Interactive Brokers (Best Kept Secret)

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Andymoler58
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Interactive Brokers (Best Kept Secret)

Post by Andymoler58 »

Is there a conspiracy against this company or do they just get outspent on advertising from the big brokerages like Scottrade etc?

If you like to invest in stocks, then this is an absolute no-brainer. The trades are usually $1 and the margin rates start at 1.6%. So you can start your own personal revolving credit line if you want to buy big ticket items.

The new brokerage model is amusing. They give you tons and tons of free research and information so that you can trade as much as possible so they can keep charging you $7 a trade. Those add up quickly. Then, they try to charge you 8% margin rates which is borderline loan sharking

Interactive Brokers offers all the Vanguard mutual funds and etf's you need too.

I just feel like this community needs to know about this secret. I don't work for them or anything. I guess they just don't advertise so people don't know about them.
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CABob
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Re: Interactive Brokers (Best Kept Secret)

Post by CABob »

Andymoler58 wrote: Interactive Brokers offers all the Vanguard mutual funds and etf's you need too.
What is the transaction fee for buying Vanguard funds?
I don't suspect a conspiracy or anything of that nature. It is not mentioned here often probably because those that post here are not interested in this type of broker.
Bob
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galeno
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Re: Interactive Brokers (Best Kept Secret)

Post by galeno »

Already a customer.
KISS & STC.
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Yesterdaysnews
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Re: Interactive Brokers (Best Kept Secret)

Post by Yesterdaysnews »

They have the best margin rates by far. If I ever make the leap to buying on margin I plan to switch. Sometimes I think it's better there is some barrier to me getting easy margin LOL.
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Andymoler58
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Re: Interactive Brokers (Best Kept Secret)

Post by Andymoler58 »

Yes, it really is a good deal even if you don't buy stock with the margin. If you go out on margin for big ticket items, cars etc, it works a lot better than having to sell positions and incur taxes. Eventually, the dividends will pay off the loan for you. And you get to write off the interest.
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asset_chaos
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Re: Interactive Brokers (Best Kept Secret)

Post by asset_chaos »

IB seems to be available over much of the world and seems plugged in to many stock exchanges all over the world (at least the developed world). I considered them for a trust I will manage in Australia. While my research into brokerages is not advanced, two questions have put me off IB. One is an inactivity fee: if you don't trade enough, they charge a monthly fee up to the equivilent of some number of trades. That fee may be waived for some level of assets, but I didn't investigate enough to ascertain. Two is I couldn't figure out how custody of the assets worked or in the case of a dispute who has jurisdiction. And that was because I couldn't figure out exactly where my account legally sat, Australia, Hong Kong, India, the UK all seemed possibilities. Again, not enough time or urgent need at the moment to figure it out or send off inquiries. IB prices were much better than even discount Australian brokerages, but since I was planning to trade as little as possible, a few extra dollars to set everything up didn't seem too onerous. My impression was that IB definitely seemed like a place for traders, not so much for buy and hold investors. Happy to be corrected and educated.
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The Planner
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Re: Interactive Brokers (Best Kept Secret)

Post by The Planner »

I'm buy-and-hold and I use Interactive Brokers to buy my ETFs. Extremely happy with the fees and level of service. Highly recommend them.
Spekus
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Re: Interactive Brokers (Best Kept Secret)

Post by Spekus »

I am small buy and hold investor so for me the deal breaker is 10 dollars inactivity fee or 120 dollars a year. Which would be more than expense fee I pay for my ETFs.
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in_reality
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Re: Interactive Brokers (Best Kept Secret)

Post by in_reality »

Do they offer brokered CDs?

I can't see any on their site.
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4nursebee
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Re: Interactive Brokers (Best Kept Secret)

Post by 4nursebee »

Doesn't Vanguard offer free trades based on asset base?

IB has plenty of detractors online, lacks handholding. But that Thomas Peterfy video last election was AWESOME
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Re: Interactive Brokers (Best Kept Secret)

Post by bondsr4me »

I have an account with them. They are very good when it comes to costs.
Their trading platform, Trader Workstation, is very good, very comprehensive.
You need to know what you are doing, because there is no hand holding.
normaldude
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Re: Interactive Brokers (Best Kept Secret)

Post by normaldude »

Andymoler58 wrote:If you like to invest in stocks, then this is an absolute no-brainer. The trades are usually $1
1) Commissions. There are good things about Interactive Brokers (currency exchange rates), but your above statement is wildly misleading, especially for transactions over 1,000 shares.

IB trade commission is 0.5c/share, $1 min, 0.5% max.

https://www.interactivebrokers.com/en/i ... &p=stocks1

So for a trade of 2,000 shares of a $20 stock, the stock trade commission would be..

- Interactive Brokers: $10 (2,000 x 0.5c/share)

- Schwab: $9 (free for Schwab ETFs)

- Fidelity: $8 (free for some iShares ETFs)

- Scottrade: $7

- Vanguard Voyager: $7 (free for Vanguard ETFs)

- Vanguard Voyager Select: $2 (free for Vanguard ETFs)

- Vanguard Flagship: 25 commission-free trades/yr, then $2 for subsequent trades. (free for Vanguard ETFs)

So for people with large accounts (Vanguard Flagship), or buy & hold investors who do 1-5 large ETF trades per year, Interactive Brokers is not the cheapest.


