Occasionally I hear from subscribers to the flagship publication of Mad Hedge Fund Trader, Global Trading Dispatch, that they can?t execute one of my market beating Trade Alerts because broker commissions will eat up a large chunk of their potential profits.
This is especially true with low dollar priced stocks, like Bank of America (BAC), involving large numbers of contracts.
When I ask how much they are paying in commissions, I am absolutely flabbergasted. Investors are being raped left, right, and center by excessive commissions, ticket charges, custodial expenses and exchange fees.
Brokerage management philosophy seems to be, ?if it moves or breathes, charge it.? Small individual investors are particularly abused.
You want to be paying for your own yacht, not your broker?s.
So, I decided to go shopping for a new online broker, assuming that I would be executing a typical volume of orders one might execute following the sometimes frenetic Trade Alerts of the Mad Hedge Fund Trader. That works out to about 20 trades a month in options, stocks, and ETFs at about 40 contracts per trade.
After speaking to a dozen different companies, I gained a pretty good read on the current state of the business.
This is a fantastically competitive industry. Firms are fighting tooth and nail to gain customer trade flows which they then sell to high frequency traders, where the real money is made.
If you are strictly passive and simply open an account on your own, the initial commissions will be very high. But lift up the phone, and suddenly everything is negotiable, and the world is your oyster.
Some will offer you 60 days of commission free trading to wrest your account away from the competition. Others will pay cash bonuses up to $2,000, depending on the size of your trading capital.
Services will vary all over the map, from bare bones discount services, to full service houses with massive research and analytical resources. Some companies charge premiums for speaking to live humans, while others don?t.
It is very important that their technical support be easily accessible to sort out the inevitable glitches and mistakes. Before taking any action, visit a potential broker?s website for a test-drive and see if it meets your needs.
Caution: none of these guys have any idea whatsoever what the market is going to do. That is my job.
Before sending that wire transfer, make sure that your new broker is FDIC insured for $250,000. Several houses went bust during the crash, and that government guarantee was worth its weight in gold.
If you have the financial sophistication, you might also ask for the broker?s financial statement. Small private firms won?t have these as they are privately owned.
When times get tough, keeping all your money in a financial institution that is ?too big to fail? is a good idea.
Here?s another warning: the people who work in this business are fantastically aggressive. Don?t give them your home phone number or they will pester you to death until you send them money. It?s almost as bad as talking to solar panel installers.
Remember also that opening a brokerage account these days requires gargantuan amounts of paperwork, thanks to vastly expanded regulation.
I?m sure they cause entire forests to needlessly fall under the axe. It is also one of the last industries, along with real estate, to still use the dinosaurian fax machine.
A further headache: many documents have to be notarized to make sure you are not a terrorist or a drug dealer laundering money.
I would also keep open a minimum of two accounts at different brokers at any one time. The lesson of MF Global is that you never want all your eggs in one basket. Everyone eventually got all their money back, but it took three years of litigation to get the last couple of bucks.
Once your account is open and has established a trade history, call your broker again. If your size or frequency of trading has increased, so has your negotiating leverage, and they will agree to better deals and bigger discounts.
Remember, it is the squeaky wheel that gets the grease.
I spoke to a dozen brokers and here is what I found. Commissions are expressed in terms of a ticket charge per options trade and a fixed commission per contract. A few cents in exchange fees get tacked on to every trade.
Interactive Brokers
Has been rated the number one firm for the last three years by the Barron?s annual survey of online brokers. They also have a large international following among my many readers abroad (we have customers in 135 countries).
They offered me a very competitive 50-cent a share commission, and ticket charges depending on whether I am adding to, or subtracting from, liquidity in the market. To learn more, go to their website: https://www.interactivebrokers.com/ind/en/main.php
OptionsHouse (formerly TradeMonster)
Founded by my friends, Jon and Pete Najarian, TradeMonster is a full service house with extensive analytical and educational resources. You can even find the Mad Hedge Fund Trader in there sometimes. They offered me a flat commission rate of 60 cents a share, no ticket charge, and a $600 cash back signing bonus.
