Why ‘Free Trading’ on Robinhood Isn’t Really Free

[cruisecontrol]

Buy 1 ES @ $2700.125... $135,006.25
Buy 500 SPY@ $270.01... $135,005.00

Isn't 0.25 the smallest tick on ES?
Buy 1 ES @ 2700.25... $135,012.50

But there is more slippage in the SPY...

1. The time it takes to execute... that's not just "exchange" time.. it's also the time it takes you to decide to make the play, enter the order on your platform, and get it off to the broker for execution. Of course the market may move in your favor during that time.

In the ES, you can "instantly reverse"... long to short, and vice-versa.. with one click of the mouse.

Why would ES take less time to execute or SPY not be able to instantly reverse?

2. Settlement. Once you sell, you can't do anything with that money until settlement. Of course you can/may use margin, but pay interest to the broker for doing so. Otherwise, you're locked out of the marketplace for 2 days. Of course you can play only a portion of your capital to have cleared funds for the next play while waiting for settlement. For comparison purposes I'm assuming you're committing ALL of your capital and don't have that option.

When you day trade stocks/ETFs on margin there is no interest payment. But now that you mention it, it's true that the futures likely have a significantly lower cost of carry than the ETF for long holding periods. Depending on your broker, it might take as little as one overnight hold to breakeven or come out ahead with the futures (wow)!

Besides, futures are 1256 contracts and get a bit of a favorable tax treatment... though that's not a slippage issue.

Interesting, I wasn't aware of that. That would be very important if you are based in the US.

The daily $$ handle on the ES is about 10x that of the SPY. I'm sure that if there were an overall advantage to the SPY, it would be the one with the bigger handle.

I think part of this a kind of network effect.. liquidity begets liquidity. For example why does SPY have 30x the volume of VOO even though VOO has lower fees. But the interest rate, tax treatment and larger minimum display size are probably big factors too.

 

[Scataphagos]

Isn't 0.25 the smallest tick on ES?
Buy 1 ES @ 2700.25... $135,012.50

Oops, yeah. Sorry.

 

[Scataphagos]

Why would ES take less time to execute or SPY not be able to instantly reverse?

I don't have "reverse position" in my trading app at brokerage house, do you? To go from a "long QQQ" to a "short QQQ".... could that be done instantly? You have to borrow shares to short. I don't know, just asking. Have never tried it.

 

[cruisecontrol]

I don't have "reverse position" in my trading app at brokerage house, do you? To go from a "long QQQ" to a "short QQQ".... could that be done instantly? You have to borrow shares to short. I don't know, just asking. Have never tried it.

I'm with IB and I use the API to trade so all I need to do to reverse is sell 2x the amount of shares I currently have. Whether it takes extra time for borrowing I do not know in practice, I don't do low latency stuff so have never tried to measure this.

In theory the time for borrowing is an implementation detail that depends entirely on the broker... index ETFs are never HTB (hard to borrow) so a good implementation will just pass the order through instantly and do the borrow after the fact or in parallel.

 

[Scataphagos]

I'm with IB and I use the API to trade so all I need to do to reverse is sell 2x the amount of shares I currently have. Whether it takes extra time for borrowing I do not know in practice, I don't do low latency stuff so have never tried to measure this.

In theory the time for borrowing is an implementation detail that depends entirely on the broker... index ETFs are never HTB (hard to borrow) so a good implementation will just pass the order through instantly and do the borrow after the fact or in parallel.

OK... that could technically be a moot point.

Then the reasons for the EX to handle 10x the $$ of the SPY on a daily basis must be "other".

 

[Altavest_Erik]

A big advantage in trading ES is these instruments are tax efficient. They are subject to U.S. Code Section 1256. All gains/losses are considered at 60% long term capital gains and 40% short term capital gains regardless of the holding period. If a $100k acct generates a 20% gain trading stocks, and assuming the highest tax bracket of 37%, the tax is...
$20k x .37 = $7,400 tax, for an IRR of 12.60%. With the ES, (.20 x $12,000) + (.37 x $8,000) = $5,360 tax and an IRR of 14.64%. The ES offers tax savings of $2,040.

 

[ajacobson]

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