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milemke08
Registered: Jun 2012
Posts: 10 |
06-08-12 09:01 PM
I'm quite new to the scene of trading and researching how brokers work and, more importantly, how they make money. I finally got around to some reading material on brokers and saw that they change a fee based on the amount of shares per order you are throwing at them. I just want to make sure that I'm understanding this system correctly.
So just like a restaurant has to pay for the food they cook as their cost to do business(overhead), traders have to pay broker fees to do business? I called a InteractiveBroker and they told me their flat rate fee structure is .005/share with a minimum order fee of $1.00.
Does this mean to place an order I have to pay .005 per share that I want to buy/sell and if that value(shares*.005) is less than $1, the broker will round it up and charge me $1 anyway. That's the only way that make sense, but I just want to be sure that I get it.
Do these broker fees apply to the buy and sell portion of a transaction? I would think that they do, but I just want to make sure.
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1245
Registered: May 2012
Posts: 510 |
06-08-12 10:15 PM
Quote from milemke08:
I'm quite new to the scene of trading and researching how brokers work and, more importantly, how they make money. I finally got around to some reading material on brokers and saw that they change a fee based on the amount of shares per order you are throwing at them. I just want to make sure that I'm understanding this system correctly.
So just like a restaurant has to pay for the food they cook as their cost to do business(overhead), traders have to pay broker fees to do business? I called a InteractiveBroker and they told me their flat rate fee structure is .005/share with a minimum order fee of $1.00.
Does this mean to place an order I have to pay .005 per share that I want to buy/sell and if that value(shares*.005) is less than $1, the broker will round it up and charge me $1 anyway. That's the only way that make sense, but I just want to be sure that I get it.
Do these broker fees apply to the buy and sell portion of a transaction? I would think that they do, but I just want to make sure.
You're correct. If you buy 1 share, they charge you $1.00. If you buy 100 shares, they still charge you $1.00. 1000 shares will cost you $5.00. They charge you per share on both the buy and the sell, not round trip. There will be addition fees from the SEC on the sell side only, but it's very small.
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Dura
Registered: May 2012
Posts: 35 |
06-08-12 11:34 PM
Quote from 1245:
You're correct. If you buy 1 share, they charge you $1.00. If you buy 100 shares, they still charge you $1.00. 1000 shares will cost you $5.00. They charge you per share on both the buy and the sell, not round trip. There will be addition fees from the SEC on the sell side only, but it's very small.
I was always wondering about this as well. Thanks for the clarification. The IB commission rate sounds like a pretty good deal. I'm currently paying $4.95 per trade with Zecco. How is it that they can stay competitive with such low commission rates?
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1245
Registered: May 2012
Posts: 510 |
06-09-12 12:08 AM
Quote from Dura:
I was always wondering about this as well. Thanks for the clarification. The IB commission rate sounds like a pretty good deal. I'm currently paying $4.95 per trade with Zecco. How is it that they can stay competitive with such low commission rates?
You have to understand their cost structure for an online trading firm. They keep their overhead very low and automate as much as possible. Also, when you enter an order, your revenues are not all they receive. If they use their own routes, they control the order flow. They can route to a firm that pays for order flow. Firms that charge ticket charges, do that because a great deal of their clearing costs are structured by orders entered and number of executions. If you buy 1000 share in one lot, that costs them less than 100 shares 10 times.
Without payment for order flow, commissions would be higher for everyone. If you trade actively, many firms will offer better then their posted rates. They will look at not only your monthly volume, but also the average size of your trades. When interest rates are higher, they also care about the size of your long and short positions. Many prime brokers made as much as 1/3 of their income from interest with higher rates.
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milemke08
Registered: Jun 2012
Posts: 10 |
06-09-12 12:47 AM
Ok, so I've been running some models using InteractiveBrokers cost plus fee structure. I chose this one to test because I want to be able to make a profit even on price changes as small as 1 cent and a .005/share doesn't allow for that.
Cost plus charges .0035/share for accounts with monthly volume <300k shares traded. This works for me because I use a high frequency strategy that trades on a minute by minute basis and does so in lots of 1000.
So let's say I buy 1000 shares of a stock at $9.45. For this action I get charged $3.5. One minute later I sell these shares for $9.46 and I am charged another $3.5. My accounting will look like:
buy 1000 shares at $9.45 = $9,450.00
$3.5 for brokerage fee
buy 1000 shares at $9.46 = $9,460.00
$3.5 for brokerage fee
So I walk out of this deal with $3 since my profit was $10 and I have to pay the $7 for fees, right?
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Dura
Registered: May 2012
Posts: 35 |
06-09-12 01:27 AM
Quote from 1245:
You have to understand their cost structure for an online trading firm. They keep their overhead very low and automate as much as possible. Also, when you enter an order, your revenues are not all they receive. If they use their own routes, they control the order flow. They can route to a firm that pays for order flow. Firms that charge ticket charges, do that because a great deal of their clearing costs are structured by orders entered and number of executions. If you buy 1000 share in one lot, that costs them less than 100 shares 10 times.
Without payment for order flow, commissions would be higher for everyone. If you trade actively, many firms will offer better then their posted rates. They will look at not only your monthly volume, but also the average size of your trades. When interest rates are higher, they also care about the size of your long and short positions. Many prime brokers made as much as 1/3 of their income from interest with higher rates.
I think I get the gist of what you're saying. It's cheaper for them to have their cost the way they do. Most of it went over my head though. I don't really understand cost structure. I do appreciate the help. Thanks.
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