get prices better than the public quote. Critics say it creates a conflict of interest: the broker has a reason to route orders to whoever pays most, not to whoever gives the best execution, and the arrangement keeps retail orders from competing on public exchanges.

Brokers still owe customers a duty of best execution under FINRA rules, meaning they must use reasonable diligence to get the most favourable terms reasonably available. Receiving payment does not remove that duty.

The SEC proposed an Order Competition Rule in December 2022 that would have required many retail orders to be exposed to auctions before a wholesaler could fill them. On June 12, 2025, the SEC formally withdrew that proposal, along with a proposed Regulation Best Execution and 12 other proposals. As of November 2026, PFOF remains legal for US stocks and options.

Options pay more

Payment for order flow on options is typically much larger per trade than on stocks, because options spreads are wide. Academic research published in the Journal of Finance in 2023 (Bryzgalova, Pavlova, and Sikorskaya) found that brokers earn more from retail options trading than from stock trading. That gives brokers a commercial reason to make options easy to trade, which is worth remembering when reading how stock options work.

How to see what your broker receives

SEC Rule 606 requires US brokers to publish quarterly reports showing where they routed customers’ non-directed orders and how much they were paid or charged, expressed both in dollars and in cents per hundred shares (per contract for options). Look for “606 report” on a broker’s website. Rule 605 reports, which under amendments that took effect for data from August 2026 now cover larger brokers as well as market centers, show execution quality: effective spreads and price improvement.

Canada: effectively prohibited

Canada takes a different approach. Canadian regulators have stated that UMIR 7.5 “has the effect of prohibiting payment for order flow” by a dealer that is a participant under UMIR. The CSA wrote this in a 2014 notice, and CIRO repeats it in its current best execution guidance, citing concerns that PFOF distorts incentives. Canadian rules also generally require trades in listed securities to be executed on a marketplace rather than internally by a dealer.

The CSA has also raised concerns about Canadian dealers routing retail orders to US dealers. A December 2014 CSA notice said some dealers might receive payments for doing so and that widespread routing of retail orders to US dealers could harm the quality of the Canadian market. For US-listed stocks, which trade under US rules, how a Canadian broker routes orders and whether it receives payments are things to look for in its disclosures.

The practical result is that Canadian brokers have historically relied more on commissions and currency conversion, and less on order-flow payments, than US brokers.

Interest on your uninvested cash

Cash sitting in a brokerage account is rarely idle from the broker’s point of view. It is usually swept into bank deposits at affiliated or partner banks, or into a money market fund. The broker (or its affiliated bank) earns interest on that money and pays you some of it.

Worked example: you leave $10,000 uninvested for a year. If the cash earns the broker 4.0% at the bank and you are credited 0.5%, the broker keeps about $350 and you receive about $50. (These rates are illustrative.) At a firm with tens of billions of dollars in customer cash, this spread can be the largest single source of revenue.

In January 2025, the SEC charged two Wells Fargo advisory firms and Merrill Lynch over policies relating to their cash sweep programs, finding, among other things, that bank deposit sweeps were the only sweep option for most advisory clients and that the firms received a significant financial benefit from that cash. The firms agreed to pay $60 million in combined penalties without admitting or denying the findings.

What to check: the rate paid on your cash, whether you can choose a higher-yielding option, and whether swept cash is protected by bank deposit insurance (FDIC in the US, CDIC in Canada) or by SIPC or CIPF, which work differently.

Margin interest

If you borrow from the broker to buy securities, you pay margin interest, usually at a rate set relative to a benchmark plus a spread that shrinks for larger balances. The broker funds the loan cheaply, partly with customer cash, and earns the difference. Margin lending is a steady revenue line and a significant risk for customers; see margin trading explained.

Securities lending

Short sellers need to borrow shares (see how short selling works). Brokers can lend out shares held in customers’ margin accounts, and many also run fully paid securities lending programs that lend shares customers own outright, sharing part of the fee with the customer.

For hard-to-borrow stocks, lending fees can be high, and the revenue is meaningful. FINRA has highlighted the risks for customers in these programs: for the duration of a loan you may lose SIPC protection on the loaned shares, lose voting rights, and receive “payments in lieu” of dividends that can be taxed differently from actual dividends. In 2025 FINRA fined a clearing firm $3.2 million in its first case under Rule 4330 over disclosure failures in such a program.

Commissions, currency conversion, and account fees

Commissions. Some brokers still charge per trade, especially in Canada and for broker-assisted trades, options contracts, and foreign markets.
Currency conversion. For Canadians buying US stocks, the broker typically converts at a rate that includes a spread over the market exchange rate. On a C$10,000 purchase, a 1.5% conversion spread costs C$150, and you may pay it again when you sell.
Account and service fees. Annual account fees, transfer-out fees, paper statement fees, inactivity fees, and premium subscriptions that bundle data, research, or higher interest on cash.
Advisory fees. Advised and managed accounts often charge a percentage of assets each year.

A simple map of incentives

Revenue line	What the broker earns more from	Where it can conflict with you
PFOF (US)	More trades, especially options	Encouraging frequent trading; routing for payment
Cash sweep	More cash left idle at a low rate	Paying you less than the cash earns
Margin interest	More borrowing	Encouraging leverage
Securities lending	Lending your shares	Lost voting rights and SIPC coverage on loaned shares
FX conversion	More conversions at a wider spread	Hidden cost on cross-border trades
Commissions	More trades	Overtrading

None of these is inherently improper. All are disclosed somewhere. The point is to read the disclosures with the incentives in mind.

What can go wrong

The January 2021 GameStop episode showed another side of the business. Brokers, including some that rely on PFOF, restricted buying in certain stocks after clearing-house deposit requirements jumped. The mechanics are in what happened with GameStop. The broader lesson is that a broker is a company with its own funding, risk, and revenue pressures, and those can affect what you can do in your account at the worst possible moment.

The short version

“Commission-free” brokers still earn money from your activity, mainly through payment for order flow (in the US), the interest spread on your cash, margin loans, securities lending, and currency conversion. In Canada, PFOF is effectively prohibited for Canadian-listed stocks, so commissions and FX fees play a bigger role. Rule 605 and 606 reports, fee schedules, and cash-rate disclosures tell you which levers a given firm is pulling.