2) Minimum Activity Fees: Interactive Brokers has a $10/month minimum activity fee. Schwab, Fidelity, Scottrade, Vanguard do not. For buy & hold investors who only make a few trades a year, Interactive Brokers fees will add up.

https://www.interactivebrokers.com/en/index.php?f=4969


3) Customer Service: Interactive Brokers is notoriously weak in customer service. One time I called them, went through the voicemail menu, and then the phone just rang & rang. I didn't even get nice background muzak. After 5 minutes of annoying teeth-rattling phone ringing, I just hung up.
niceguy7376
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Re: Interactive Brokers (Best Kept Secret)

Post by niceguy7376 »

Based on the latest posting, look at sogotrade if you are into stock buying. You can buy a package of trades at $3.

I used sogotrade during my BB (Before BogleHead) days.

Now, I am in buy and hold VG or Fido funds.
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backpacker
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Re: Interactive Brokers (Best Kept Secret)

Post by backpacker »

normaldude wrote: Minimum Activity Fees: Interactive Brokers has a $10/month minimum activity fee.
The fee is waved for accounts over $100,000.
denovo
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Re: Interactive Brokers (Best Kept Secret)

Post by denovo »

Andymoler58 wrote: The trades are usually $1
Not true. They use a weird formula, if I traded $50,000 in a stock of VWO (Vanguard Emerging Markets) , the fee would be $60. TD Ameritrade and Vanguard offer a lot of index funds for FREE. So does Fidelity and I am sure others.


and the margin rates start at 1.6%. So you can start your own personal revolving credit line if you want to buy big ticket items.

No boglehead investing theory considers using margin for investing or for most consumer purchases.

I just feel like this community needs to know about this secret. I don't work for them or anything. I guess they just don't advertise so people don't know about them.

Not a secret. IB has been well-discussed and it's useless.
"Don't trust everything you read on the Internet"- Abraham Lincoln
Rob Bertram
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Re: Interactive Brokers (Best Kept Secret)

Post by Rob Bertram »

As others have said, Interactive Brokers has been mentioned here occasionally. It offers a lot of features for people who want to trade a wide variety of securities. For people who only invest in low-cost index funds, there are better brokers (like Vanguard, Fidelity, and Schwab).

Be careful. Interactive Brokers offers the cheapest margin rates of any brokers. Just because it's cheap doesn't mean that everyone should use it, however. Margin investing should be approached with caution and an understanding of the risks involved. In addition, margin rates aren't fixed but move with the fed funds rate, so it's not as safe or as nice as it looks. All things considered, there are times where a margin loan might be the optimal solution to pay for an unexpected expense.
livesoft
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Re: Interactive Brokers (Best Kept Secret)

Post by livesoft »

Since IB does not offer free trades, it turns out to be one of the expensive brokers. One should not pay any commissions to buy/sell stocks, ETFs, and mutual funds nowadays. Some no-commission brokers:
WellsTrade
Vanguard
Merrill Edge
Fidelity
TDAmeritrade

As for research, no one should pay for that as well. All research is free and easily obtainable on something called the Internet.

There are other criteria for a broker that are important, but so far I haven't seen them mentioned in this thread.
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core4portfolio
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Re: Interactive Brokers (Best Kept Secret)

Post by core4portfolio »

If you are trading less then try Sharebuilder.. this will be 5.95 per trade with costco membership or 6.95
No inactivity fees and they have some bonus offers going on.
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Re: Interactive Brokers (Best Kept Secret)

Post by ivyhedge »

I have used iB for years, and have nothing but great things to say: equity, forex, and futures.

Consider what interests you and what level of assets you plan to commit to the firm: that will determine your fee structure. The firm caters to individual investors all the way up to hedge funds; customer service exists, but do not expect hearts and roses.
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Re: Interactive Brokers (Best Kept Secret)

Post by aaaaaaabbbbbbbbbb »

normaldude wrote:1) Commissions. There are good things about Interactive Brokers (currency exchange rates), but your above statement is wildly misleading, especially for transactions over 1,000 shares.

IB trade commission is 0.5c/share, $1 min, 0.5% max.

https://www.interactivebrokers.com/en/i ... &p=stocks1

So for a trade of 2,000 shares of a $20 stock, the stock trade commission would be..

- Interactive Brokers: $10 (2,000 x 0.5c/share)

- Schwab: $9 (free for Schwab ETFs)

- Fidelity: $8 (free for some iShares ETFs)

- Scottrade: $7

- Vanguard Voyager: $7 (free for Vanguard ETFs)

- Vanguard Voyager Select: $2 (free for Vanguard ETFs)

- Vanguard Flagship: 25 commission-free trades/yr, then $2 for subsequent trades. (free for Vanguard ETFs)

So for people with large accounts (Vanguard Flagship), or buy & hold investors who do 1-5 large ETF trades per year, Interactive Brokers is not the cheapest.
IB is not the only one that charges cents for every share you trade. The other brokers advertise a fixed fee per trade, but in reality they also charge cents/share for very large trades. Except IB has better prices - $1 minimum for a trade as opposed to $7+ plus minimum at other brokerages, and 0.5 cents/share beyond a threshold as opposed to 1 cent/share at other brokerages. However, it is true that certain brokerages beat IB by offering completely free trades on certain securities.

----

Lots of posters seem concerned about the fact that IB does not have free trades. Since they charge 0.5 cents/share, and shares of ETFs are typically worth about $50, we're looking at what is effectively a load of 0.0001. So not really a concern, especially compared to the many benefits IB offers. (The effective load is higher if you're buying very small quantities, but still low).
Johno
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Re: Interactive Brokers (Best Kept Secret)

Post by Johno »

I've mentioned IB so often I've been afraid people think I'm paid to advertise for them. :D But, IB took a big step down for me recently when they banned options-on-futures trading in IRA. At the same time they increased margin on outright futures positions in IRA's by a factor of 3. Think or Swim only requires exchange minimum margin, so again less than a third as much. Actually I'm going to quit IB and go to Think or Swim for my IRA trading (more like hedging, usually) account, after many years. Unfortunately though nobody else allows futures options trading in IRA without requiring a high level of activity to make the fees work (Trade Station for example).

