Can someone help me understand broker fee structure

M

milemke08

I'm quite new to the scene of trading and researching how brokers work and, more importantly, how they make money. I finally got around to some reading material on brokers and saw that they change a fee based on the amount of shares per order you are throwing at them. I just want to make sure that I'm understanding this system correctly.

So just like a restaurant has to pay for the food they cook as their cost to do business(overhead), traders have to pay broker fees to do business? I called a InteractiveBroker and they told me their flat rate fee structure is .005/share with a minimum order fee of $1.00.

Does this mean to place an order I have to pay .005 per share that I want to buy/sell and if that value(shares*.005) is less than $1, the broker will round it up and charge me $1 anyway. That's the only way that make sense, but I just want to be sure that I get it.

Do these broker fees apply to the buy and sell portion of a transaction? I would think that they do, but I just want to make sure.
 
Quote from milemke08:

I'm quite new to the scene of trading and researching how brokers work and, more importantly, how they make money. I finally got around to some reading material on brokers and saw that they change a fee based on the amount of shares per order you are throwing at them. I just want to make sure that I'm understanding this system correctly.

So just like a restaurant has to pay for the food they cook as their cost to do business(overhead), traders have to pay broker fees to do business? I called a InteractiveBroker and they told me their flat rate fee structure is .005/share with a minimum order fee of $1.00.

Does this mean to place an order I have to pay .005 per share that I want to buy/sell and if that value(shares*.005) is less than $1, the broker will round it up and charge me $1 anyway. That's the only way that make sense, but I just want to be sure that I get it.

Do these broker fees apply to the buy and sell portion of a transaction? I would think that they do, but I just want to make sure.
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You're correct. If you buy 1 share, they charge you $1.00. If you buy 100 shares, they still charge you $1.00. 1000 shares will cost you $5.00. They charge you per share on both the buy and the sell, not round trip. There will be addition fees from the SEC on the sell side only, but it's very small.
 
Quote from 1245:

You're correct. If you buy 1 share, they charge you $1.00. If you buy 100 shares, they still charge you $1.00. 1000 shares will cost you $5.00. They charge you per share on both the buy and the sell, not round trip. There will be addition fees from the SEC on the sell side only, but it's very small.
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I was always wondering about this as well. Thanks for the clarification. The IB commission rate sounds like a pretty good deal. I'm currently paying $4.95 per trade with Zecco. How is it that they can stay competitive with such low commission rates?
 
Quote from Dura:

I was always wondering about this as well. Thanks for the clarification. The IB commission rate sounds like a pretty good deal. I'm currently paying $4.95 per trade with Zecco. How is it that they can stay competitive with such low commission rates?
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You have to understand their cost structure for an online trading firm. They keep their overhead very low and automate as much as possible. Also, when you enter an order, your revenues are not all they receive. If they use their own routes, they control the order flow. They can route to a firm that pays for order flow. Firms that charge ticket charges, do that because a great deal of their clearing costs are structured by orders entered and number of executions. If you buy 1000 share in one lot, that costs them less than 100 shares 10 times.

Without payment for order flow, commissions would be higher for everyone. If you trade actively, many firms will offer better then their posted rates. They will look at not only your monthly volume, but also the average size of your trades. When interest rates are higher, they also care about the size of your long and short positions. Many prime brokers made as much as 1/3 of their income from interest with higher rates.
 
Ok, so I've been running some models using InteractiveBrokers cost plus fee structure. I chose this one to test because I want to be able to make a profit even on price changes as small as 1 cent and a .005/share doesn't allow for that.

Cost plus charges .0035/share for accounts with monthly volume <300k shares traded. This works for me because I use a high frequency strategy that trades on a minute by minute basis and does so in lots of 1000.

So let's say I buy 1000 shares of a stock at $9.45. For this action I get charged $3.5. One minute later I sell these shares for $9.46 and I am charged another $3.5. My accounting will look like:

buy 1000 shares at $9.45 = $9,450.00
$3.5 for brokerage fee

buy 1000 shares at $9.46 = $9,460.00
$3.5 for brokerage fee

So I walk out of this deal with $3 since my profit was $10 and I have to pay the $7 for fees, right?
 
Quote from 1245:

You have to understand their cost structure for an online trading firm. They keep their overhead very low and automate as much as possible. Also, when you enter an order, your revenues are not all they receive. If they use their own routes, they control the order flow. They can route to a firm that pays for order flow. Firms that charge ticket charges, do that because a great deal of their clearing costs are structured by orders entered and number of executions. If you buy 1000 share in one lot, that costs them less than 100 shares 10 times.

