Trying to understand how an online broker such as eToro make money is a legit question if you’re approaching this world for the first time and you want to have a wider vision on what’s going on in this sector before investing your money in it.
As a matter of fact, answering this question is not extremely complex, because its business model is not as much complicated if compared to other online brokers that based their revenues on the Social Trading system.
Basically, we can sum-up their way of making money in 3 basic ways:
- Through a Market Maker model;
- Through fees and commissions related to CFDs;
- Through fees and commission not-related to trading.
So let’s go straight to the point by looking closely at these models.
1. Hybrid Market Maker Model
The famous Israeli online broker operates mainly as a hybrid market maker which employs features related to NDD and STP. This fact makes a huge difference from other regular market maker brokers in terms of operations and basic system.
Basically ,a pure market maker has a system built in a way that if you lose money, they win money, which makes them quite similar to a bet-system alike. It can be a problem to many people and creates, it goes without saying, an uncomfortable feeling caused by the fact that there may be a conflict of interests.
In the eToro case, while still being supported in part by that system, it retains part of the balance in order to avoid over-exposure incidents. To fight that, they use a STP model that allows them to release part of the trade’s volume directly in the providers liquidity balance in case they can’t balance it up with the opposing orders when the risk level becomes too high.
Additionally, this involves also a no dealing desk (NDD) activity. It means basically that eToro will not interfere at all in your trading activity or its monetary outcome.
2. Fees And Commissions Related To CFDs
The simplest way to make money for eToro is through the spread.
Spread is applied on every trading operation executed on the eToro trading platform. It means that every time one trader opens a position in its e-portfolio, there’s an automatic fee paid -which is the spread. This system allows eToro to maintain and offer its main features, such as the Copy Trading and Social Trading services.
Speaking of which, when a trader selects another trader (usually a Popular Investor) with the Copy Trading feature, it will copy any operation opened in the selected portfolio and when transported to the first-trader portfolio, all the operations will be copied and opened. In order to do that a (proportioned) commission will be paid too.
3. Fees and Commissions Non-related To Trading
The last source of eToro’s revenue are all the fees and commission which are not strictly related to a trading activity. Those are usually pretty low but common.
For example, eToro charges a $10 inactivity fee if your account has been inactive for a period of 12 months. Or again, an “infamous” fee is the withdrawal fee, which charges $5 for every withdrawal from your eToro balance. We said “infamous” because in the US this fee was very debated, until it was completely abolished for eToro USA LLC.
Ultimately, another fee that produces quite a revenue return for eToro are the cryptocurrency transfers from etoro e-wallet to the crypto e-wallet made through eToroX. The fee depends very much on which currency you are dealing with and where to send it of course, and we cannot discuss the amount requested for this kind of operation.