I was reading Jason’s posting and forum entry was thinking…

“Yeah, commissions stink. With the E*Trade account, my net loss was ($629). I paid $441 in commissions.

I have thought numerous times about moving to another broker for commissions, but I’m really happy with how E*Trade has treated me otherwise. As my account size grows, the commission cost will become a smaller part of my gains/losses.”

Why are people paying more than they should? I really don’t understand it. It’s as if people enjoy throwing money out the window. My mother is in the same boat. She traders with Ameritrade, and BlueMax, and these companies are ripping you off.

Let me give an example:

On the etrade website they are saying you can get a savings account with no fees and no minimums for 5.05%. They are saying that they are 6x the nation average. Well, what they are talking about is a rip off!

I trade with Interactive Brokers which I consider a competitive broker. When my money is parked at IB I get interest based on the libor rate, which is a daily interest rate that banks lend to each other without collateral.

Right now the USD libor rate is 5.304%, and IB takes a 0.25% cut when paying interest thus I get 5.054%! In other words I get more interest with IB than eTrade.

Then people seem to get excited about Zecco and its no cost trades. It looks like no cost trades, but I wonder about the spread? Some brokerages that trade in CFD’s take no fees either, but their spreads include a fee.

Though I think I know where Zecco makes it money. They calculate an outrageous margin rate. Normally a margin rate is calculated using the libor, or at least that is what the brokerages pay. In my case my broker charges libor + 0.5%. Considering that the USD interest rate is 5.304%, I am charged 5.804% on my margins. With Zecco charging 10.5 percent, you are paying an additional 4.3% interest. This is money thrown out the window, up in smoke what have you!

And even if you don’t trade on margin if you day trade or do trades over multiple days you probably use margin. The exchanges hold your money for three days, which means during those three days you can’t buy or sell with that money. Normally brokerages will credit your account right away because from the brokerages perspective the transaction is a done deal and all that is left to do is fill out the paperwork.

To understand what I mean by margin even though you have enough cash consider the case where you have 30,000 in your account. If on day 1 you daytrade 15,000, then on day 2 you only have 15,000 available to trade. Even though your account will say 30,000 the 15,000 that has be credited to you is on margin until the cash is cleared. BTW this rule is not brokerage related, but is an exchange thing.

Summarizing it, what I don’t get is why people are throwing their money away when they could use a Professional Broker and save money?

You have to ask yourself are you trading for fun or are you serious about trading? If you are serious, then you need to calculate the interest costs, trade costs, and so-on. At the end of the day all that matters is how much you have in the pocket, not how much you made before expenses!

Comments (7)

Christian, thanks for the article. I should check out Interactive Brokers.

As to why I pay more for E*Trade… I like their interface and customer support (so far). I like their charting tools.

Umm… of course I could keep my account there with a minimum and do my trading through another broker. Could be worth it.

Why not save $100-$300?

I am planning on doing a lot less trading over the next few months though. I have a lot of other work on my plate and could use the 1-2 hours a day I spend keeping up on investments and reading about investing. Posting on this blog, etc. I’ll probably park my money in an index fund and try to forget about it. Even so, thanks a bunch for the advice.

If I read the Zecco faq correctly, they do not mess with the spread, since they are not a market maker.

http://www.zecco.com/trading/.aspx?tab=FAQ

I do agree with what you said about their margin rates, however one has to keep in mind that most discount brokers have such margin rates.

The bottom line is, if you have enough capital that the comission does not bother you, you go ahead and look at “advanced” things like cash interest and margin rates. If you are just starting out and have less than $5K invested, you need to worry about the comission cost. Unless of course you are trading very few stocks with that money.

Thanks for the comments, but I completely disagree that “once you have enough money commissions don’t matter.”

If you follow Cramers advice then you nibble and buy shares, and slowly sell shares. I myself am trying to be delta neutral and I often buy and sell shares. I regularly buy blocks of 100 to 500 shares, but buy them in intervals.

I pay about 0.005 to 0.01 per share premium. With etrade to get the same leverage I would have to trade in 800 share blocks or about 30,000 to 80,000 USD. That is completely nuts!

If I deal in 200 shares at a time I would need an 8 cent difference before I make any money. Whereas with IB I need an 2 cent difference. And I have found time and time again when cutting losses a 2 cent difference helps minimize losses.

That’s all fine and good, and I actually agree with you. That is why I wrote about investors investing less than $5K, which is the minimum to start an account with Interactive Brokers.

I have Scottrade, at $7 a trade they are hard to beat. I found out recently that Bank or America offers $5 trades, or free trades if you have $25k in a savings account. I don’t trade excessively, but why pay more for the same service?

I’m only 25 but really into trading tech stocks. As I have a long way to go to establish a proper portfolio i’ve chosen sharebuilder. I can do 4$ trades but what i like the most is i’m not limited to buying entire shares, so lets say i have 50$ to spend to buy a share of oh say ibm (not really) it would be around 80+$ normally. well i can get a percentage of that share minus the 4$ fee of course. Yet if i buy multiple shares at a time say a little ibm, some apple, some amd, ect ect i’m still only paying 4$ TOTAL not per trade. This mind you is done automatically every tuesday when the market opens. Not a real time trade (although they do have that aswell). For my income and money its hands down the best long term investment tool.

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