How do stockbrokers in the U.S. manage to be so cheap? In Germany, I know a few brokers but at most of them, the cost of an order is over 5€ (approx. 6$) every time. In the states, you have brokers like M1 Finance where they invest your money from dividends automatically and with zero commission. As they need to pay the stock exchanges too, how does this work? How do they afford this?
Traditionally, commissions were a large part of the annual revenues for brokerage firms. As discount brokerage became more popular and as the industry evolved, brokers diversified into other areas.
In recent years before their elimination, commissions were a minor fraction of most brokerages’ revenues. Commissions made up 28% of revenue at TD Ameritrade, but just 17% at E*TRADE and 6% at Charles Schwab. Here's an article that breaks down brokerage revenues before commissions were eliminated.
Other sources of revenue for brokers include:
- interest on cash balances
- margin lending
- borrow fees from shorters
- payment for order flow
- sale of annuities and insurance
- asset management fees
- mutual fund/ETF management fees
- financial planning fees
- market making
From the linked article, the lion's share of broker revenue comes from interest: 67% at E*Trade, 60% at Interactive Brokers, 57% at Schwab and 51% at TD Ameritrade.