How Do Trading Platforms Make Money?

Written By: Ehsan Jahandarpour

how do trading platforms make money

In order to answer this question, we will look at different sources of revenue for trading platforms. These include subscription fees, interest on loans, market maker commissions, and overnight fees. These are common sources of revenue for trading platforms. Let’s take a closer look at each one. These types of revenue are essential for the success of trading platforms.

Overnight fees

Traders who use online trading platforms pay a monthly subscription fee to use their services. The money they spend on the service is then used to cover overnight fees. These fees are calculated based on the interbank offered rate, a benchmark interest rate used by banks all over the world. Traders who are not able to pay the fee can borrow money from credit cards or banks to make their trades.

Overnight fees are a form of interest on leveraged investments. These types of trading vehicles borrow money from the broker and multiply the original investment capital to create a larger position. Overnight fees are collected from the borrower when the trading platform needs to hold the position overnight.

Market maker commissions

Market makers are companies that buy and sell financial assets for a commission. They make their money by using a spread called the bid-ask spread. They can make a lot of money this way if enough customers use their services. They earn this income through commissions and trading volume. The higher the volume of volume, the higher the commission they can make. In the currency market, the market makers tend to be banks or foreign exchange trading companies. Individuals are not able to make their own markets, which is why they use market makers.

Market makers make money by charging a commission to execute orders. They promised to provide the best execution, but instead prioritize the cheapest option. Some brokers, including Interactive Brokers, have stated that their zero-commission option, IBKR Lite, doesn’t always provide the best execution. However, if customers want the best execution, they can purchase IBKR Pro and pay a small fee for it. Robinhood, on the other hand, automatically sends orders to a market maker with the best execution.

Interest on loans

Trading platforms earn money by charging interest on loans to their customers. Margin accounts allow you to borrow up to 50% of the equity value of a security. Depending on the broker, interest rates and loan terms will vary. The terms will also be specified in the margin agreement. This agreement should be read carefully before you decide to use a margin account.

Subscription fees

When you consider that you’re paying a platform to execute your trades, you may wonder how they can possibly make money. The CFTC has received hundreds of complaints for fee fraud in recent months. In some cases, the scammers are targeting the recently unemployed, especially those who work from home. In others, the scammers target those who don’t have a lot of experience trading. These complaints highlight the importance of a clear disclosure policy for the fee structure.

As you shop around for a trading platform, keep in mind the value propositions that each broker has. For example, a broker should be able to provide technical and fundamental research, volume-based discounts, and customer support. These features should make a difference to your trading experience, but a good platform will also be able to provide better trade execution and streaming news.

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