When Robinhood launched in the US and Zerodha disrupted India's brokerage world, the headline was always the same: free trades. No commissions. Zero. The pitch was compelling enough that every major broker eventually had to follow. But free is never actually free. Somewhere, someone is paying. The question worth asking is who, and how much.
Where the Revenue Actually Comes From
The most talked-about revenue source for zero-commission brokers in the US is Payment for Order Flow, or PFOF. The basic mechanics: when you place a trade, the broker doesn't send it directly to an exchange. Instead, it routes your order to a market maker, who pays the broker a small fee for that privilege. The market maker profits by capturing the spread between the buy and sell price. You get your trade executed, the broker gets paid, and the market maker makes money on the difference.
In India, PFOF doesn't work the same way because SEBI has stricter rules around order routing. Indian zero-commission brokers like Zerodha built their model differently. They charge zero on equity delivery trades but collect a flat fee (Rs 20 per order, typically) on intraday and F&O trades. Since F&O volumes in India dwarf delivery volumes, that flat fee generates serious revenue at scale. It's a clever structural bet on trader behaviour.
The point is that "zero commission" is a product decision, not a charity decision. The revenue just comes from somewhere less visible.
The Float and the Interest Income Nobody Talks About
One of the quieter but substantial income streams for large brokerages is the interest earned on idle customer cash. When you deposit money into your trading account and it sits uninvested, the broker holds that float. At scale, even a modest interest rate on billions of rupees or dollars in aggregate customer balances adds up to significant revenue.
In the US, this became a major story when interest rates rose sharply after 2022. Robinhood's interest income jumped considerably as rates climbed, because they were earning meaningfully more on the cash their customers held in accounts. Customers, meanwhile, often earned little or nothing on that same cash. The spread between what the broker earns and what it passes on to customers is pure margin.
Indian brokers face a slightly different regulatory environment here, with SEBI rules around client fund segregation limiting some of this. But the principle holds broadly: cash on platform has economic value that doesn't show up in a commission line.
Margin Lending and Premium Features
Another significant revenue pillar is margin lending. When traders borrow money to amplify positions, they pay interest on those loans. For active traders, this can be a substantial cost. For the broker, it's a high-margin business because the loans are secured against the customer's own portfolio.
Beyond lending, many zero-commission platforms have introduced tiered subscription models. Robinhood Gold, Zerodha's Kite Connect API access for developers, Groww's premium analytics features. The logic is straightforward: give away the basic product, charge for the power-user layer. This is a classic freemium structure, and it works because the free tier builds the user base that makes the premium tier viable.
Data and analytics products sold to institutional clients are another layer. Aggregate, anonymised order flow data has genuine value to researchers and institutions trying to understand retail sentiment. Whether this creates any conflict of interest is a legitimate debate, but it's part of the revenue picture.
What This Means for Market Structure
The zero-commission model has had real consequences for how markets function, not all of them obviously positive.
On the access side, the benefits are clear. Millions of first-time investors entered markets in India between 2020 and 2023 partly because the cost of a single trade dropped to nearly nothing. Demat account openings roughly tripled over that period. Lower friction genuinely democratised participation, at least at the entry level.
But the model also has incentive problems worth thinking about. A broker that earns more when customers trade more has a structural interest in encouraging trading activity, even if frequent trading often produces worse outcomes for retail investors than a patient, long-term approach would. Gamified interfaces, push notifications about market moves, one-tap order placement. These aren't accidental design choices. They reflect what drives engagement on platforms whose revenue scales with transaction volume.
SEBI has been watching this closely. The 2024 regulations tightening F&O access for retail investors were partly a response to data showing how many retail participants were losing money in derivatives. The regulator's concern was that easy, cheap access to complex instruments was producing harm at scale. The business model and the user outcome were pulling in different directions.
The Sustainability Question
Zero-commission brokers in their early years often operated at a loss, subsidised by venture capital. The bet was that scale would eventually produce enough ancillary revenue to make the model work. For some, that's proven true. For others, the unit economics remain challenging, particularly in markets where F&O volumes are cyclical and interest rates don't always cooperate.
The Indian market has an interesting wrinkle here. Zerodha, which is profitable, built its model before the VC-fuelled growth race. Newer entrants spent heavily on customer acquisition and are now under pressure to monetise those users without alienating them with fees. That tension between growth and profitability is playing out across the sector right now.
What's clear is that "free" trading platforms are businesses with real revenue models, and understanding those models matters. Not because the platforms are necessarily doing something wrong, but because the incentives embedded in a business model shape the product in ways that aren't always obvious from the outside. When something costs you nothing directly, it's worth spending a moment thinking about what the platform is actually optimising for.