Now that their IRA futures trading policy stinks, IB's main advantage IMO is the margin rates and amounts in taxable accounts. I will keep most of my ETF's there in my taxable account. IB comprises a free source of cheap contingent liquidity. For me that would be for lending money to my little real estate entity when needed, not particularly for paying grocery bills if laid off. Beside the *much* lower rates than any other retail-oriented broker, IB will calculate allowed margin amount on a VAR basis which typically allows around 75% borrowing rather than rule based 50%. So, if you only borrow say 25 or 30%, that liquidity is pretty safe from a margin call in all but the most cataclysmic meltdowns.

On cash (non futures) commissions though, I've built up 100's of unused free trades at Vanguard. Vanguard's 'trading platform' if you can even call it that, is terrible. But you can use somebody else's (IB, ToS, etc) better platform to look at the market and still put the orders in on Vanguard. For example when I hedge with options on cash ETF's I do it on Vanguard for zero, not IB.
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Re: Interactive Brokers (Best Kept Secret)

Post by asset_chaos »

livesoft wrote:There are other criteria for a broker that are important, but so far I haven't seen them mentioned in this thread.
Heck, I'll bite. What are the important criteria for a good broker to have?
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Re: Interactive Brokers (Best Kept Secret)

Post by TradingPlaces »

normaldude wrote:
Andymoler58 wrote:If you like to invest in stocks, then this is an absolute no-brainer. The trades are usually $1
1) Commissions. There are good things about Interactive Brokers (currency exchange rates), but your above statement is wildly misleading, especially for transactions over 1,000 shares.

IB trade commission is 0.5c/share, $1 min, 0.5% max.

https://www.interactivebrokers.com/en/i ... &p=stocks1

So for a trade of 2,000 shares of a $20 stock, the stock trade commission would be..

- Interactive Brokers: $10 (2,000 x 0.5c/share)

- Schwab: $9 (free for Schwab ETFs)

- Fidelity: $8 (free for some iShares ETFs)

- Scottrade: $7

- Vanguard Voyager: $7 (free for Vanguard ETFs)

- Vanguard Voyager Select: $2 (free for Vanguard ETFs)

- Vanguard Flagship: 25 commission-free trades/yr, then $2 for subsequent trades. (free for Vanguard ETFs)

So for people with large accounts (Vanguard Flagship), or buy & hold investors who do 1-5 large ETF trades per year, Interactive Brokers is not the cheapest.


2) Minimum Activity Fees: Interactive Brokers has a $10/month minimum activity fee. Schwab, Fidelity, Scottrade, Vanguard do not. For buy & hold investors who only make a few trades a year, Interactive Brokers fees will add up.

https://www.interactivebrokers.com/en/index.php?f=4969


3) Customer Service: Interactive Brokers is notoriously weak in customer service. One time I called them, went through the voicemail menu, and then the phone just rang & rang. I didn't even get nice background muzak. After 5 minutes of annoying teeth-rattling phone ringing, I just hung up.
Bingo!

On top of this, you really need to know what you are doing.
livesoft
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Re: Interactive Brokers (Best Kept Secret)

Post by livesoft »

asset_chaos wrote:
livesoft wrote:There are other criteria for a broker that are important, but so far I haven't seen them mentioned in this thread.
Heck, I'll bite. What are the important criteria for a good broker to have?
See this thread:
viewtopic.php?p=2244856#p2244856

Also with all the complaints about incorrect and delayed 1099s, the great and timely 1099 criteria might need to move up a notch. I don't think I've ever seen 1099's mentioned in a review of brokers.
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Re: Interactive Brokers (Best Kept Secret)

Post by Johno »

livesoft wrote:
asset_chaos wrote:
livesoft wrote:There are other criteria for a broker that are important, but so far I haven't seen them mentioned in this thread.
Heck, I'll bite. What are the important criteria for a good broker to have?
See this thread:
viewtopic.php?p=2244856#p2244856

Also with all the complaints about incorrect and delayed 1099s, the great and timely 1099 criteria might need to move up a notch. I don't think I've ever seen 1099's mentioned in a review of brokers.
I don't disagree with any of the items in list on other thread, but two things:
1. Whether you're looking for *the* broker, or one broker among more than one. So for example my mutual funds (all but one of them Vanguard funds), the bulk of my stock/bond type assets, are at Vanguard. I don't need other brokers for Vanguard mutual funds. And I have lots of free trades built up at Vanguard which I generally use when trading among Vanguard's limited offering of products, but I don't trade those much.

2. The list includes all the things important to the person who wrote it (presumably) but not necessarily all the things important to any reasonable investor. There are good reasons for some investors to trade products other than cash stock/ETF. And the statement earlier in thread that 'BH investors would never consider margin' is with due respect presumptuous, since it's simply nonsense to say reasonable investors would never use margin (including as contingent liquidity, say instead of a HELOC etc) and thus the statement defines out of the 'BH investor' category reasonable investors, which is presumptuous. Again, IB is so far ahead of any other retail oriented broker on margin it's not funny. And that could be a decisive reason to have *some* marginable assets parked at IB.

