Since IB does their interest based on benchmark (BM) and they either pay you BM minus some percent (based on tiers) on your long currency and charge you the BM plus some percent on the short currency, it seems to be a headwind and interest expense can add up fast, especially leveraged. Question: Is this how all spot forex brokers do this? This must be a big $$ maker for IB. For example, had two long USD/JPY trade this month, and while the USD BM is slightly higher than the YEN (0.11% USD vs. 0.106%), but after they take off/add to the BM, those trades have a high interest charge. So, I am tier two, I got paid 0% for long USD and charged 1.106% for short YEN. Not complaining too much, it may shave 2-3% a year off performance, just wondering if all forex brokers do this?
They all do. Many of them don't even publish their rates, it's an arm and a leg to get the data from them. IB's rates are in fact very competitive, most spot FX brokers charge higher interest rate spreads.
If you're doing longer term position trades, trade FX futures. The interest rate differentials are factored into the price at a much more narrow spread than spot. There's also the tax advantage of having the interest gain/loss factored into the futures price (at 60/40 tax rates).
I used to trade futures fx, moved to spot for more liquidity. I wish the futures fx market was as liquid as the ES or ZN. Yeah, it's not that big of a deal. My average trade holding is 2 days, but I use leverage and since trading spot for a little over a year, interest exp is shaving off about 2.5% of annual returns so far.
This is where the $$ is made for forex brokers. I guarantee the spread they made is much higher than on commissions or even MM.
Interestingly enough, Oanda has them beat by over half. 0.10% earned on long USD, 0.55% charged on short JPY. Net -0.45%. http://fxtrade.oanda.com/analysis/historical-rates
Sometimes you get a positive carry trade (i.e. make money by holding a currency pair). For example, if you've got a decent long position in AUD.USD, you're interest earned at IB will exceed your interest expense even if you borrow all the USD. In theory this affects the value of the currency pair in an offsetting manner so you should probably only hold this and similar pairs for other reasons, not just the carry trade.
Yes, I do get positive carry, but over time because I am fighting the +/- to the BM, I always have negative interest expenses. My point was IB is making a mint on this deal since they get access to the BM rates, then slash them if you are long (owning), and add to them if you are short (borrowing). And since you trade a pair, you get nailed on both sides. Then if you leverage up...those tiny charges add up quick. I am usually in/out of a trade in 2 days, but with 5 pairs I trade, the interest expense adds up. No biggie in the grand scheme on things.
Yes IB makes money on this. But their current USD margin rate for a small negative balance is 1.62%. I also have an account at E-Trade and their USD margin rate for a small negative balance is 8.44%. So I never complain about IB's rates.