Discount Stock Broker

[LeeD]

Quote from shortbleu:

Hi LeeD and Tickmagnet and all

Hello shortbleu,

Quote from shortbleu:

Hi LeeD and Tickmagnet and all,

I realise it is quite costly to install a currency hedge for a UK resident having a deposit in USD , I’ve looked into Interactive Brokers (IB) and I would be interested to open a stock account with them as long as you can confirm the following :

1) As a UK resident can I open a stock account in GBP and the deposit will remain in GBP even if I trade in foreign currencies stock? i.e, there is no currency risk on the deposit, there is currency risk on the P&L denominated in foreign currency?

All of this is correct! If you go this direction, you may want to consider "margin" account. Although, I understand, you don't intend to apply any leverage on the stock portfolio, having a little leeway may prove useful later. Obviously, you can "upgrade" the account if you need it later ("upgrade" is subject to manual approval by IB staff).

Quote from shortbleu:

2) I need GBP 6,250 minimum (equivalent of USD 10,000) to open the account?

Yes, equivalent of USD 10,000.

You will also need to confirm on the application form that you have sufficient experience and understanding of the assets you want to trade. I think the required experience is 2 years.

Quote from shortbleu:

3) What happen if the account falls below GBP 6,250 due to a loss or withdrawal?

Nothing, except IB doesn't pay interest on balances below $10,000 in the respective currency. So, if you convert a potentially small loss from USD to GBP or GBP depreciates, you may stop receiving any interest. Currently, the interest is 0.01% anyway.

If the value falls further below USD2,000 the account will be stopped from using any margin (it's a government requirement).

Regarding the account type. I highly recommend using margin account.

Suppose you don't want to use leverage but you want to be fully invested. If GBP/USD rate falls but the value of the stock portfolio in USD terms stays unchanged, the value of the deposit in GBP will fall below the value of the stock portfolio (in USD). In a margin account it fine. Just your leverage slightly increases (the value of the assets in the portfolio is higher than deposit+P&L) and you may consider liquidating some equity positions in the log run to keep the leverage at bay. In an account that doesn't allow margin, IB will urgently liquidate some of the equity positions in order to keep the portfolio unleveraged.

Quote from shortbleu:

4) The only cost to run the account will be commission to open/close positions and monthly fee of USD 10 or are there any other costs? (NB: I only need to see a live price on the ask price and the bid price and their related volumes to trade. I don’t need any depth level 2 or graphs, so costs should be kept to a minimum).

The $10 fee will apply only if you don't accrue $10 fees in the respective month.

Further, if you have an equity portfolio (as opposed to keeping the balance uninvested), you will pay interest on the portfolio value. Remember the discussion regarding the cost of holding a currency position with IB? When you buy stocks, you borrow USD from IB (with your GBP deposit as a collateral) and are liable for respective interest (benchmark rate + IB spread).

You may further want to purchase IB data package. However, nothing stops you from trading on daily or delayed prices available from web-sites without live prices in the platform. WIth IB you don't get live market prices for free unless. IB charges "non-professionsl" customers $10 per month for US Securities & Commodities Non-Professional Bundle (which is much cheaper than any standalone data service). The latter fee is waved in months the customer contributes $30 in commission.

Quote from shortbleu:

5) Example: The account is opened with GBP 6,250, the yearly cost to buy 1100 european stocks(from Belgium, france or Italy) on 1 April 2010 at EUR 5 each and selling them back at the same price of EUR 5 on 31 March 2011 would be as follow: 1100*eur 5 *0.1% to buy the stocks + 1100*eur 5 *0.1% to sell the stocks + 12* USD 10? Are there any other costs?

+ interest on the EUR balance you borrow, that is
EUR 1,100 * 1.851% = EUR 20.36

Quote from shortbleu:

Will the account show the following:
Deposit balance GBP +6,250
Commission : EUR -11 (1100*eur 5 *0.1%+1100*eur 5 *0.1%)
Monthly fees: USD -120
Profit/loss = EUR zero
Or do they convert the commission and monthly fees in GBP, or just the EUR commission in USD and the monthly fees stay in USD?

The commisssions and profit/loss are not converted into the account currency. So, you will end up with the full deposit but will owe (have short currency position) the inactivity fees in USD and the commission in EUR. You can convert these manually whenver you want.

Quote from shortbleu:

Many thanks

You are welcome as always!

