Trading commissions

[JTrader]

I feel that if I am ever to take my traidng to the next level, I need to start trading through Direct Access. Etrade Direct Access CFD's offer 0.2%-0.1% commissions. Although this doesn't sound much, 0.1% means that I have to make 0.8 points profit on a trade before I break even and cover my trading fees. 0.15% would mean 1.2 points, and 0.2% would mean 1.6 points profit needed to break even on a trade. This adds a considerable amount of pressure.

I have been in this game for around 1 year and so my knowledge beforehand is fairly limited with regard to trading fees. My theory woud be is that as the broker market place becomes ever more competitive services will continue to improve and commissions and trading terms will also improve. What do others think? Is this what is already happening?
by how much can things improve?
What could the situation be like in two-three years time?

All contributions welcomed,

Cheers.

 

[anley]

Commissions will always come down as the natural part of any business cycle however brokers rely a lot on the fact that the majority of their clients (retail) haven't a clue about commissions and the damage that they do. So in effect they'll still try and get as much as possible from those who are inexperienced.

This is why CFDs are the biggest con-game in the City today, and 75% of CFD traders haven't worked this out yet.

 

[raf110]

Direct access is a bit different, Firstly the company has to fund the purchase of the underlying stock and also have to pay fees to the exchange to transact the trade. I think between 0.08% - 0.1%, will be the lowest they can go. Unless of course the borrow the stock but even this requires collateral.

 

[JTrader]

if CFD's are a con, what alternative would you suggest?

Cheers.

 

[Naz]

Trade the Dow with no spread and $6 commission per 1000 shares traded,all on my level 2 direct access screen.With fantastic liquidity.I think thats a pretty good deal.

 

[JonnyT]

But from that screen the spread is 2c for 1000 shares...

JonnyT

 

[TheBramble]

JT - where are you getting the 2c from?

Naz - you also have to pay $100pm for the DAE platform don't you? Or perhaps you don't - is there a volume waive?

 

[JTrader]

Hi Naz

which broker/s offers $6 commissions per 1000 shares?
is this a leveraged product? if so, what % margin is required?

And does the $25000 US day traders rule apply?

Cheers.

 

[Naz]

The screen shot is just an example to show that the spread at times can be nothing.

Even when there is a small spread the DAE trader can buy on the bid, through an ECN and pay no spread.

The $6 per thousand shares traded is the brokers standard charge no matter how you get your fill.ie $12/round trip.

If you do enough trades in the month, negotiate with your broker and could find the DAE platform is free,otherwise yes it will cost you $100/month.

However take the spread better trading the Dow at £10 point and it costing him 5 points in and 5 points out.Thats £100/round trip.Do twenty round trips in a month and thats £2,000 in costs.

Take the DAE trader trading the Dow using the Diamonds shown above.If he captures the spread or hits the ask when the spread tightens, his costs would be 20 round trips ($12 /round trip) total cost $240,plus the platform fee of $100,total cost $340 or £188/month.

Therefore trading the Dow this way would save the DAE trader in this example £1812/month over the spread better trading the same instrument.

Directaccesselite.com offer this.You need $25,000 for an account and get 4/1 margin.The platform also allows you to trade Nasdaq stocks.

 

[TheBramble]

Naz - what do mean 'using the diamonds...'?

 

[Naz]

The Diamonds (code DIA ) are a Dow tracking stock.

In the example above the spread better would save $25,000 in trading costs in just under 8 months if he traded the Dow using the Diamonds on a direct access platform.

Its also easier to manage a position if you haven't got a large spread to clear first of all.

 

[Trader333]

Naz,

Whilst I agree that it is far more cost effective to trade using DAE than it is to use a Spreadbetting company your cost comparison is not comparing like with like.

SB at £10 per point is the equivalent of trading at approx 1800 shares per trade and not 1000 because £10 = approx $18

So if you get charged $6 per 1000 then I presume it is 1.8 x $6 for 1800 which = $10.80 per side or $21.60 per round trip.

That means that for 20 round trips the difference is:

For the Spreadbettor = 20 x £100 = £2000 or ($3600)

For the DAE trader = 20 x $21.60 = $432 + $100 platform fee = $532 or (£295)

Saving = £1705 or $3070 which is still a huge saving.

A spreadbettor may also argue that they only pay the 5 points spread at entry and not at exit so not paying it twice which would change the calculations again to half the above but it is still a huge saving.

I dont use SB as you know and am very much pro the Direct Access approach.



Paul

 

[donaldduke]

I think you should assume at least one point spread in your
direct access calculations. This would reduce the
difference from £705 (assuming 1 way 5 point SB spread) to about £580 pounds.

Now lets say after that 20 trades you were up 1000 pounds
betting and up 1580 using direct access (because you paid
580 less in costs).