IB isn't as far ahead on commission cost depending what the investor trades, how often and in what size, as has been correctly pointed out. But they aren't much behind anyone else in that regard either.

IB is also fine IME on stuff like tax reporting. Vanguard's is more extensive but it's often wrong on basis/cg's (not their 'fault' necessarily, usually caused by imperfect information they have about my previous buy/sells before they started tracking basis info in detail, even though the stuff has always been at Vang, but anyway I have all the relevant info in my own spreadsheet, I'm confident it's correct, and I have it for taxable stuff that's now held at IB as well).

Again though IB is a lot less good than it was for me since they eliminated options-on-futures as available product in IRA's, plus greatly raising outright futures margin requirements. I'm going to dump IB for IRA, though keep them as home for most of my ETF's in taxable for the contingent borrowing ability at low rate. I also keep some taxable ETF's at Vang, the most appreciated ones I use for charitable donations, which you can't do at all thru IB AFAIK, though no problem doing it thru Vang without 'walk in office'. I've never talked to a representative of a retail broker (of mine) face to face, ever, in 30+ yrs of investing. :D
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Re: Interactive Brokers (Best Kept Secret)

Post by livesoft »

^So the only advantage that IB has over other brokers is better margin rates. Is that a summary of this thread?
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Re: Interactive Brokers (Best Kept Secret)

Post by Taylor Larimore »

Is there a conspiracy against this company or do they just get outspent on advertising from the big brokerages like Scottrade etc?
CABob gave a good first reply:
I don't suspect a conspiracy or anything of that nature. It is not mentioned here often probably because those that post here are not interested in this type of broker.
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3 Never bear too much or too little risk
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6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
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CABob
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Re: Interactive Brokers (Best Kept Secret)

Post by CABob »

Taylor Larimore wrote:
Is there a conspiracy against this company or do they just get outspent on advertising from the big brokerages like Scottrade etc?
CABob gave a good first reply:
I don't suspect a conspiracy or anything of that nature. It is not mentioned here often probably because those that post here are not interested in this type of broker.
And as it turns out there are a number of posters that like IB or at least see value in their structure.
OTOH it is very far from a no-brainer that all should use them.
Bob
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Re: Interactive Brokers (Best Kept Secret)

Post by Rob Bertram »

livesoft wrote:^So the only advantage that IB has over other brokers is better margin rates. Is that a summary of this thread?
You can also trade a wider variety of securities. For example, you can buy futures in an IRA account. I believe only IB and ThinkOrSwim (TD Ameritrade) allow that right now.

You don't necessarily need to have a leveraged portfolio to get a slightly better return on your investment by using futures. For example, an e-mini S&P 500 future contract is worth about $105k right now with about 0.5% implied financing. Instead of holding onto $105k worth of SPY, you could put $50k into a 5-year CD yielding 2.25%, buy one e-mini contract, and keep the rest in cash to meet price changes.

edit: The bonus return for this would be about 2.25%*50k - 0.5% *105k = 1125 - 525 = 600 per 105k or 0.57% risk free.
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Re: Interactive Brokers (Best Kept Secret)

Post by Johno »

livesoft wrote:^So the only advantage that IB has over other brokers is better margin rates. Is that a summary of this thread?
It is now the only thing in which IB is way ahead of the pack, margin policies in taxable. As Rob mentioned, IB's variety of product is far ahead of other retail-oriented brokers except ToS, and as of recently IB raised futures margin requirements in IRA's way above those at ToS. Otherwise assuming the product range is just mutual funds and ETF's, IB's commissions are very competitive and their platform excellent. In those respects they aren't better than *any* other broker, nor is anyone else much better than they are.

But seems your implicit approach is who is the best *single* broker for all around service to investors with low interest or familiarity in products beyond mutual funds and ETF's and who may need some hand holding. That's not IB.
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Re: Interactive Brokers (Best Kept Secret)

Post by galeno »

The main reason we are with IB is because it gives USA-NRAs w/o a tax treaty cheap and safe access to Ireland domiciled Vanguard and Ishares ETFs. Using them reduces our portfolio costs by 50% (0.36%).

The main disadvantage is it's a USA domiciled broker. If and when a non-USA broker available to us stops acting like the old full service brokers regarding portfolio costs, we will switch.
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Re: Interactive Brokers (Best Kept Secret)

Post by The Planner »

galeno wrote:The main reason we are with IB is because it gives USA-NRAs w/o a tax treaty cheap and safe access to Ireland domiciled Vanguard and Ishares ETFs. Using them reduces our portfolio costs by 50% (0.36%).

The main disadvantage is it's a USA domiciled broker. If and when a non-USA broker available to us stops acting like the old full service brokers regarding portfolio costs, we will switch.
This. For index investors outside the US (i.e. most of the world), brokers like Saxo Capital Markets charge commissions that are 400% more expensive than IB; lack the currency flexibility; and lack the wide range of Ireland-domiciled ETFs (like VUSD) available on IB. IB is miles cheaper than any of the alternatives that European expats like me could also use. My account is over 100k USD, so I don't pay the inactivity fee.
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Re: Interactive Brokers (Best Kept Secret)

Post by Kevin M »

Back when I was using IB (2007-2010), there was a $10 minimum trading fee and $10 exchange fee, so $20 minimum per month. At the time, it was by far much cheaper to do the options trading I was doing (hedging employee stock options by selling calls) than at Fidelity or Vanguard, so it was worth it, but unless fairly active, no way. After done with the options trading, I transferred all of my IB holdings to a WellsTrade account at Wells Fargo for 100 free trades per year, and still have that account.

