In any business, keeping overhead costs low while maximising revenue, and thus making the most profit on the revenue is key to success. But a business that doesn't produce enough revenue to cover the costs etc. is going to lose and eventually go bust. Cost cutting may balance the books, but it won't make a bad business into a good one. Other factors are needed to do that. So, IMHO, 'the solid strategy etc. being key' assertion is correct, but keeping a close rein on costs is important too and shouldn't be scoffed at. Best Natalie
Quote from Girlpower: Cost cutting may balance the books, but it won't make a bad business into a good one. Other factors are needed to do that. I have to disagree with this when applied to trading. Of course, if you are not gross-profitable with reasonable confidence, the commission rate doesn't matter - you will eventually lose. There are styles like mine that would not be profitable with a per-ticket rate (especially the $20 rate from the late 90s!). However, with a decent per-share rate, I am successful. Cost-cutting, in this case, not only balances the books - it provides a decent income. It's not black or white, either. Along the spectrum from a rate that makes you net profitable to one that does not, there is a point at which you are paying too much in commission to justify the risk. Past that point, while still net profitable, you'd be better off long-term doing something else. Figuring out where that point is can be quite difficult. This is different in every line of business, and even for different styles of trading, too. My commission expense amounts to about 10-20% of my gross profit, which would be way too high for a longer-term, higher-risk, lower-confidence strategy. This week, I read about a midwest state that was raising it's current top tax rate on riverboat casinos from 50% to 70% on gross revenues over a certain amount. I'd like to see their risk/reward analysis and how it justifies staying in business with that big a shakedown! Even the mob would let them keep more than that
I agree. I know of one strategy traded by some friends (and me too occasionally) that has a goal of 1 cent per share gross per day. It's a high volume scalping style, and is designed to take advantage of ultra-low commissions. The low commissions are an edge, and at a penny a share you could trade the system like a champ and lose money after ecn and sec fees. The point being that in some instances, commissions do matter. A lot. And to the naysayers, yes the firm makes good coin and yes you pay a high % of your gross in fees. But good traders can net 6 figs a year with extremely low risk.
i just heard don bright on the radio say they now have the lowest rates. 0.40 after the first 1000 shares.and yes rates do matter a lot. once you get to the point where you can trade the spread and make a profit you have a huge advantage.
Rates based on per share, and the reduced rate for larger size orders such as Bright's and Interactive Brokers' model - is not a fair comparison. There is more risk for the prop trader in trading larger size orders. You are less likely to get the entire order filled at one price, especially since decimalization. Additionally, firms or clearing firms on the back end benefit if they are trading contra to your orders (IB makes no secret of this practice), since they 1) have the first opportunity to trade against you, and will do so "internally" 2) only will do so if a clear edge exists (for instance, exploiting an arb opportunity) and 3) having the edge, will want to do as many shares as possible to exploit that edge to its maximum potential. This will likely offset any commission reduction based on >1000 share orders.
Since you are initiating the order, what difference does it make who trades against it? If you don't want to trade, don't enter the order. And if you are worried about IB taking the trade for some reason , you can always route DIRECT to an ecn or MM. So that argument fails. Since you elect to trade at price X, what disadvantage is there that 'offsets' a commision advantage. We assume you are a skilled trader, and know when and where to trade. If that's not the case, then free commisions won't help you either, just prolong the agony of failure.
My point is just that the temptation to do larger size orders has some effect on your other trading costs, most importantly, at what price your orders can get done. If you are adding liq with these larger orders, your risk of partial fills are increased, especially when going >1000 shares. So you don't get the discount. If you are taking liq, you may save .002 on 1000 shares by entering 2000 share orders, but on average may be paying an extra .01 on 500-1000 shares of that due to slippage. On NYSE, your biggest risk is that the specialist "screws you" on an order. Better when that happens on 500-1000 share orders instead of larger orders. Not to mention that this comm structure discourages scaling in/out, this applies in both NYSE and OTC. My point is simply that the .002 (or whatever it is) is a slim improvement in fees and one should consider that while this cost goes down slightly, other costs may increase. Some traders may get a benefit by this comm structure, but it will not be there for everyone.
Quote from esc_trader: ...Additionally, firms or clearing firms on the back end benefit if they are trading contra to your orders (IB makes no secret of this practice), since they 1) have the first opportunity to trade against you, and will do so "internally" This is not true, and is clearly spelled out by them. With the exception of orders that are specifically allowed/requested to execute against TMBR by the customer, IB does not internalize executions. Timber-Hill may end up being on the other side of your trade, but only because they (or their systems) have entered an order in the marketplace on the other side that happens to meet the criteria of that marketplace to get executed against your order. Further, it is my understanding that they have ensured that such proprietary orders are never based on any internal knowledge of the brokerage's customer order flow. T-H is just another institutional customer of IB, and has no access to information that is not available to any other customer. Personally, for a marketable NASDAQ order, I don't care who is on the other side of the trade as long as it is at the inside market. In the case of NYSE orders, it's great to have the choice of trying for a quick fill at the bid or offer from TMBR or trying to get price improvement from the floor. If IB were to offer commissions rebates for TMBR executions to account for their reduced costs on these, that would be even better.
Rec'd a PM pointing me to this thread.... ESC_Trader... This is NOT true. IB will only route to an affiliate (timber hill) if the affiliate can meet or better the NBBO (best bid or offer in the market place). If you don't believe me, go to the source and read the quarterly routing reports IB submits to the regulators. The facts will show that the opposite of what you say is true. http://www.interactivebrokers.com/download/1Q_2003_IB_QOR.pdf
I did not say that TMBR will fill a customer at a worse than NBBO price. I said that when a customer is filled by TMBR they are being filled by an organization with a relationship to IB itself. The term "internalize" may have some negative connotations, of course, depending on one's specific definition. I define it as an IB customer order, granted rotued through SMART that goes to TMBR and does not make it out to the ECNs or exchanges to intereact, which is clearly the case on TMBR fills. My point is not to criticise IB or this practice, this may be preferable for the trader to get increased liquidity, it may not. If you are trying to take out an NBBO bid or ask, TMBR fills can be counterproductive to your trading. For what it is worth, my experience with TMBR is that it was more helpful to me than not, but this will not be true for all traders for the reasons I mentioned.