I know that this question has been hinted at on other open question sites like Quora but I have yet to find anyone who lists all of the points in one place.
I understand that firms make money by:
- Commission and fees - Charging investors a fee to buy/sell securities.
- Interest on idle cash - Accruing interest from investor's money.
- Interest on cash lent in margin account - Charging interest on the borrowed money in a margin account.
- Fees charged for short selling - Charging the investor for the securities that have been lent.
- Payment for order flow - Market makers pay the brokerage firm for the right to transact with the firm's clients. Assuming the firm itself is not a market maker.
- Exchanges pay firm for liquidity - Exchanges where the buying/selling of securities are taking place, pay the firm for providing traffic so to speak.
I have two questions?
- Did I miss any, are there any other ways that I missed that brokerage firms make a profit?
- How is interest accrued on on idle cash? Is it invested by the firm in the background in low-risk securities that pay a premium? Or in low-risk government bonds? How??
Any advise, direction, or links to blogs or books would be greatly appreciated.