For most Bogleheads, IB is not an attractive option (no pun intended).

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Re: Interactive Brokers (Best Kept Secret)

Post by Day9 »

They still have the minimum $10/mo in monthly commission fee (if you don't pay at least this much in commissions you are charged the difference each month)

Do they still have that $10/mo exchange fee?

For example this page says "IBIS Research Platform - Standard fee - Free" but then goes on to list monthly fees for other research bundles.

https://www.interactivebrokers.com/en/i ... ata&p=info

If anyone who uses IB could please chime in with what monthly fees they end up paying I'd appreciate it.
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Rob Bertram
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Re: Interactive Brokers (Best Kept Secret)

Post by Rob Bertram »

I picked all the free research and market data and declined the others.

When I was below $100k, the only fee I was charged was the minimum activity of $10 of trade commissions a month. For a month where I only did $2 in trades, I was charged $8 to make up the difference. That's it.
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

I had about 50 trades last year in my Interactive Brokers account with average trade size ~60. My total commission for the year was less than $60. I would have been charged $400 - $500 in commission if I used other major brokerage firms (TDA, ETrade, Schawb, etc), for my trading last year. That’s a heck of saving thanks to IB.

A 100 share limit order trade using IB’s cost plus commission structure only cost me 35 cents. Sometimes even less than 35 cents due to exchange rebates. I don’t know about any other brokerage firm that will funnel back rebate from exchange back to customers.

Also when I had to put a down payment for a new car last year, I borrowed $20K in margin from my IB account. A month later, I deposited funds to eliminate the negative cash. It is nice to have instant liquidity with low interest rates for whatever need arises.

I think major advantages of IB besides its low commission and margin interest rates are:

Price improvement higher than industry average.

No selling of order flow. Results in IB orders getting better pricing than NBBO more often. Most other brokers sell their order flow for $$ and perfectly satisfied with getting NBBO for client orders.

Transparent pricing structure under cost plus commission where IB will pay back clients rebates it receive from exchange for orders adding liquidity (Limit orders). Most other brokers will pocket these rebates for themselves.

Financial strength. IB’s excess regulatory capital excess of the requirement is 2 billion equity. By comparison TD’s excess capital is 1.3 billion and Etrade’s excess was 625 million. Note that both TD and Etrade hold much greater client asset base than IB.

Widest selections of US and International exchange traded products and currencies

That being said IB’s cons are: inactivity fee on accounts below 100K and market data fees for people needing real time market data.

Overall,for BH’s with >$100K for brokerage investment and don’t care about viewing real-time prices, IB is a solid option.
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Re: Interactive Brokers (Best Kept Secret)

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (brokerage).
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Re: Interactive Brokers (Best Kept Secret)

Post by indexfundfan »

saver007 wrote:Also when I had to put a down payment for a new car last year, I borrowed $20K in margin from my IB account. A month later, I deposited funds to eliminate the negative cash. It is nice to have instant liquidity with low interest rates for whatever need arises.
Although I have moved my ETF/stock trading to free platforms (VBS for Vanguard ETFs and Merrill Edge for everything else), I still keep an account at IB as one liquidity source if ever I need cash quickly. My balance is high enough to waive the monthly fee and to qualify for portfolio margin, so any required maintenance margin is very low (~10% in my case).

FWIW, IB also gives you have one free wire transfer out a month, so the money can hit your bank on the same day if you submit the request early enough.
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livesoft
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Re: Interactive Brokers (Best Kept Secret)

Post by livesoft »

@saver007, thanks for the information, that was quite a nice write-up, but ...
saver007 wrote:[…]
Overall,for BH’s with >$100K for brokerage investment and don’t care about viewing real-time prices, IB is a solid option.
… are you saying that IB does not provide real-time prices? I guess if that is true, they do not provide real-time level II quotes!?
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Re: Interactive Brokers (Best Kept Secret)

Post by Waba »

I just opened an account with IB to benefit from their lower commissions on option trades.(And better fills, pretty please?)

I wouldn't recommend them to anyone who follows the Boglehead way of investing.
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Re: Interactive Brokers (Best Kept Secret)

Post by Waba »

livesoft wrote:@saver007, thanks for the information, that was quite a nice write-up, but ...
saver007 wrote:[…]
Overall,for BH’s with >$100K for brokerage investment and don’t care about viewing real-time prices, IB is a solid option.
… are you saying that IB does not provide real-time prices? I guess if that is true, they do not provide real-time level II quotes!?
They do provide it for an additional monthly fee. You should spend a few hours reading their pricing page :D
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

livesoft wrote:@saver007, thanks for the information, that was quite a nice write-up, but ...
saver007 wrote:[…]
Overall,for BH’s with >$100K for brokerage investment and don’t care about viewing real-time prices, IB is a solid option.
… are you saying that IB does not provide real-time prices? I guess if that is true, they do not provide real-time level II quotes!?
For realtime market data feeds, IB pass through exchanges's market data fees to clients. I think its about $1.50 each for for NYSE,AMEX,NASDAQ Level 1 feeds or a bundled fee of $10. Unless you are a trader, you dont need a real time feeds. Yahoo Finance have realtime market data.. I dont subscribe realtime data for my IB account as the cost doesnt worth it for me and i am not a trader.
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Re: Interactive Brokers (Best Kept Secret)

Post by livesoft »

Waba wrote:They do provide it for an additional monthly fee. You should spend a few hours reading their pricing page :D
I did look at their pricing page. :)

Since I get free trades at WellsTrade and free real-time level II quotes at TDAmeritrade and WellsTrade does a great job on price improvement, I don't think IB will be helpful to me at all although it does better than WellsTrade on amount of price improvement in the NerdWallet study linked below, but WellsTrade provided almost 9 times the percent of trades with price improvement (88% versus 10% for IB).