 

[LeeD]

Given the topic has been raised, another potential investment vehicle is a spread-betting company. This way there would be no inactivity fee and likely no data fee (spread-betting companies quote market price with their own spread included and thus avoid exchange fees). Additional benefit is spread-betting profits (if any) are tax-free in the UK.

The disadvantage is you will have substantially higher effective commission (spread betting companies charge a small "spread" outside exchange-trade bid-ask) and rolover (the cost of holding position overnight) will likely be in the range of 1% higher than IB (extra 1% of the position value per year).

 

[shortbleu]

Hi LeeD,

Thanks very much for the detailed response.
I did not think about the leverage question, but you're right, if possible I should ask for a margin account.


"The $10 fee will apply only if you don't accrue $10 fees in the respective month."

I won't trade much, I am more a sort of buy and hold investor than a day trader so I am quite likely to pay USD 10 fee more often than not.

That is weird that I need to pay a benchmark rate + IB spread to hold foreing ccy positions. I know that a future account with deposit in GBP and positions in an e-mini USD future would not be charged a benchmark rate + IB spread. A stock account seems to work differently than a future account.

The fact IB does not provide a simple live price feed is a turn off. From my understanding, other stock brokers as Zecco or Just2trade provide this for free.


The main turn off I have to say is the interest paid on the EUR balance. I believe the amount charge should be:

1,100 stocks * EUR 5 * 1.851% = EUR 102 !!!
Almost 2% a year, it's not going to happen!! I need to reconsider my postion and see what would cost a hedge if I make a deposit in USD with another broker.

LeeD, your post has opened my eyes, in proportion to the relatively small amount I have to invest (say about GBP 5000 - 7000), IB would cost me a fortune, just in monthly fees + data feed and they are not the cheaper in terms of commission.

Spreadbetting, I thought about it bu the overnight cost is a major turn off since I will hold positions for years, this will cost me a fortune, I really need an investment that does not attract any charges for holding long positions over the long run.

Rather than going with IB which charges a fee every single month, I would prefer opening an account in USD with Just2Trade or Zecco that won't attract the monthly fee.
Obviously, that will cost me more upfront as I will need to convert the GBP into USD and use a company that will probably charge me maybe around 1.5% for the conversion. But this is a one off and in the long run this will cost less than going with the monthly fee.

With regards to the hedge, I opened a demo account with FXCM as I wanted to get an idea of they rollover rate for the GBP/USD.
It is as follow: for a position of 10K GBP/USD they charge or credit the customer GBP -0.11 or GBP +0.04 daily and the bid ask spread is 2.9.
So the rollover will translate as a profit. Obviously it could be better but it's not that bad to make a bit of money on the rollover and better than what I expected.

I am not an expert but FXCM seems to be a quite large, solid and competitive forex broker. I am not really concerned about the bid ask spread of 2.9. For sure I might find a tighter spread elsewhere but since I won't do loads of round turns in the forex account it does not really matter. I am more interested in finding a forex broker with very very competitive rollover rates as in the long term, the expense / income on the rollover will add up.
So if you know any large forex broker with very competitive rollover rates, please let me know. I heard Oanda was quite good but I don't know their rollover rates. Any idea?

Today when the GBP/USD rate was around 1.61, my retail bank proposed me a rate of around 1.56 to convert GBP into USD.
This means they charge over 3% to do the conversion. I read somewhere some specialist companies charge around 1% which is still a significant amount but far better than my retail bank.
Do you know any specialist companies or internet links that I could look into and start doing some research to get a good conversion rate?

Many thanks
Shortbleu

 

[LeeD]

Quote from shortbleu:

That is weird that I need to pay a benchmark rate + IB spread to hold foreing ccy positions. I know that a future account with deposit in GBP and positions in an e-mini USD future would not be charged a benchmark rate + IB spread. A stock seems to work differently than a stock account.

The difference is quite simple. With equities you need to have (borrow) the full price in USD or EUR. Whether the position is leveraged or not, the broker has to buy the actual stocks for you.

With futures you don't buy anything. You only need to contribute the margin, which for currency contracts may be as low as 2% - 3% of the actual currency amount. Hence, even if you had to pay interest on the margin, it would be an order of magnitude lower. Further, certain exchanges accept margin in alternative forms such as government securities or foreign currency.

Further, currency futures actually do incorporate the difference in interest rates (notice, future prices are slightly different from spot currency rates) but not the broker's "rollover" fee.