Lets assume a lower rate of tax of 21%, via the direct
access route your profits would be reduced to 1280 pounds
and to 1000 pounds if you are higher rate tax payer.

Not much difference.
So there are times when DA is better sometimes when SB is
better.

As a rule of thumb (assuming you have a profitable system) i would say:

Less than one trade a day, use SB.
1 trade a day, there isn't much difference eitherway.
More than one trade a day, use DA.

Also if the markets become more volatile this pushes things more
in favour of spread betting because the spread becomes
less noticeable.

 

[Trader333]

DD,

Also if the markets become more volatile this pushes things more
in favour of spread betting because the spread becomes
less noticeable

I have to disagree with this as it assumes you will always get the direction correct which is highly unlikely. In volatile markets you are far more likely to hit your stop.

Also why assume a 1 point spread when Naz has demonstrated that it is 0 or can effectively be negative by capturing the spread ?

I have compared the use of SB against direct access for intraday trading. My conclusions show that in volatile markets you will get filled immediately using DA and can often be waiting up to 30 seconds using SB or be switched to telephone only trading by which time the opportunity is gone or well into profit for the DA trader.

People always argue the tax case which I agree is very applicable for longer time frames but not intraday and I would rather pay tax on a profit than no tax on a loss.

That said it is each to their own and I am sure someone will demonstrate that they can make money consistently by intraday SB. However it doesnt suit me as my main concern in trading is prevention of capital loss which is much easier with DA than SB.



Paul

 

[donaldduke]

So you DA traders never buy on the offer? Or sell on the bid?

By volatile markets i meant for example
the stock market with a high VIX reading, not a choppy market
thats whipsaws you.

 

[Naz]

Its always difficult to give an example because there can always be small variables.For instance i didnt include any sb bias.

To be fair i would also add that holding a Dow trade with a sb company for days looking for the longer run minimises the effect of the entry cost and maximises the tax free element.

However Trader333 and myself have shown how much can be saved by trading the Dow with DA for the shorter time frame trader.This is using only one trade a day,any more trades than this and the savings would be magnified many times more.

I actually prefer trading the Q's (Nasdaq 100 tracking stock).If you include the ECN books in the level 2 screen, you'll find you're trading without a spread even more often than the Diamonds.That way you just hit the ask all the time.The fill is as quick as clicking your fingers.

All this is only an opinion.You might think differently.

 

[strokey tone]

CFD trading makes lots of money for the broker whether they get it right or wrong and it is the client who takes all the risk, the broker I dealt with Logic Investments were hard sell and got miffed if you didn't want to do the trades they recommended, Logic liked to manage risk as they call it by getting clients to open £5000 trades which means £50 open plus £50 close plus 0.75% commission plus the finance on the CFD which means your bet (because that is what you are really doing) has to earn £100 plus profit commison costs just to get your money back!
They are doing this many times an hour to clients who indeed might make a profit now and then,however this is soon swallowed up by losses and of course the finance fee on the CFD account.
CFD trading is a complete con being sold to unsuspecting clients in some cases by overcharging brokers who are really more like bookmakers.

 

[strokey tone]

Commissions will always come down as the natural part of any business cycle however brokers rely a lot on the fact that the majority of their clients (retail) haven't a clue about commissions and the damage that they do. So in effect they'll still try and get as much as possible from those who are inexperienced.

This is why CFDs are the biggest con-game in the City today, and 75% of CFD traders haven't worked this out yet.

I fell for the sales chat from Logic Investment, I think it took them about three months to wear me down and I gave them my trust assuming that they would be like a dear old broker I trusted in the past, what a mistake!
In order to reduce my risk Logic said it was better to put me in £5000 CFD positions, however as they have a minimum charge of £50 in then £50 out plus vat and 0.5% commission you can see how difficult it was for me to make a profit either short or long and the advice they gave was dire in most cases, but they said I must trust them and think like a trader, so like a fool I thought as I am paying their fees, why not? Why not indeed!
So I wish you well in your trading and I have had an expensive steep training curve in the way brokers operate today and they are not the same as the old chap I cut my investing teeth with as most brokers now seem to operate like bent bookmakers with the ethics of a Mexican drug pusher, just like the market makers and the financial media!
Now I realise what spivs most brokers appear to be I shall not be using them ever again and I will trade myself in divi paying stocks which is where the money from here will go if I ever get out, result of Logic advice needless to say as I made the mistake of saying to them that I had done well with these in the past, it was an easy sale for them!
As Alexious said, traders want to sell but the problem is so many brokers are operating like this whilst promoting themselves to investors as having their clients best interests at heart and charging their clients advisory fees so there is a clear conflict of interest which should be sorted by the FSA or the like but never will be !