Here is a NerdWallet analysis of price improvement where WellsTrade did well: http://www.nerdwallet.com/blog/investin ... n-quality/ though it is probably not up to date anymore.
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Re: Interactive Brokers (Best Kept Secret)

Post by comeinvest »

Rob Bertram wrote:
livesoft wrote:^So the only advantage that IB has over other brokers is better margin rates. Is that a summary of this thread?
You can also trade a wider variety of securities. For example, you can buy futures in an IRA account. I believe only IB and ThinkOrSwim (TD Ameritrade) allow that right now.

You don't necessarily need to have a leveraged portfolio to get a slightly better return on your investment by using futures. For example, an e-mini S&P 500 future contract is worth about $105k right now with about 0.5% implied financing. Instead of holding onto $105k worth of SPY, you could put $50k into a 5-year CD yielding 2.25%, buy one e-mini contract, and keep the rest in cash to meet price changes.

edit: The bonus return for this would be about 2.25%*50k - 0.5% *105k = 1125 - 525 = 600 per 105k or 0.57% risk free.
I believe your argumentation ("you don't necessarily need to have a leveraged portfolio... to get better return") is flawed. In essence, what you are doing is an incarnation of some sort of risk parity type portfolio (leveraged equity+bonds). Contrary to bonds, your 5-year CD is not listed and hence gives the illusion that it's value does not fluctuate. In essence though, it's inner value fluctuates and will drop in response to rising interest rates. On the other hand, the implied financing rate on our e-mini may change to any rate during the course of the numerous contract rollovers that you have to do during the 5 years. In particular, it may well become higher than your 2.25% CD rate. You are essentially trying to capture the duration premium of long-term vs. short-term risk free rates, with a leveraged play on 5-year bonds. This premium has been very small historically, and certainly carries risk. On another note, the actual carry cost of your leveraged S&P 500 position is not only the implied financing rate built into the contract, but you have to add the spreads and commissions of the rollovers, as well as the opportunity cost of the performance bond that earns no interest.
Having all that said, I'm not saying your strategy is bad, and in fact it will probably slightly outperform an index investment in the long run. This doesn't change the fact that it is essentially a leveraged equity+bond investment with various indirect friction costs. For larger portfolios, the actual "effective" financing cost of this strategy may be higher than simply using the broker's margin (IB) for leverage, due to the transaction and hidden cost of this strategy.
Regardless how you slice and dice it, there is no free lunch that can ever be generated out of thin air just by using increasingly complex instruments.
Last edited by comeinvest on Thu May 14, 2015 12:58 am, edited 5 times in total.
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Re: Interactive Brokers (Best Kept Secret)

Post by freebeer »

Andymoler58 wrote:Is there a conspiracy against this company ...
If you like to invest in stocks, then this is an absolute no-brainer. ...I just feel like this community needs to know about this secret...
Uh, this community generally doesn't like to speculate on individual stocks since that is contrary to Bogleheads principles. So, why exactly do we "need to know"?
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Re: Interactive Brokers (Best Kept Secret)

Post by Johno »

comeinvest wrote:
Rob Bertram wrote:
livesoft wrote:^So the only advantage that IB has over other brokers is better margin rates. Is that a summary of this thread?
You can also trade a wider variety of securities. For example, you can buy futures in an IRA account. I believe only IB and ThinkOrSwim (TD Ameritrade) allow that right now.

You don't necessarily need to have a leveraged portfolio to get a slightly better return on your investment by using futures. For example, an e-mini S&P 500 future contract is worth about $105k right now with about 0.5% implied financing. Instead of holding onto $105k worth of SPY, you could put $50k into a 5-year CD yielding 2.25%, buy one e-mini contract, and keep the rest in cash to meet price changes.

edit: The bonus return for this would be about 2.25%*50k - 0.5% *105k = 1125 - 525 = 600 per 105k or 0.57% risk free.
I believe your argumentation ("you don't necessarily need to have a leveraged portfolio... to get better return") is flawed. In essence, what you are doing is an incarnation of some sort of risk parity type portfolio (leveraged equity+bonds). ...the implied financing rate on our e-mini may change to any rate during the course of the numerous contract rollovers that you have to do during the 5 years. In particular, it may well become higher than your 2.25% CD rate. ... For larger portfolios, the actual "effective" financing cost of this strategy may be higher than simply using the broker's margin (IB) for leverage, due to the transaction and hidden cost of this strategy.
Regardless how you slice and dice it, there is no free lunch that can ever be generated out of thin air just by using increasingly complex instruments.
The idea given by Rob is a 'risk parity' variation of the basic arbitrage in e-mini implied financing rate and FDIC insured deposit rates but there is a free lunch element in it. Which is, that the e-mini implied financing rate is based on institutional market players arbitraging the futures v cash stock positions if their financing rate on cash stock positions, collateralized by the stock, is higher or lower than the futures implied financing rate. But the best rates at which individuals, and not institutions, can deposit money more or less credit risk free (FDIC insured) is strictly higher than the e-mini implied financing rate. Even for cash, the best FDIC insured savings account rates are 1.05%. Even if you must keep 25% of the cash in the futures account to cover a one day move (5% exchange min maintenance margin plus 20% daily price movement limit on e-mini, after which trading stops and you have till next day to replenish margin from bank account) and earn zero on it, 75% of 1.05% is still more than 100% of 0.5%. The instruments aren't being used to 'generate' this discrepancy, just to take advantage of it.

