Commissions for trading in small blocks

[movingslow]

I haven't done any day trading yet, but thinking seriously about trying some more frequent trading strategies in the stock market.

So far, commissions are killing the profits in my calculations. What I don't know/understand is how can some penny stock traders be profitable due to enormous transaction costs?

For example, Interactive Brokers charges a commission based on the amount of shares traded. If one share is worth less than a dollar, the relative costs for penny stocks can be enormous (minimum cost enforced). In addition, if you break the trade into smaller blocks, as you probably should for less liquid stocks, you end up paying the minimum commission multiple times over, am I correct?

How do you remedy this situation? Are there some brokers that allow retail traders to break an order into smaller parts or utilize an algo without charging a fixed minimum for every smaller part of the trade? Or how do profitable retail traders typically survive these commissions if they trade less liquid stocks?

 

[zdreg]

Review their commission schedule before posting useless questions.
https://www.interactivebrokers.com/en/index.php?f=1590

 

[movingslow]

Review their commission schedule before posting useless questions.
https://www.interactivebrokers.com/en/index.php?f=1590

Thanks, I have spent quite a lot of time exploring that page.

Let's clear something: I'm a beginner and probably ask stupid questions. I'm here to learn, ok

Let me try to formulate my question in a more specific way:
IB charges commission based on how many shares are traded, e.g. 0.0035 USD per share in the lowest category of the tiered system. But the minimum is also 0.35 USD per trade.

Assume you want to trade some less liquid stocks, say, 1 000 shares of a company that trades at $0.50 per share, and you need to break the trade into smaller parts. You want to only execute 100 shares at a time to not move the price too much. This would mean that you need to do 10 separate trades of 100 shares, each worth about $50. Thus, you end up paying 10* $0.35 = $3.5 in commissions for $500 worth of shares bought. That's almost 1%.

If you're trading frequently, 1 % cost per trade is gigantic. At least that is my impression, and the strategies I've been experimenting with cannot survive with that kind of commissions.

But maybe I have misunderstood something in the commission structure? If so, please point out where I'm making a mistake. Thanks!

 

[Stamamarti]

Thanks, I have spent quite a lot of time exploring that page.

Let's clear something: I'm a beginner and probably ask stupid questions. I'm here to learn, ok

Let me try to formulate my question in a more specific way:
IB charges commission based on how many shares are traded, e.g. 0.0035 USD per share in the lowest category of the tiered system. But the minimum is also 0.35 USD per trade.

.... Thanks!

If this is your 'thing' then take a look around and see that many other brokerage firms (TD, FID, SCHAWB, etc,....) do provide access to 0 (ZERO) commission equity trades...

 

[movingslow]

If this is your 'thing' then take a look around and see that many other brokerage firms (TD, FID, SCHAWB, etc,....) do provide access to 0 (ZERO) commission equity trades...

I'm aware of those, but on the other hand, IB seems to offer better/more fair execution (direct market access, no HFTs front running, etc.), correct?

In any case, I'm wondering about breaking trades into smaller parts. Do retail traders regularly do this with less liquid stocks? Does any retail broker offer e.g. algos that allow you to execute the trade in smaller parts without incurring commissions for each part separately?

 

[movingslow]

I took a closer look at the details of the IB commission structure. In the tiered structure, can adding liquidity (placing limit orders that won't execute immediately) actually get your total costs down considerably? I'm not sure if I'm understanding it correctly?

For example, if you trade 1 million shares per month, your commission per share is $0.002 + exchange fees. For NYSE, adding liquidity can actually subtract from this fee? To add liquidity, you just have to place limit orders? Is that how it works?

 

[eastern_warrior]

Thanks, I have spent quite a lot of time exploring that page.

Let's clear something: I'm a beginner and probably ask stupid questions. I'm here to learn, ok

Let me try to formulate my question in a more specific way:
IB charges commission based on how many shares are traded, e.g. 0.0035 USD per share in the lowest category of the tiered system. But the minimum is also 0.35 USD per trade.

Assume you want to trade some less liquid stocks, say, 1 000 shares of a company that trades at $0.50 per share, and you need to break the trade into smaller parts. You want to only execute 100 shares at a time to not move the price too much. This would mean that you need to do 10 separate trades of 100 shares, each worth about $50. Thus, you end up paying 10* $0.35 = $3.5 in commissions for $500 worth of shares bought. That's almost 1%.

If you're trading frequently, 1 % cost per trade is gigantic. At least that is my impression, and the strategies I've been experimenting with cannot survive with that kind of commissions.

But maybe I have misunderstood something in the commission structure? If so, please point out where I'm making a mistake. Thanks!

If you think 1000 shares of a 50 cent stock is a large order then you need to step back a bit. The monetary value of that order is $500. That will not move a market.

 

[movingslow]

If you think 1000 shares of a 50 cent stock is a large order then you need to step back a bit. The monetary value of that order is $500. That will not move a market.

I would hope so, but I'm afraid it may for small, illquid stocks. There are plenty that have average volumes of less than $100,000 per day. Based on data, the typical trade size for these stocks is around $100. Of course there are larger orders being executed at once, but I would assume they usually have a considerable impact on the price.