Without payment for order flow, commissions would be higher for everyone. If you trade actively, many firms will offer better then their posted rates. They will look at not only your monthly volume, but also the average size of your trades. When interest rates are higher, they also care about the size of your long and short positions. Many prime brokers made as much as 1/3 of their income from interest with higher rates.
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I think I get the gist of what you're saying. It's cheaper for them to have their cost the way they do. Most of it went over my head though. I don't really understand cost structure. I do appreciate the help. Thanks.
 
Quote from milemke08:

Ok, so I've been running some models using InteractiveBrokers cost plus fee structure. I chose this one to test because I want to be able to make a profit even on price changes as small as 1 cent and a .005/share doesn't allow for that.

Cost plus charges .0035/share for accounts with monthly volume <300k shares traded. This works for me because I use a high frequency strategy that trades on a minute by minute basis and does so in lots of 1000.

So let's say I buy 1000 shares of a stock at $9.45. For this action I get charged $3.5. One minute later I sell these shares for $9.46 and I am charged another $3.5. My accounting will look like:

buy 1000 shares at $9.45 = $9,450.00
$3.5 for brokerage fee

buy 1000 shares at $9.46 = $9,460.00
$3.5 for brokerage fee

So I walk out of this deal with $3 since my profit was $10 and I have to pay the $7 for fees, right?
More...

Cost plus does not include ECN fees. If you add liquidity, you will make more money. If you take liquidity, you will pay more. Adding liquidity means that when you trade with another party, you were the first person at that price, the other person then traded with you. Go to any ECN website or check your broker's website for ECN rebates/fees schedule.
 
Quote from zdreg:

not exactly. IB doesn't receive payment for order flow. that is one of the reason price improvement is or nearest the highest in the industry. in most cases, price improvement is more important for the trader than commissions.
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Yes they do. In options, they are directed MM on the AMEX. That entitles them to a minimum 40% of the order if they like. Timber Hill pays .25 for penny pilot symbols and .55 for others. On other exchanges like the ISE and CBOE, someone pays them if you route your order there. On equities, if you use a smart route it goes to a dark pool where equity market makers, including Timber hill pay for a first look at the orders.
 
https://www.interactivebrokers.com/...rmSampleView?ad=order_routing_disclosure.html

Payment for Order Flow - Stocks: IB receives payments for several types of order
executions in US stocks.
Dark Pools: IB receives order flow payments from some "dark pool" ATSs for routing orders to
those dark pools. While IB benefits from these payments, IB customers also benefit from IB’s
access to dark pools. Dark pools provide a source of substantial additional liquidity. Dark
pools charge lower execution fees than exchanges. Dark pools also provide fast executions
and the possibility of executions at prices more favorable than the prevailing NBBO.
ECN Rebates: IB receives liquidity rebates from ECNs for certain orders routed to those ECNs.
ECN liquidity rebates are credited against the fees charged by the ECNs to execute other
orders. ECN rebate amounts change frequently. Rebate rates for most ECNs are posted on the
IB website (in the section on cost-plus commission costs). They also typically are posted on
ECN websites.
Liquidity Provider Relationships: IB has entered arrangements with certain institutions under
which such institutions may send orders to IB at or near the NBBO. These orders are held
within the IB system and are not displayed in the national market. If another IB customer
order could be immediately executed against such an order held in the IB system (at the
NBBO), the orders may be crossed and the execution reported to the National Market System.
This arrangement provides extra liquidity for IB customer orders and leads to faster
executions at the NBBO (since the orders do not have to be sent to an exchange or ECN to be
executed but can be executed within the IB system). IB may receive payment in the form of
commissions or commission equivalents from the liquidity providers for these executions.
 
Payment for Order Flow - Options: IB receives order flow payments in varying amounts
from U.S. option exchanges, specialists and/or market makers pursuant to the mandatory
marketing fee programs that have been adopted by the exchanges and approved by the SEC.
If multiple exchanges are quoting at the NBBO for an option order and IB has discretion as to
where to send the order or a portion of it, IB generally will "break the tie" by sending the
order to an exchange where it will receive the most payment for the order or to an exchange
designated by the firm from whom IB will receive the most payment (typically IB’s affiliate
Timber Hill LLC - see below).
Several options exchanges, including BOX and NYSE ARCA have adopted a "maker-taker"
market structure, in which exchange members are charged for orders that take liquidity from
the exchange (i.e., marketable orders that trade against a posted quote or limit order) and
receive a rebate for orders that provide liquidity to the exchange (i.e., non-marketable limit
orders that are posted and then trade against incoming marketable orders). The charges
imposed or rebates offered by these exchanges affect the total cost of execution, and IB’s
SmartRouting System may take this into account in determining where and how to route
options orders.
 
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