But the natural extension is to boost this margin by taking some duration risk on cash not used for margin. That might include putting the 20% in fixed income ETF's with some duration or credit risk (and sell orders triggered by a drop in the e-mini) or the idea Rob mentions. Yes there is added risk but still an underlying arbitrage element: that FDIC deposit rates (money market or CD) are high compared to the rates at which market clearing players can finance stock positions collateralized by the stock.

And this arbitrage can be relatively larger for other asset classes. For example for treasury futures the implied financing rate tends to be lower, more like the repo rate, plus the chance of multi-10% price moves is lower than for stocks, and the expected return to begin with is lower. So FDIC money market account plus treasury futures beats investing in treasuries directly by a very significant margin relative to the expected return for such an investment. A best yielding 5yr direct CD might still be best, especially since it's puttable (break option, which is attractively priced assuming the bank makes good on allowing the withdrawal) but for max liquidity, treasury futures plus cash in the bank (at best available FDIC insured rates) currently beats the stuffing out of investing cash in treasuries.

Transactions costs are pretty low. For e-mini say, 4 quarterly rolls, 8 trades, $50 per tick, .25 tick bid-offer, .125 bid-mid, ~$2 commission, so 8*(.125*50+2)/105k~6.2 bps if you get done on bid when selling and offer when buying, not counting broker minimum fees, effect of which depends on your scale. $2.02 commission is IB, ToS is $3+ IIRC. It's also feasible to get done on the right side of one trade in a roll and wrong side on the other, ie no net bid offer cost, by taking a bit of risk of doing worse. It is a labor input though, no matter.

Hence, it can be important that a broker offer futures trading on attractive terms. Again, IB has recently changed policy on this as it relates to IRA's and instituted punitive margin requirements, 3+ times exchange requirement. Think or Swim still requires only exchange minimum. The drag of IB's far higher margin requirement more than offsets their slight advantage in commission. Again speaking of IRA, and in general the comparisons given are affected by tax where it applies.
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Re: Interactive Brokers (Best Kept Secret)

Post by TravelerMSY »

Only one thing to add about IB that hasn't been mentioned. You get the rebate for adding liquidity if you're on the unbundled commission plan. Of course, you pay it when you remove.
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Re: Interactive Brokers (Best Kept Secret)

Post by comeinvest »

Johno wrote:
comeinvest wrote:
Rob Bertram wrote:
livesoft wrote:^So the only advantage that IB has over other brokers is better margin rates. Is that a summary of this thread?
You can also trade a wider variety of securities. For example, you can buy futures in an IRA account. I believe only IB and ThinkOrSwim (TD Ameritrade) allow that right now.

You don't necessarily need to have a leveraged portfolio to get a slightly better return on your investment by using futures. For example, an e-mini S&P 500 future contract is worth about $105k right now with about 0.5% implied financing. Instead of holding onto $105k worth of SPY, you could put $50k into a 5-year CD yielding 2.25%, buy one e-mini contract, and keep the rest in cash to meet price changes.

edit: The bonus return for this would be about 2.25%*50k - 0.5% *105k = 1125 - 525 = 600 per 105k or 0.57% risk free.
I believe your argumentation ("you don't necessarily need to have a leveraged portfolio... to get better return") is flawed. In essence, what you are doing is an incarnation of some sort of risk parity type portfolio (leveraged equity+bonds). ...the implied financing rate on our e-mini may change to any rate during the course of the numerous contract rollovers that you have to do during the 5 years. In particular, it may well become higher than your 2.25% CD rate. ... For larger portfolios, the actual "effective" financing cost of this strategy may be higher than simply using the broker's margin (IB) for leverage, due to the transaction and hidden cost of this strategy.
Regardless how you slice and dice it, there is no free lunch that can ever be generated out of thin air just by using increasingly complex instruments.
The idea given by Rob is a 'risk parity' variation of the basic arbitrage in e-mini implied financing rate and FDIC insured deposit rates but there is a free lunch element in it. Which is, that the e-mini implied financing rate is based on institutional market players arbitraging the futures v cash stock positions if their financing rate on cash stock positions, collateralized by the stock, is higher or lower than the futures implied financing rate. But the best rates at which individuals, and not institutions, can deposit money more or less credit risk free (FDIC insured) is strictly higher than the e-mini implied financing rate. Even for cash, the best FDIC insured savings account rates are 1.05%. Even if you must keep 25% of the cash in the futures account to cover a one day move (5% exchange min maintenance margin plus 20% daily price movement limit on e-mini, after which trading stops and you have till next day to replenish margin from bank account) and earn zero on it, 75% of 1.05% is still more than 100% of 0.5%. The instruments aren't being used to 'generate' this discrepancy, just to take advantage of it.

But the natural extension is to boost this margin by taking some duration risk on cash not used for margin. That might include putting the 20% in fixed income ETF's with some duration or credit risk (and sell orders triggered by a drop in the e-mini) or the idea Rob mentions. Yes there is added risk but still an underlying arbitrage element: that FDIC deposit rates (money market or CD) are high compared to the rates at which market clearing players can finance stock positions collateralized by the stock.

