Occasionally I hear from subscribers to the flagship publication of Mad Hedge Fund Trader, Global Trading Dispatch, that they can’t execute one of my market beating ‘Trade Alerts’ because broker commissions will eat up a large chunk of their potential profits.
This is especially true with low dollar priced stocks, involving large numbers of contracts.
When I ask how much they are paying in commissions, I am absolutely flabbergasted.
Investors are being raped left, right, and center by excessive commissions, ticket charges, custodial expenses and regulatory exchange fees.
Brokerage management philosophy seems to be, “if it moves or breathes, charge it.”
Small individual investors are particularly abused.
You want to be paying for your own yacht, not your broker’s.
So, I decided to go shopping for a new online broker, assuming that I would be executing a typical volume of orders one might execute following the sometimes frenetic “Trade Alerts” of the Mad Hedge Fund Trader.
That works out to about 20 trades a month in options, stocks, and ETFs at about 40 contracts per trade.
After speaking to a dozen different companies, I gained a pretty good read on the current state of the business.
This is a fantastically competitive industry.
Firms are fighting tooth and nail to gain customer trade flows which they then sell to high frequency traders, where the real money is made.
If you are strictly passive and simply open an account on your own, the initial commissions will be very high. But lift up the phone, and suddenly everything is negotiable, and the world is your oyster.
Some will offer you 60 days of commission free trading to wrest your account away from the competition. Others will pay cash bonuses up to $2,000, depending on the size of your trading capital.
Services will vary all over the map, from bare bones discount brokers, to full service houses with massive research and analytical resources.
Some companies charge premiums for speaking to live humans, while others don’t.
It is very important that their technical support be easily accessible to sort out the inevitable glitches and mistakes. Before taking any action, visit a potential broker’s website for a test-drive and see if it meets your needs.
Caution: none of these guys have any idea whatsoever what the market is going to do.
That is my job.
Before sending that wire or ACH transfer, make sure that your new broker is FDIC insured for $250,000. Several houses went bust during the crash, and that government guarantee was worth its weight in gold.
If you have the sophistication, you might also ask for the broker’s financial statement. Small private firms won’t have these as they are privately owned.
When times get tough, keeping all your money in a financial institution that is too big to fail is a good idea.
Here’s another warning: the people who work in this business are fantastically aggressive. Don’t give them your home phone number or they will pester you to death until you send them money. It’s almost as bad as talking to solar panel installers.
Remember also that opening a brokerage account these days requires gargantuan amounts of online paperwork, thanks to vastly expanded regulation.
I’m sure they cause entire forests to needlessly fall under the axe. It is also one of the last industries, along with real estate, to still use the dinosaurian fax machine.
A further headache: many documents have to be notarized to make sure you are not a terrorist or a drug dealer laundering money.
I would also keep open a minimum of two accounts at different brokers at any one time.
The lesson of MF Global is that you never want all your eggs in one basket. Everyone eventually got all their money back, but it took three years of litigation to get the last couple of bucks.
Once your account is open and has established a trade history, call your broker again.
If your size or frequency of trading has increased, so has your negotiating leverage, and they will agree to better deals and bigger discounts.
Remember, it is the squeaky wheel that gets the grease.
I spoke to a dozen brokers and here is what I found.
Commissions are expressed in terms of a ticket charge per options trade and a fixed commission per contract. A few cents in exchange fees get tacked on to every trade.
Has been rated the #1 firm for the last three years by the “Barron’s“ annual survey of online brokers. It has also been voted the best options broker and lowest cost broker.
They also have a large international following among my many readers abroad (we have customers in 135 countries) and offer a fixed and tiered commission depending on the region.
They offered me a very competitive 70 cent per contract commission and all base fees are waived unlike many of the other brokers who charge between $5 and $10 for a fixed base fee.
Interactive Brokers has significantly lower commission costs if you trade in high volume. Fees per contract would drop all the way down to 15 cents per contract if over 100,000 monthly contracts are executed.
Between 50,001 and 100,000 executed monthly contracts would get you 25 cents per contract and between 10,001 and 50,000 would cost you 50 cents per contract.
The pricing for 10,000 contracts would be 70 cents per contracts and all options trades have a minimum cost of $1.
This sliding scale is obviously geared towards traders who trade in high volume and are rewarded handsomely with considerably lower commissions.
If you have over $100,000 in your trading account at Interactive Brokers then a $10 monthly service charge is waved, and if your trading account drops below this threshold and you have not spent more than $10 in monthly commissions then the difference is charged to your account.
The pricing system at Interactive Brokers is overwhelmingly skewed towards volume trading and penalizes traders who are trigger shy.
To learn more, click here??to go to their website.
OptionsHouse was acquired by E*Trade in late 2016 for $725 million and all accounts were absorbed into the parent company E*Trade.
