If you dig deep and research all the fees a broker must pay (that is one not getting paid for order flow), you'll find that for the fees we charged for stocks for large size trades below $1 were less than the costs. All we did was raise the cap on the fee to cover these costs. We can't be all things to all people but we need to service our core client base. Changes such at this allow us to keep our fees low where the majority of our business is generated.
This isnt solely about sub $1 stocks. It affects stocks under $2 as well, although to a lesser degree. Further on the subject of digging deep for charges that exchanges impose on brokers. How about if you look here: http://www.nasdaqtrader.com/trader/tradingservices/productservices/pricesheet/pricing.stm On NASDAQ stocks there is a sliding scale for both rebates and fees depending on monthly volume. I bet IB as a whole exceeds these limits quite easily. So if you want to really be seen as FAIR then how about you distribute some of these extra free profits you are getting to your customers?
http://www.interactivebrokers.com/en/accounts/fees/commission.php?ib_entity=llc Maximum Per Order under Bundled-North America 3 months ago used to be: "0.2% of trade value". Now it is "0.5% of trade value plus exchange, ECN, regulatory and specialist fees"
The increase in the cap only affects very cheap stocks. The fact is that the commission pricing until November had loopholes that were exploited by people such that the penny stock business was a notably poor business line. Example: Trader places liquidity adding order with Broker X (a broker who passes though the rebate). Trade hits his own price from an IB account where we cap the commission at 0.2% and the liquidity taking charge is as high as 30% on a 1 penny stock. IB loses on the rebate-vs-commission and the trader earns a nice 30% return on a riskless transaction. The penny stock business has proven to be far more expensive in terms of the hidden costs that occur in the trading of these very manipulatable instruments. The commission cap increase merely aligns the commission revenue more appropriately to these costs. It ensures we do not price the service less than its cost.
Very interesting, just goes to show you how clever folks are in the quest for a fast buck. I don't think anyone would expect IB to charge less than the ECN charge, not even the ones that took advantage of it. Still not 100% clear what can be added to the BUNDLED .5 cent.
Dear IBJ Yes I agree with you on a "0.2% inclusive of all costs agreement" However your argument doesnt hold water mathematically when it is "0.2% + exchange etc fees" vs "0.5% + exchange etc fees". Either situation is a negative sum game for such a notional arbitrateur. In other words you have already passed thru ALL COSTS. The rest is profit. Period. The fact of the matter is that legitimate trading (i.e. not arbitrage) of low priced stocks offers the greatest risk to reward ratio there is on an alpha basis verses the free beta that the general market offers (for a non-institutional trader). You are simply seeking to increase your exposure to such profits without incurring the risks that your customers incur to gain this profit in the first place. Stock777: Unbundled starts at 0.0035 and you can get NASDAQ rebates (although by my reckoning IB keep some of those rebates on a volume basis, so their "exchange fees" are not really accurate). Therefore the bundled commission of 0.005 (with no effective cap) is absolutely pointless.