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Are You Paying Too Much To Your Broker?


Options Trading is a business. As in any business, there are costs. One of the major costs is commissions that we pay to our broker (other costs are slippage, market data etc.) While commissions is a cost of doing business, we have to do everything we can to minimize that cost. This is especially true if you are an active trader.

The impact of commissions on your results can be astonishing.

 

This excellent article by Business Insider is asking the right questions (and also answering some of them):

 

When you pay commission fees for online stock trades, where does that money go? Do you get better execution by paying $9.99 to TD Ameritrade than by paying $1 to Interactive Brokers? How much better? Enough to justify the difference in price?

 

Their conclusions:

  • At least 17 million investors overpaying for online brokerage
  • Only 12% of commission fee is used for trade execution at top brokerages
  • Over $1.8 billion per year wasted on unused premium services

Lets analyze one specific month, January 2015, and see how different commissions structure can impact the returns of our SteadyOptions model portfolio.

 

SteadyOptions $10k model portfolio traded 228 contracts in January. If you paid $0.75/contract with no ticket fee, you spent $171 on commissions, which is 1.7% of your portfolio value. While not cheap, but considering the fact that we produced 20.7% ROI in January (12.4% return on the whole account assuming 10% allocation), it is completely reasonable.

 

However, if you had a ticket fee of $8, in addition to $0.75/contract, you would pay $427 in commissions, more than double. In this case, your returns will be reduced by 4.3%.

 

This will make HUGE difference in the long term. To see how huge, I went to pro-trading-profits.com, a third party website that tracks performance of 400+ newsletters. I clicked on SteadyOptions performance report and played with different parameters. Using the $0.75/contract with no ticket fee, a $10,000 portfolio would produce $35,693 gains since inception. Adding $8 ticket fee to each trade would reduce the gains to $23,869.

 

The impact of the ticket fee is especially significant if you have relatively small account.

 

Of course commissions is only part of the whole package. Other factors include tools, platform, customer service etc. Barron's publishes a comprehensive brokers review every year. Here is the last one. Interactive Brokers (IB) was ranked #1 by Barron's third year in a row. This is the broker I personally have been using for the last 7 years and I'm very happy.

 

Barron's mention that "IB offers a lot more support to new clients, including individuals, especially those with larger accounts. Yes, using the word "support" in the same sentence as Interactive Brokers (without the modifier "dismal") is a change for us, but the firm has clearly made this a point of focus."

 

Their conclusion:

 

"Interactive Brokers continues to have extremely competitive pricing, and the lowest margin fees of any broker in our survey. You may incur some data fees, but the firm takes care of any options-exercise costs, which can generate unexpected fees at many other brokers."

 

On the open section of our forum, we have couple very useful discussions about brokers:

 

Brokers and commissions
Interactive Brokers tips, tricks, webtrader etc.

 

There is a consensus among our members that IB and TOS by TD Ameritrade offer the best combination of commissions, platform, and execution. If you decide to go with TOS, I highly recommend that you negotiate a commissions structure that does not include a ticket fee.

 

Here are couple more good articles worth reading:

 

The Truth Behind Broker Commissions - Learning Markets
Comparison of online brokerages in the United States
Relative Importance Of Options Brokerage Fees

 

For Canadian traders, here is an excellent study on the commissions schemas offered by Canadian discount Brokers.

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Guest BIOTRADER

Posted

IMO it's unfair you compare the costs stated here...At TOS i am paying $1.25 with no ticket fee.  This is slightly above the IB rate and TOS wins hands down on their platform, support, etc.  

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$1.25 is still almost double than IB. And there is no assignment or exercise fee with IB. Better margin rates. Better margin for VIX trades. VIX trades are among our best trades, and TOS margin for those trades is absurd.

As for the platform, I'm very happy with IB platform. Based on our members feedback, IB fills are also consistently better than TOS too.

Don't believe me? Read Barron's survey. IB is #1 three years in a row, based on 8 parameters, not only cost.

You will overpay THOUSANDS of dollars in commissions every year with TOS. Bug if you are happy with them, who am I to convince you otherwise? After all, they charge what they charge only because people are ready to pay.

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Guest Biotrader

Posted

Ok let's look at the categories. IB VS TOS

Trading experience and technology 4.8 vs 4.2: honestly this one baffles me how IB can be on top. Their platform is horrible. I mean you can trade using it but to perform any meaningful analysis it's useless. Their charts suck!

Usability 4.5 vs 4.6. not sure exactly what this means but ok

Mobile 4.7 vs 4.7: not sure hoe IB is that high. I would give it a 4 tops.

Range of offerings. 3.8 vs 4.5: actually surprised on this one as I thought IB offered pretty much all the instruments.

Research 4.8 vs 4.9; ok

Portfolio analysis : 5.0 vs 4.7 : I actually agree on this, TD is lacking here

Customer service 4.6 vs 4.8: IB should be a 1 here, beyond incompetence

Costs 4.7 vs 1.7 ; this is the one that skews the rating. So even if IB is AT .75 and TOS at 1.25 that should put TOS rating at a minimum at 4.

With costs adjusted this would bring TOS much closer to IB and with the other categories scored more accurately for IB, a clear winner.

This is my unbiased assessment after using IB for 5 years and TOS for the past 3.

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I agree regarding analysis. However, if you are an active trader, with the money you save on commissions you can buy a decent options analysis software. I'm using ONE - compared to ONE, both IB and TOS should get 1.

 

Also, don't forget that most clients don't pay 1.25 with TOS. I even tried to negotiate with them group discount for SO members - they lowest they were ready to go was 1.50, which is double compared to IB. Over time, this is HUGE. If you trade even 20k portoflio with SO, you save over $4k per year. For 5k portfolio, that's $10k in savings. Even if you pay 1.25, you still save around $7k/year with IB. Add better fills most of the time, better margin rates etc. - and the choice is pretty clear.

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Speaking about customer service:

I opened an additional account with IB last week. The whole process has been completed within 3 days. I started the application on Tuesday, on Friday it was completed and on Monday I could start trading. Their sales rep actually called me twice to help with the process and make sure that they have all the necessary docs.

I opened 3 tickets recently, all of them have been resolved within 24 hours.

No customer service issues for me.

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What is your opinion of Options House.  Stockbrokers.com rates them highly. Yet consumer reviews rates their CS poorly.    The commissions are $5 ticket charge and .50 contract charge.   This is more competitive than IB.    At TOS I am getting $7 ticket charge and $.65 option contract charge. I am thinking about switching to IB or Options House.

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