You may consider hedging with e-Micro contracts. they are 1/10 of teh size of the full currency contract, namely EUR12,500 and GBP6,250. The problem is eMicros are less liquid than the full-size futures and what you save in interest charges you may loose in rolling bid-ask spreads when you roll the future contract every quarter.

Quote from shortbleu:

The fact IB does not provide a simple live price feed is a turn off. From my understanding, other stock brokers as Zecco or Just2trade provide this for free.

Note whatever feed is not exactly free for the broker. They still to have to negotiate the price of live prices with respective exchanges. IB is till much cheaper than stand-alone live feeds but I appreciate many other brokers give basic feed for equities free. (In fact, NASDAQ exchange fee for individual subscribers is something like $1 per month and should be much cheaper for brokers.) Perhaps, pricing is the IB way to discourage less active traders - brokers live off commission.

Quote from shortbleu:

The main turn off I have to say is the interest paid on the EUR balance. I believe the amount charge should be:

1,100 stocks * EUR 5 * 1.851% = EUR 102 !!!
Almost 2% a year, it's not going to happen!!

Expensive indeed. 1.5% out of these is IB fee, which can be more affordable with other brokers.

Quote from shortbleu:

I need to reconsider my postion and see what would cost a hedge if I make a deposit in USD with another broker.

As usual, please be careful with various fees and charger. I would expect a specialised FOREX shop may offer much more competitive rollover than IB but then few equity brokers seem to offer FOREX trading.

Quote from shortbleu:

LeeD, your post has opened my eyes, in proportion to the relatively small amount I have to invest (say about GBP 5000 - 7000), IB would cost me a fortune, just in monthly fees + data feed and they are not the cheaper in terms of commission

You are welcome!

Quote from shortbleu:

Rather than going with IB which charges a fee every single month, I would prefer opening in a account in USD with Just2Trade or Zecco that won't attract the monthly fee.
Obviously, that will cost me more upfront

Good luck with whatever path you choose!

 

[shortbleu]

Not sure if I should use Oanda or FXCM?

FXCM do not hold GBP accounts and would charge me 0.92% on my deposit to convert GBP into USD (seems awful).
Their rollover rates are more competitive than Oanda


Oanda: They old can hold accounts in GBP, but their rollover rate are less competitive than FCXM.

Which broker shall I go for? I would run long term positions for months. Would better rollover rates compensate the 0.92% charge quickly or is that going to take years?

Also, with FXCM, if I want to withdraw the funds and spend them in the UK, i will need to convert again and spend about another 1%... in charge....

 

[LeeD]

As I understand you are talking about the provider of the currency hedge and not a stock broker...

Given you are not planning to trade currency much and would hold the position for years, the difference in rollover rates is what probabbly will make the most difference in the long term.

You need to find out how exactly the rollover rates are calculated in each case, what benchmark rates the 2 companies use and what annualised rollover fee they chatge on top of the rate difference. If you don't, it's like giving them a blank check.

Just for comparison, IB (which is far too expansive for small currency positions already) still charges 1% less than one of the largest spread-betting companies IG Index. So, in a year you would make whatever you loose on the conversion.

I believe, if you live in the UK you may not be able to open account with FXCM in the US and have to open an account via the UK branch of FXCM, which accepts deposits in GBP (as well as EUR, USD, NZD). By doing so you also save on not having to do international money transfer.

 

[LeeD]

Another thought is you may hedge via an option from a service like AnyOption.com. It will likely be more expensive but then you won't have to top up the currency account if dollar appreciates.

 

[shortbleu]

Hi LeeD,
Would you know some good companies that convert GBP into USD at a good rate (less than 1% charge)?

Thanks

 

[LeeD]

Hi shortbleu,

I can't recommend one as better than others. I believe even Oanda does it.

Warning: some brokers wouldn't accept funds transferred via such companies.

From FXCM FAQ: "FXCM cannot accept funds sent through exchange houses. These types of financial institutions are considered high-risk for money laundering. Any funds received via this method will be returned upon receipt. "

 

[shortbleu]

Thanks LeeD,
I will have to transfer the funds in GBP from my UK high street bank and have them converted in USD by FXCM at a charge of 0.92% then since their micro accounts are only maintained in USD.

After say a year of trading with FXCM, if I want to open another account with a different forex broker, can I transfer my USD deposit from the FXCM micro account directly to another forex broker, or will I have to firstly transfer the funds back to my UK high street bank (get them converted back to GBP) and secondly re-send the funds to another broker and convert again in USD?