As is the case in any business, there are many things to consider and oversee so that your business will flourish. It’s the goal of all businesses to be efficient and ultimately make as much money as possible. Nowhere is this truer than in the trading industry. Even though the cost of entry into the business is relatively inexpensive, there are still many routine fees and expenditures that make it challenging to succeed. In this article we’ll take a look at some of those fees and how we can do a better job managing them.
I think we’ve all heard the statement: ‘I was profitable BEFORE fees, but after commissions, platform and other expenses I barely broke even.’ What are these ‘fees’ that traders commonly speak of and how can we help to mitigate them? Let’s begin by listing the most common and costly fees that traders are responsible for:
- Platform: Free up to $400/mo.
- Commissions: Varies greatly:
- Flat Fees: $3 to $10 per trade
- Per Share Fees: from 5c per 100 shares to $1 per 100 shares (avg. = 40c per 100)
- ECN Routing (ARCA, BATS, EDGX etc.): 29c per 100 shares
- SEC Sec. 31: $22.10 per million dollars
Those are the ‘basic’ fees that all traders encounter. There are also ‘other’ fees such as internet connection, chat room subscription, profit sharing, taxes and more. However, for the purposes of this article we’re going to focus on the ‘basic’ fees, as these are areas that most traders can do a better job of controlling. To be honest, I’m personally shocked at how many traders have not considered the fees they are paying, and how to potentially alleviate them in some capacity.
We’ll start by taking a look at the worst case scenario. Let’s use a new trader who is trading very small shares, typically 100 share lots, and ‘over trading’ which is common amongst newbies. We’ll also assume they are on a ‘retail’ platform (E-Trade, Trade Station, Scott Trade, Schwab etc.). The platform will typically be in the neighborhood of $100-$200 per month, and in some cases if you trade enough shares it’ll be free, however many new traders don’t meet the minimum share requirements to get it for free. Often times these platforms will start traders on a ‘FLAT FEE’ commission basis because most new traders don’t know the difference between per share and flat fee, and it’s far more lucrative for the broker dealer this way. Let’s break it down for a newbie trading 100 share lots, taking 150 trades a month and using flat fees. Note: most ‘flat fee’ commission structures include ‘ECN’ routing fees)
- Platform: $150
- $7 each way (1 fee to enter, 1 fee to exit)
- 150 Trades: $7 entry, $7 exit = $14 per trade
- 150 x $14 = $2100
- TOTAL: $150 + $2100 = $2250 per month
$2250 is an exorbinate amount of money for a new trader to be paying per month just for commissions. Yet many traders are paying this because they don’t know the difference. Heck, even at half the number of trades (75 per month) they are still paying $1125, which is still A LOT! Now let’s take a look at how these fees would compare if this trader was on ‘average’ per share commissions with ECN routing fees included. Note: we won’t get into commission rebates in this article.
- Platform: $150
- $0.40 each way (1 fee to enter, 1 fee to exit)
- 150 Trades: $0.40 entry, $0.40 exit = $0.80 per trade
- 150 x $0.80 = $120
- ECN Routing Fee (ARCA): $0.29 (entry and exit if using market orders)
- 150 x $0.58 = $87
- TOTAL: $150 + $120 + $87 = $357 per month
Would you rather pay $2250 per month or $357 per month? I think the answer is obvious. The unassuming newbie trader is paying 6 times more money for the same exact number of trades. In this example, the second trader is saving almost $1900 per month in fees and commissions versus the first trader. This is very significant because it allows you to stay in the game longer, which is extremely important for most newer traders as it usually takes longer to succeed than they think. $1900 per month saving is over $22,000 per year! That’s a lot of savings!
As you can see, trade fees and commissions can account for a substantial amount of money if you are not careful with the platform and fee structure you choose. The goal is to find balance. It’s not just about finding the cheapest fees either. What you are looking for is a balance between using a solid platform that has nice charting, a good HTB list, is stable/reliable, and of course has a cost effective fee structure. To be honest, it’s not as hard as you might think, but, you have to ask before you send them your money. Always ask what the commission structure is and don’t be afraid to try to negotiate. More often than not they will be willing to give you a discount if you tell them you are an active trader. It certainly doesn’t hurt to ask because the worst they can do is say no. Besides, you have other choices if you aren’t happy with a particular broker. (In the next article I will break down all of the ‘major’ platforms with their commission structure and reliability.)
At the end of the day, trading is a business. Your business. The only way to run it efficiently is to make sure your expenses are in check. In the beginning it can literally be the difference between success and failure, especially if you are spending an additional $22,000 per year on unnecessary commissions! Don’t be stubborn, naïve and foolish. Make sure to always check what the fee schedule and commission structure is, because either way, positive or negative, it will have an enormous impact on your trading success. Happy Trading! If you have any questions or comments please contact us at: [email protected] or Call us at 800-947-4027