TradeMonster merged with Options House, and the two firms have integrated customer lists, market data management, and services.
https://www.optionshouse.com/
Place Trade
A deep discount broker located in Raleigh, North Carolina would charge me a 75-cent commission and a $1.00 ticket charge, but these were soft numbers. I?m sure one more phone call would have dropped them by half.
http://www.us.placetrade.com/
TD Ameritrade
Their website offered a 60 cent commission, $600 in cash back and 60 days of free commissions. But when I called to learn more, I was left on hold for 20 minutes, so I gave up.
https://www.tdameritrade.com/home.page
TradeStation
This ubiquitous marketer offered me a $4.99 ticket charge and a 20 cent commission if I did more than 200 trades a month. Drop below this and it jumps up quite a lot.
http://www.tradestation.com/
OptionsXpress
This Charles Schwab subsidiary could do an $8.95 ticket charge and a 75-cent commission. It has recently invested a lot in mobile (smart phone) executive, one of the fastest growing parts of the market.
About a third of my readers now access my research through their phones, although how they read those tiny letters is beyond me.
http://www.optionsxpress.com/
TradeKing
Is giving customers a $4.95 ticket charge and a 65-cent commission. They have been growing through acquisition in recent years, picking up a number of other small online brokers.
https://www.tradeking.com/
Fidelity
Its website offers a $7.95 ticket charge and a mere 10 cent commission along with its Trade Armor service. Unfortunately, I couldn?t find out what this is because I was left on hold for 20 minutes. As you can probably tell by now, my patience with poor customer service is pretty low, so I hung up.
https://www.fidelity.com/
E*TRADE
This firm earned a perpetual place in the minds of San Francisco based traders when a disgruntled customer shot out one of their massive windows at their Market Street branch at the height of the financial crisis.
This firm seemed one of the most eager to get my business. They have a steep starter $9.95 ticket charge and a 75-cent commission. But that declines dramatically if I trade more than 150 times a month. They also offered me a generous $1,200 cash bonus to switch my account, and 60 days of commission free trading.
Tony, I?ll get back to you!
https://us.etrade.com/home
Merrill Edge
This old line wire house came close to going under during the crash, and was bought at the last minute by Bank of America (BAC) for a pittance, after no small amount of government pressure.
With a $6.95 ticket charge and a 75-cent commission, they are no bargain. But if you like a lot of hand holding, and want someone to take you out to play golf on your birthday, this is your place. And if you maintain cash balances of over $25,000 at (BAC) you get 100 free trades and a cash back bonus of $1,200. It?s all in the family.
https://www.merrilledge.com/
Scottrade
Another prolific advertiser, they came in at a $7 ticket charge and a $1.25 per contract commission. They will offer cash bonuses to move an account from $100 up to $2,000 for amounts over $1 million. They will also toss in another $100 to cover transfer fees.
Although they are an online broker, they boast a 500 branch national network that comes in handy when handling the extensive paperwork for a new account.
https://www.scottrade.com/
Charles Schwab
My first impression after looking at the Charles Schwab website was ?Charles, you?re getting really old!? Schwab has graced the box next to mine at the San Francisco Opera for the last 20 years.
It?s interesting to see how this firm has evolved over the last four decades. When it first arrived on the scene, it was a disruptive, iconoclastic discount broker that thumbed its nose at Wall Street.
Today, it is dripping with establishment pretention, and has moved up market, getting more expensive. Its main presence in the options market comes from its purchase of optionsXpress described above.
https://www.schwab.com/
To get more in-depth information on the many broker offerings out there, please read the Barron?s annual online broker rankings by clicking here at
http://online.barrons.com/articles/SB50001424053111904628504579433251867361162
