I notice that the Interest Rates on equity purchased on margin is very low. In fact, I am hard pressed to find anyone else who offers interest rates anywhere near what IB is offering. Am I missing something? Are there other brokers out there who do compete at this level? If not, then why not? (Why would IB the only one who could offer interest rates at this level). Note: I'm referring to holding equity positions on margin for a prolonged period (months+). Thank you.
As an easy way to compare several: https://www.interactivebrokers.com/en/index.php?f=1340 Let's go with the simple 200k amount: IB @ 1.81% TD @ 8.50% Option Xpress @ 7.00% (I know the higher the amount, the less it goes, but none of them seem to get within 2% of IB). Also pulled Lightspeed Trading (https://www.lightspeed.com/pricing/margin/) It shows a 4.75% -> 5.50% (much better than the above list, but still higher than IB), with a best rate of 4.00% (again, higher than IB). So: Any idea why IB is able to offer such lower rates compared to other brokers. Are there other brokers that offer better rates? (Note: I know one must look at the *whole* package offered by a broker and that other services, fees, reliability, etc. can outweigh the impact of the interest rate difference, but given the *significant* difference between the various brokers (i.e., more than double over IB), I'm curious why there would not be a competitor to IB at a closer interest rate. Or is there one and I'm just not aware of them )
This is why IB is indispensable. For all the whining that goes on on this site, no one lets you borrow money at rates even approaching IBs.
Which begs the questions: Why hasn't a competitor setup shop to offer rates that are close? a 2.0% to IB's 1.81% would be competitive enough, yet I have yet to see one. Generally market forces should have done something here
Simple answer: because it's a cost of doing business that most are not aware of but earns a nice chunk over time for those brokers who charge several percentage points above prime. IB's borrow list of shortable stocks is also way more competitive than the rest. So are their fx spreads. And a number other charges. It's not a broker for everyone but for most on the retail side it makes it a broker that is very hard to beat.
So the argument is that enough of the customer base is unaware of the benefits of lower interest rates that it is not a deciding factor for them. And those who are, will be going to IB? I guess one could make an argument that for "sophisticated" non-institutional investors, IB is the de-facto brokerage service to use and is so well embedded it would be hard to beat? (And those who could beat it, do not feel the need?) Interesting argument... I guess the 'next' option up would be working as a professional/institution directly through/within an investment firm (and therefore get better margin rates)
Those rates are only charged on overnight margin loans, held. Hence this does not even apply to pure day traders. I forgot but if memory serves well then the cutoff time is NY 5pm or so. But it might be different, just saying there is a cutoff and if a day trader closes positions after market close (US time zone) then those borrow rates on margin will not be assessed. Also, which newbie ever asked about those borrow rates? I have hardly ever seen such question asked. Those who do ask arise my interest because they either take sizable positions to make it worthwhile to pay attention to or else they just did their homework thoroughly.
It is not uncommon for me to take 100k+ position on margin and hold for a month or more before liquidating or otherwise covering the position with cash. And I quite often do this so it would be expected for me to hold 100k+ on margin year round. So, long term margin rates are important to me
You've pretty much nailed it right here. As well, though, consider that "newbs" are very costly customers to hold, relative to the amount of trading (commissions-generation) that they do, and to the amount of "bank" they bring. IB *started* as a wholesaler (clearing firm), went into institutional services, and eventually, into Main St. retail. But each time, their costs of doing business rises -- staffing, help lines, trade errors, [lawsuits based on user error....!] educationeducationeducation..... Even the strides they've made in the last 5? years have been monumental -- Hell! They ADVERTISE now!! (That freaked me out...) Anywho, even if they've geared up for hoi polloi, it doesn't mean they wouldn't rather it was institutions that kept knocking at their door. And those institutions are *exactly* the ones who're watching margin interest rates. Yep!