Have you ever wondered how day traders can afford to make so many transactions without incurring large trading costs? It’s not common knowledge, but it is possible to bring your costs to $0.
I am a quant trader, and help support our clients at the DailyInsider, a strategy which recommends four stocks to trade before at open, and then sell before market-close. One of our subscribers e-mailed me the following question.
“Who do you execute your trades through? Thinkorswim is $10/trade, which would put this strategy around $21,000/year in trading costs alone.”
As shocking as this might seem, that number is almost correct. With these costs added to a regular sized portfolio, you are probably giving most of you profits away to your broker, but you don’t have to! I thought I will just Google a proper guide and link it to our subscriber when I realized there is little information out there; this inspired me to write this post. So here I am hoping to help you eliminate those unnecessary costs.
Getting the Right Broker for You
Let me start with the simplest method of all, using a percentage based broker instead of a fixed price broker. Regardless of whether you buy shares valued at $2000 or $100,000, fixed price brokers such as ThinkOrSwim (Ameritrade) charge the same rate per transaction. Logically this means that the bigger your transaction, the lesser your relative costs are.
For example, if I were to use Ameritrade to buy $2000 in shares (each cost $10, so 200 shares), I would be giving up 1% on my buy and sell transactions ($10 * 2 = $20). This is outrageous regardless of whether you are a day trader or long term value trader. However, if you purchase shares worth $100,000, that figure goes down to 0.02%, a negligent amount. Note there might be some other non-broker fees.
In comparison, you could change to a per share pricing (percentage based) broker like IB (Interactive Broker). Under their fixed pricing you pay just $0.005 a share with a minimum commission of $1.
For example if I were to now use IB for the same $2000 transaction I would pay just $2 total. This would be 200 shares at $0.005 a share, which equals $1 for each transaction (opening and closing the position). Just by using the right broker you are able to take down the cost by 90%. However there is a downside to this. If I were to make the second transaction of $100,000, it would mean buying and selling 5000 shares, or $25 for each action.
For lower size transactions you are much better off using a percentage broker. Below is your estimated cost per (small) transaction with most major brokers.
Source: Interactive Brokers
For large size transactions you are much better off using a fixed price broker.
Brokers Are There to Make Money, Use Your Negotiating Power
Many people are not aware how much negotiating room there is between them and their brokers. When you trade large volumes your broker earns large commissions off of your trades, resulting in a serious interest on his side to keep your business. Because there are so many brokers, it is very easy to switch, thus giving you leverage.
If your broker does not clearly state on his website a reduced price for high value traders then call and ask. You might be surprised. Other brokers will clearly state their improved pricing as your volume increases. Below are examples of tiered pricing for two major brokers, IB and E-trade.
Source: Interactive Brokers and E-Trade
However, just because they advertise these rates there is no rule which says you can’t negotiate further. Remember, brokers value your business.
Always Look for New Opportunities
New technologies are revolutionizing the brokerage industry. API’s and the internet allow the cost of doing business to go down to near $0. If you are willing to give up on some aspects such as service or advice from your broker there are some cool solutions out there.
One great example is Tradier Brokerage, which charges just $3.49/order, beating all other sites by a significant margin. The downside? You need to use their API to trade, which means you need a lot of experience in writing code. Just kidding, today you can write your own trading algorithm with a breeze! QuantConnect is a platform which lets you automate your trading and connects directly to the Tradier API (as well as IB’s). If you think that’s cool it gets even better. The two companies made a partnership which offers QuantConnect traders who use the Tradier API to trade at just $1/order, wow! Another cool social trading algorithmic platform worth checking out is Quantopian, where you could even get sponsored by a hedge fund.
Now for the grand finally, what if you could trade for virtually free? There have been several efforts at this in the past, but one company really stands out. Robinhood offers $0 trades through their iPhone App, which you can tap into. How is this possible? Well that is a bit of a complex answer, but it has to do with very low costs and unused cash on traders’ accounts. You can learn more about that here.
Trade Free Earn Big
So you just lowered your trading costs from $20,000 to $0! That is not a negligent sum. What’s next? Go and implement a high value strategy that will earn you big. Come learn more at the DailyInsider, and find out how we are revolutionizing financial information and accountability at TipRanks.
Disclaimer: I would like to add that I am in no way related with any of the brokers above, or receiving any compensation from them or their related companies.