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Fidelity Cuts Commissions to $4.95


DooDiligence
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I'm no trader but every little bit counts.  Happy Fidelity customer.*

 

* Other than their annoying restrictions against trading unlisted stocks.

 

Do you mean you can't buy stocks that are trading in the OTC?

 

Fido does not allow you to buy OTC stocks with No Info and some other designations (Grey Info?).

You can buy OTC stocks with current financials.

Some OTC stocks may fluctuate between the two as/when they file financials with OTC markets (I guess).

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To me, I think this is net positive overall (slightly), but short term negative for sure in terms of IB's financials.

 

Lower brokerage revenues near term for competitors, lower growth in accounts for IB near term, but I think much less competition overseas by US comps, and less staying power of US comps in the US long term. 

 

They (US comps) should focus on their support and website and outsource to IB their trading / brokerage infrastructure.  After the cuts in commissions, I think they will begin thinking about this, at least the smaller guys.... win-win in the near term; long term IB scales and wins.

 

I think long term, this is an oligopoly market, so SCHW / Fido / IB are probably the ones to make it here.

 

I would suggest that this doesn't erode IB's "cost" advantage... this erodes IB's "price" advantage, which will surely slow their growth in the coming year.

 

Again, I'm not wringing my hands with greed, but I don't think this is a negative long term.  Fidelity's weighted average commission was already near $4.95... for even moderately large accounts, they negotiated down a long way from $7.95 already.  I do think it's indicative of a commoditizing market, and I think in commodity markets a few differentiators and low cost producers win. 

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Yes, like sleepy said, you can get free trades at Merrill Edge (and they'll give you money for transferring). If you have $100,000 there you get 100 a month. If you have the credit card too, you get 5.25% on gas, 3.5% on groceries/warehouse clubs and 1.75% back on everything else.

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Honestly, I've never understood the IB price advantage.

 

When opening my fund, I shopped prices.  Indeed, IB is the best and lowest price on a per share commission basis.  But I was used to individual accounts with a $7.95 trade at the time.  At any decent size, I don't think IB is cheaper.  For example, let's say I want to buy $50k of BAC.  BAC trades ~$25, so the IB commission is $10, which is clearly worse than fidelity, schwab, whatever.  I routinely have block trades in IB with commissions of $20-$60 dollars, which I would have never seen at fidelity.

 

So I guess IB has a pricing advantage if you are a tiny account and do a lot of trades?  I personally would rather have fidelity or schwab for an individual account, but I guess I do bigger trades than normal. 

 

For funds, it definitely has a pricing advantage, as you can't really use fidelity or schwab.

 

Addendum: I will say hands-down, IB is definitely better for options and margin.

 

 

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Race, you should use variable / tiered pricing at IB... cost is 30-40% less than you are quoting for their "fixed" pricing structure (rough number, on average).

 

I think execution improvements at IB honestly probably make my commission there zero.

 

If you do market order, I think the retail guys will do better, because internalizers will execute you more / faster cause they think you are dumb money, but I think with limits (adding liquidity) through IB with tiered commission structure you come out ahead no matter what.

 

I think for the vast majority of stocks, you can't execute >50-100k trades at a single execution price anyway, so unless you are trading only ultra liquid shares, I think your example(s) aren't really valid because SCHW / Fido would break those orders in two, or you are doing a market order and you have market impacts to measure.

 

As a side note, just traded (with tiered commission structure) $46k worth of BAC in a single trade yesterday.  Commission was $7.14. (EDIT: and this was a marketable limit order, taking liquidity... )

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Race, you should use variable / tiered pricing at IB... cost is 30-40% less than you are quoting for their "fixed" pricing structure (rough number, on average).

 

I think execution improvements at IB honestly probably make my commission there zero.

 

If you do market order, I think the retail guys will do better, because internalizers will execute you more / faster cause they think you are dumb money, but I think with limits (adding liquidity) through IB with tiered commission structure you come out ahead no matter what.

 

I think for the vast majority of stocks, you can't execute >50-100k trades at a single execution price anyway, so unless you are trading only ultra liquid shares, I think your example(s) aren't really valid because SCHW / Fido would break those orders in two, or you are doing a market order and you have market impacts to measure.

 

As a side note, just traded (with tiered commission structure) $46k worth of BAC in a single trade yesterday.  Commission was $7.14. (EDIT: and this was a marketable limit order, taking liquidity... )

 

Ok, it is certainly true that I was using fixed.  And it does appear that tiered is better across the board.  Why is fixed offered at all?  I'll see how much better it gets on future trades.

 

I would also buy that execution improvements could make the cost worthwhile, but that is hard to measure.

 

Still though, I've done larger trades on a single price with fidelity.  My fund partner makes trades bigger than our fund in his personal account on etrade, and I'm confident it is better pricing than we are getting at IB, at the fixed cost at least.  E.g., yesterday I sold Leucadia on IB and it cost me $63 dollars, and it occurred in less than a second--I'm sure it would have gone that fast in Fidelity too, for $5 apparently.  It is true that you can't change the price, but they will keep executing at the price for the rest of the day if need be, using the same commission. 

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Ok, it is certainly true that I was using fixed.  And it does appear that tiered is better across the board.  Why is fixed offered at all?  I'll see how much better it gets on future trades.

