How does Firstrade make money with free/$0 commission trading? How TastyWorks brokerage firm generates revenue from its no-fee investment service?

How Firstrade and TastyWorks Make Money

If you are aware of Firstrade’s and TastyWorks’s $0 commissions, you may be wondering how these brokers actually make any money to stay in business. The reality of the brokerage industry is that there are a variety of ways that brokers bring in the money outside of commissions. Although both Firstrade and TastyWorks are private companies (and therefore don’t offer a lot of insight into their financials) this article will explain how these brokers are able to churn a profit despite not charging clients trading commissions.

Margin Accounts

A big chunk of broker revenues comes from their margin business. Anyone who has a margin account probably appreciates the ability to borrow cash from their broker at moment’s notice to take advantage of an investment opportunity that just surfaced, and your broker appreciates this too because it’s easy money for them. Firstrade and TastyWorks earn daily interest payments from their clients that borrow money. Firstrade’s margin rates range from 5.5% to 9.75% while TastyWorks’s are a bit lower, ranging from 3.99% to 6.99% with the higher rates corresponding to lower margin balances.

Paid Subscriptions

Many brokers sell premium data packages on a subscription basis to their customers that are looking for data that goes beyond the standard package. TastyWorks offers subscription-based access to real-time foreign market quotes, which is another way they generate revenues.


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Interest on Idle Cash

This next income generator goes hand-in-hand with the first one – interest on idle cash balances. Regardless of whether or not you have a margin account, at some time or another you’ve probably had cash sitting in your brokerage account. Whether it’s a few dollars that’s been sitting there for a year or its thousands of dollars that you’ve been keeping on the sidelines anticipating waiting to deploy, these cash balances add up to quite a bit of money across the two brokers’ millions of accounts.

Firstrade and TastyWorks earn interest on your idle cash balances, either by investing it in short-term reserves or by lending it out to their other clients that want to borrow money to invest. Earning 5% on a significant pile of cash across all your client accounts is a pretty sweet deal that probably nets both brokers millions in profits every year.

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Selling Order Flow to Market Makers

This last source of revenue is likely the least well-known one as it’s not something brokers want to advertise. When you place an order through your Firstrade or TastyWorks account, they will direct your order to market makers for best execution. Market makers are intermediaries that hold large quantities of shares in the stocks they cover in order to facilitate trading, or to “make a market”. They buy the shares you want to sell and then turn around and sell them to someone looking to buy and vice versa, and they make money on the spread – the difference between the bid and ask prices.

Market makers naturally have close relationships to the various brokers as that is where they get their business from, and in many cases the market makers will compensate brokers with rebate payments for giving them priority access to execute their customers’ orders. In theory, when you submit a market order, it should get executed by the market maker with the lowest ask price, so there is naturally a conflict of interest when market makers are paying brokers for priority access to their orders. Being able to see pending order flow across brokers - “market depth” - also gives market makers valuable insight into where a price may be headed in the short-term, which is another reason they would be willing to pay for this information. The best way to ensure you are getting best execution with these brokers is to avoid market orders and always use limit orders so that you remain in control of the price you receive.

How Firstrade Makes Money Summary

Neither Firstrade nor TastyWorks are public companies so it is difficult to know for sure how much of their total revenues are accounted for by each of these activities. What we do know is all of these income-generating activities are standard practice throughout the industry. While most of them are expected, some, such as compensation for order flow, are less well-known.

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