And this arbitrage can be relatively larger for other asset classes. For example for treasury futures the implied financing rate tends to be lower, more like the repo rate, plus the chance of multi-10% price moves is lower than for stocks, and the expected return to begin with is lower. So FDIC money market account plus treasury futures beats investing in treasuries directly by a very significant margin relative to the expected return for such an investment. A best yielding 5yr direct CD might still be best, especially since it's puttable (break option, which is attractively priced assuming the bank makes good on allowing the withdrawal) but for max liquidity, treasury futures plus cash in the bank (at best available FDIC insured rates) currently beats the stuffing out of investing cash in treasuries.

Transactions costs are pretty low. For e-mini say, 4 quarterly rolls, 8 trades, $50 per tick, .25 tick bid-offer, .125 bid-mid, ~$2 commission, so 8*(.125*50+2)/105k~6.2 bps if you get done on bid when selling and offer when buying, not counting broker minimum fees, effect of which depends on your scale. $2.02 commission is IB, ToS is $3+ IIRC. It's also feasible to get done on the right side of one trade in a roll and wrong side on the other, ie no net bid offer cost, by taking a bit of risk of doing worse. It is a labor input though, no matter.

Hence, it can be important that a broker offer futures trading on attractive terms. Again, IB has recently changed policy on this as it relates to IRA's and instituted punitive margin requirements, 3+ times exchange requirement. Think or Swim still requires only exchange minimum. The drag of IB's far higher margin requirement more than offsets their slight advantage in commission. Again speaking of IRA, and in general the comparisons given are affected by tax where it applies.
Thanks Johno for elaborating on a few things. From a theoretical no-arbitrage viewpoint, I'm not understanding how banks can offer risk-free rates via CDs higher than treasury rates of the same duration. I assume there are some cross-selling opportunities of higher margin banking products involved. If that is the case, there may be a small risk-free arbitrage element to Rob's strategy, together with some illiquidity premium from the CDs and duration risk premium. The latter two are no free lunches, and many alternative "nearly" risk free slightly leveraged portfolios could be constructed to slightly enhance returns. You could e.g. go with 110% equity or whatever, with unlikely but hard to quantify tail risk. For me personally, I currently have zero allocation to government bonds and risk-free fixed income in my portfolio in the first place, as I concur with the idea that the fixed income market with largely negative expected real returns is currently skewed / manipulated and not suitable to fulfill its traditional role in risk management and complementing equity allocations. Therefore, unfortunately I cannot take advantage of this slight arbitrage element to the spread between CDs and implied futures financing rates, let alone leveraging treasuries by using treasury futures (a horrible idea to me). But that's a whole different story and has been discussed elsewhere in this forum.
Last edited by comeinvest on Thu May 14, 2015 2:11 pm, edited 1 time in total.
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Re: Interactive Brokers (Best Kept Secret)

Post by lack_ey »

comeinvest wrote:[...] From a theoretical no-arbitrage viewpoint, I'm not understanding how banks can offer risk-free rates via CDs higher than treasury rates of the same duration. I assume there are some cross-selling opportunities of higher margin banking products involved. [...]
Dunno, FDIC insurance is like a federal subsidy for retail investors and their piddling sub-$250,000 accounts to keep confidence in the banking system. Banks want capital so they can turn around and make more money with it; the ones with enough margins or desperate enough can offer higher CD rates, which the government guarantees along with all the other ones at other banks at lower rates. The better rates seemingly always seem to be nontrivially higher than equivalent-duration Treasuries.

Better yet are the put options on those direct bank CDs, paying something like a 1% penalty to get out of what's essentially a 5-year bond whenever you want even if the market value would be much lower because interest rates shot up (unless they're mean about it and change the conditions on you, which hasn't yet been much an issue in practice, though we haven't really seen sharply rising rates yet in the modern era with these online banks and such). Better yields and better options than Treasuries!

It's just mooching off of the gravy train. I mean that in a positive sense. :P

That goes for just holding CDs instead of Treasuries. Adding Treasuries futures for leverage on top of that is a different matter and more complicated.
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Re: Interactive Brokers (Best Kept Secret)

Post by comeinvest »

lack_ey wrote:
comeinvest wrote:[...] From a theoretical no-arbitrage viewpoint, I'm not understanding how banks can offer risk-free rates via CDs higher than treasury rates of the same duration. I assume there are some cross-selling opportunities of higher margin banking products involved. [...]
Dunno, FDIC insurance is like a federal subsidy for retail investors and their piddling sub-$250,000 accounts to keep confidence in the banking system. Banks want capital so they can turn around and make more money with it; the ones with enough margins or desperate enough can offer higher CD rates, which the government guarantees along with all the other ones at other banks at lower rates. The better rates seemingly always seem to be nontrivially higher than equivalent-duration Treasuries.

Better yet are the put options on those direct bank CDs, paying something like a 1% penalty to get out of what's essentially a 5-year bond whenever you want even if the market value would be much lower because interest rates shot up (unless they're mean about it and change the conditions on you, which hasn't yet been much an issue in practice, though we haven't really seen sharply rising rates yet in the modern era with these online banks and such). Better yields and better options than Treasuries!

It's just mooching off of the gravy train. I mean that in a positive sense. :P
But you have to fill out forms and applications, open accounts... monitor CD expiration dates... cancel auto-renewal provisions... set up linked accounts to transfer the interest... or do you use broker CDs? Isn't it easier to put the money e.g. in municipal bonds (fund) or a medium duration investment grade index fund, wouldn't the return be higher including interest rate curve rolldown returns, and you have everything in your portfolio with one broker, no monitoring and administration headaches? Yes I know even short and medium term AAA municipal bonds theoretically have credit risk - but in reality? Another option would be to use longer term bonds to complement your equity position - higher rates than CDs, and better combined risk/return characteristics of the equity/bond portfolio.
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