Option pricing is split into two tiers. Traders who execute between 0-29 quarterly trades are charges a base $6.95 fixed fee plus 75 cents per contract. 30+ quarterly trades will cost you $4.95 plus 50 cents per contract.
Complex option trades with multiple legs will see the base fee double.
A deep discount broker located in Raleigh, North Carolina was given a 4.5 star rating in the Barron’s Best Online Brokers Annual Review.
Low prices are definitely the theme for them as they waive the base fee for options trades and charge 75 cents per contract with a minimum fee of $1.50 per trade.
A simple call and request can lower the amount for opening an account from $5000. Hard to imagine that they would refuse even $2000.
Just a word for the wise. These deep discount brokers are stretched thin in their office and are nothing close to a full service broker. It is safe to say that if you need to be in constant contact with your broker then this is probably not the broker to choose.
Also, the deep discount brokers that work off of dangerously thin margins often use a trading platform that has constant technical errors and pricing malfunctions which comes from an under investment in software development. You get for what you pay for.
Commission deals at the high end start at $2,500 cash back and 90 days of commission fee trades if an account over $1 million is opened and go all the way down to 90 days of commission free trades if an account of over $10,000 is opened.
These limited time deals are constantly recycled and variations are continually added to find any way to encourage investors to open an account.
The base commission for an options trade is $6.95 plus 75 cents per contract.
This ubiquitous broker is renowned for their trading platform and offered me a $5.00 base ticket fee to trade options plus a 50-cent per contract fee.
TradeStation has a variety of options commissions that are also not based per contract but based per trade. It would not hurt to pick up the phone and negotiate advantageous terms with them.
They even have a commissions choice without a base fee.
TradeStation is constantly rated as the Best for Frequent Traders, Best for Mobile Trading, and Best Platform Technology by numerous third party sources.
The technical analysis tools are excellent and the overall customers experience stands out among its peers.
The trading platform quality is miles ahead of the deep discount brokers who unsurprisingly offer a scant trading platform. Active online option traders would not go wrong if they decided to open an account here.
OptionsXpress by Charles Schwab
Charles Schwab Is one of the largest brokerage firms in the United States. It is based in San Francisco and acquired OptionsXpress to boost their options business in 2011 costing Schwab $1 billion.
OptionsXpress offers a $4.95 base commission plus a 65-cent per contract fee. The trading platform is highly intuitive and a free virtual trading account allows potential traders to practice their skills before being thrown into live combat.
The $25,000 paper money virtual trading account can be signed up for free and the all in one trade ticket interface is easy to use.
Ally Financial is one of the top auto lenders, but that didn’t stop them from buying into the discount online brokerage industry.
Tradeking, a discount player, was bought by Ally Financial in 2016 as Ally intends to develop its online footprint.
Tradeking was rebranded Ally Invest and offers a special rate of $3.95 base commission for option trades and a 50 cent fee per contract.
The standard rate is $4.95 per contract and 65 cents per contract.
The special rate is contingent on making 30 or more trades per quarter or having an account balance of over $100,000. If traders do not qualify for the special rate criteria then the standard rate pricing is applied by default.
Fidelity Investments has staked its name on mutual funds and wealth management. I would go one step further and say their options business is not the primary driver of Fidelity.
Fidelity limits traders to only 20 option contracts per trade. Fidelity is a risk adverse broker and they clamp down on the number of options contracts per trade as they deem options too risky to handle. This philosophy is also reflected in the rigid pricing structure with no deals or alternative pricing systems.
The base commission is $4.95 plus 65 cents per contract.
Meaning a trade with 10 option contracts would extract a commission of $11.45, and that jumps to $17.95 if you trade the maximum 20 contracts per trade.
I would not recommend Fidelity for active options traders and specifically volume option traders.
Equity trading is a business that Fidelity want to attract with a competitive equity trade commission of $4.95.
This old line wire house came close to going under during the crash, and was bought at the last minute by Bank of America (BAC) for a pittance, after no small amount of government pressure.
They charge a base $6.95 fee and 75 cents per contract for their options pricing. The problem here is Merrill Edge charges per each option leg rendering debit and credit spread trades costly.
Options traders should look at brokers who can execute a multi-leg trade in one trade ticket and not in parts. Execution costs would rapidly rise in this scenario and Merrill Edge’s base fee is not exactly on the cheaper side as well.
Scottrade was bought out by TD Ameritrade of Omaha, Nebraska for $4 billion in 2016 which follows the trend of the huge consolidation that has besieged the brokerage industry. If you are thinking of opening an account here then you might as well open one at TD Ameritrade instead.
Their prices come out to a $6.95 base fee and 70 cents per contract.
What really stood out with Scottrade is their exorbitant $32 fee for a Broker-Assisted options trade which is a lot higher than the industry average. Apparently, they assume that traders cannot use their online trading platform by themselves.
To get more in-depth information on the many broker offerings out there, please read the Barron’s annual online broker rankings by clicking here.
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