 

Some people appreciate determinism.  It's a bit off putting when you put in a large trade and IB reports your commission as "-$0.55 - $4.17" which is what they do.  Some folks would rather it just say "$3.75". 

 

I would also buy that execution improvements could make the cost worthwhile, but that is hard to measure.

 

Agree.  IB measures it and brokers do report this number (in aggregate).  IB is the only one who publicizes it though... for obvious reasons.

 

Still though, I've done larger trades on a single price with fidelity.  My fund partner makes trades bigger than our fund in his personal account on etrade, and I'm confident it is better pricing than we are getting at IB, at the fixed cost at least.  E.g., yesterday I sold Leucadia on IB and it cost me $63 dollars, and it occurred in less than a second--I'm sure it would have gone that fast in Fidelity too, for $5 apparently.  It is true that you can't change the price, but they will keep executing at the price for the rest of the day if need be, using the same commission.

 

I think you get better executions (weighted for price received, and execution success) for a $200k trade by not placing a single price limit for all $200k and instead breaking it into (even a simple) algo or time weighted trade.  it's probably not possible for us/me to prove one way or another to ourselves, but it is self evident to me, and while many would argue the different would be small, I think to make $50 make sense on a $200k trade, it doesn't take much.

 

Again, for large, liquid names, that you want to do a market order on, I think a fixed structure for pricing is superior in terms of commission and (likely) execution... but even in that case, I'm not 100% sure.  Machines aren't reducing order size for no reason, there is a market impact (I see markets move away from me on even moderately sized limits)... there is a lot of information content in a $200k non-hidden limit order, and I think you may have more market impact than you realize, esp. since fidelity just hands it to Citadel...

 

My 2 cent.  Every year, the same discussions end up going on re: IB vs. Fido, and the commentary is always the same... I think perhaps I should just write up a document that captures the pros / cons. :)

 

thanks for the thoughts, I hope the tiered commish saves you some $$$!

 

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Well, I'm convinced I'm at least going to save money on switching to tiered, so I got something out of all of this!  Do you get credit for providing liquidity on trades with this pricing too?  I've never really understood how that works other than hearing it exists (my trading sophistication is clearly showing--which is why I don't trade that often and just stick to analysis...)

 

I also do find it believable that algos could improve execution enough to take care of the commission, it is just hard to verify.  It's a bit of a non-issue anyway, as I really do not have any other choice than IB for the fund, and it seems fine.

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Market micro-structure is crazy complicated.  But yes, some situations, when providing liquidity you can get paid to trade at the exchange level.

 

I've read a few text books on this to understand market making and internalizers / HFTs a bit better... honestly, it's still pretty hard to grock, mostly because US market structure and regulations are idiotic.

 

Note some stocks are moving to $0.05 spreads on US exchanges (but of course some folks... cough ... Citadel... cough) can trade intra-spread.  I would actually not be surprised that this round of brokerage commission cuts is partially related to this "pilot" being extended to more shares, as it increases (or should) order flow payments to brokers.

 

Just a side note, but trading in these shares it notably more challenging and exposes some of the issues we addressed above....  It's crazy to think how backwards US markets have become when $0.05 spreads exist (for retail) on a $3.50 stock.

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Guest longinvestor

This fee cut is interesting. Most of my net worth is in Fidelity, so it is good that I will end up paying less. But I'm the atypical client of Fidelity; I haven't added them up but I've had less than 20 trades in the last 8 years. (Look to the left under my handle ;)). Somehow this plus the fact that my balances have grown appear to have gotten the attention of Fidelity. The frequency of tailored communications for me has increased over the past year. I want to be left alone, they would like me to be more active!

 

On this note, an interesting comment was made by Betty Quick during her interview with Buffett on Monday. She apparently has taken his advice and moved her own retirement money @ Fidelity into 100% low cost index funds. But she is getting all these warnings from Fidelity about not being so concentrated in equities, you should have a well balanced portfolio with bonds etc. 

 

Activity is the enemy of the investor but that is what feeds the mouths of market makers! Munger once mused on what the impact of all this would be on NYC real estate prices!

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Well, I'm convinced I'm at least going to save money on switching to tiered, so I got something out of all of this!  Do you get credit for providing liquidity on trades with this pricing too?  I've never really understood how that works other than hearing it exists (my trading sophistication is clearly showing--which is why I don't trade that often and just stick to analysis...)

 

I also do find it believable that algos could improve execution enough to take care of the commission, it is just hard to verify.  It's a bit of a non-issue anyway, as I really do not have any other choice than IB for the fund, and it seems fine.

 

Race,

Just curious, why don't you have any other choice than IB?

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Well, I'm convinced I'm at least going to save money on switching to tiered, so I got something out of all of this!  Do you get credit for providing liquidity on trades with this pricing too?  I've never really understood how that works other than hearing it exists (my trading sophistication is clearly showing--which is why I don't trade that often and just stick to analysis...)

 

I also do find it believable that algos could improve execution enough to take care of the commission, it is just hard to verify.  It's a bit of a non-issue anyway, as I really do not have any other choice than IB for the fund, and it seems fine.

 

Race,

Just curious, why don't you have any other choice than IB?

 

There really aren't many choices for small funds, and it is the cheapest of that small set.

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