Interactive Brokers (Best Kept Secret)

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comeinvest
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Re: Interactive Brokers (Best Kept Secret)

Post by comeinvest »

Johno wrote: 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.
Johno, can you explain how you quantify the "drag" of higher margin requirements? Wouldn't the higher margin requirements only affect portfolio returns if your desired leverage is higher than the requirements? Even with 3 times exchange requirements for example on the ES future, quite significant leverage could still be achieved, right?
denovo
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Re: Interactive Brokers (Best Kept Secret)

Post by denovo »

This is one of the threads where I read where I start to think people are paid to come on this forum and promote certain products. :x
"Don't trust everything you read on the Internet"- Abraham Lincoln
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dnaumov
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Re: Interactive Brokers (Best Kept Secret)

Post by dnaumov »

IB is a phenomenal broker, especially if you happen to live outside the US. I live in Finland and have an account with the german branch of Lynx, which is owned by IB. If I compare the single cheapest local finnish discount broker against IB/Lynx, Lynx offers trade commissions and margin rates at 1/3 the level of the cheapest local broker. This, while offering access to double the amount of various stock exchanges all over the world.
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Taylor Larimore
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Complexity vs. Simplicity

Post by Taylor Larimore »

Bogleheads:

My head is spinning:
Margin requirements; futures trading; leverage; cross-selling; put options; auto-renewal provisions; interest rate curve; rolldown returns; hidden costs; arbitraging the futures; market clearing players; puttable break option; 4 quarterly rolls, 8 trades, $50 per tick, .25 tick bid-offer; illiquidity premium; exchange requirements; tail-risk; duration risk; unbundled commission plan; repo rate; net bid offer cost; e-mini contract; inner value fluctuates; real time feeds; option trades; better fills; limit order trade; basis/cg's; inactivity fee; regulatory capital excess
What experts say:

Jack Bogle:
Simplicity is the master key to financial success.
Laura Dogu, co-author of "The Bogleheads' Guide to Retirement Planning":
A simple portfolio is actually the ultimate in sophistication. It almost always lowers cost (including taxes), makes analysis easier, simplifies rebalancing, simplifies tax-preparation, reduces paper-work and record-keeping, and enables caregivers and heirs to easily take-over the portfolio when necessary. Best of all, a simple portfolio allows the investor to spend more time with family and friends."
David Swensen, Yale Chief Investment Officer:
"As a general rule of thumb, the more complexity that exists in a Wall Street creation, the faster and farther investors should run."
Warren Buffett:
"There seems to be some perverse human characteristic that likes to make easy things difficult."
MORE

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Johno
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Re: Interactive Brokers (Best Kept Secret)

Post by Johno »

comeinvest wrote:
Johno wrote: 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.
Johno, can you explain how you quantify the "drag" of higher margin requirements? Wouldn't the higher margin requirements only affect portfolio returns if your desired leverage is higher than the requirements? Even with 3 times exchange requirements for example on the ES future, quite significant leverage could still be achieved, right?
In this case though the goal isn't to have any net leverage. Assume the investor has X times ~$106k in cash to invest and can either invest it in X times 500 shares of the SPY S&P* ETF or go long X number of e-mini contracts*. In the latter case most of the cash is still available to invest elsewhere.

In the basic bank account version, there would be three categories of cash:
-in the bank account earning up to 1.05%, basically 'risklessly'
-on the brokerage side of the account with say IB or ToS as reserve against the maximum daily margin call of 20%, but otherwise available to invest in a bond ETF (with a sell order triggered by a drop in the e-mini). Say the investor is willing to take moderate credit/duration risk on this portion to get some return, for example Vang's short term IG corporate ETF VCSH, 1.6% SEC yield, 3 yr avg maturity.
-on the futures side of the account w. IB/ToS as margin earning zero (for example at IB Fed Funds-.50%, minimum zero)

If the three categories are 75%, 20% and 5% (~exchange required minimum maintenance margin) and assuming the futures implied borrowing rate is 0.5%, the 'net interest margin' so to speak is .05*0+.20*1.6+.75*1.05-.50%= .61% that you wouldn't get at all investing in the cash S&P ETF**, though you're taking small additional risk to get it (the risk of VCSH on 20%; and risk to the broker on 5%***) as well as jumping through some hoops, but that's self evident in the whole idea, thus not suitable for everyone, I've never said it was, hard to understand sometimes the defensive reactions (not by you). But that spread is not minor for the small risk, IMO.

If the margin amount is 15%, now the net margin is only .15*0+.2*1.6+.65*1.05-.5=.50%. That's what I mean by drag. Moreover, you've tripled your exposure to the broker. It's significant.

*each contract, at $50 per tick, is equivalent to around 2117.5*50=$105,875 of ETF at today's closing price, the SPY ETF comes out at about 500 shares per e-mini contract.
**as noted above the transaction costs of rolling the futures contracts is in same ballpark as the expense ratio on SPY.
***money posted as margin for futures will in general not be covered by SIPC.
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Kevin M
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Re: Interactive Brokers (Best Kept Secret)

Post by Kevin M »

comeinvest wrote: 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?
Yes, it does require some additional work. Good brokered CDs have a higher yield than Treasuries, but generally not as high as direct CDs, and you don't get the cheap put option (early withdrawal for about 1%).
comeinvest wrote: 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, it is easier to just stick with bond funds. So some choose simplicity, some choose superior risk/return for some extra work, and some choose some of each. It's all good.

The "rolldown return" is not guaranteed, but is only realized to the extent the yield curve remains positively sloped, and does not shift up significantly. If the entire yield curve shifts up enough, your roll return is wiped out, even if the yield curve shape remains the same.
comeinvest wrote: 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.
I think the best assumption is that the market is pricing in the credit risk and term risk appropriately (keeping in mind that CDs are not really part of the same market). I like to use CDs instead of Treasuries for about 70% of my fixed income, but also use longer-term bond funds with some credit risk for about 25% of fixed income, to get some extra yield and have some exposure to the additional risks. If the risk pays off, move more from bond funds to CDs, and if the risk shows up, move some from CDs to bond funds.

Kevin
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comeinvest
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Re: Interactive Brokers (Best Kept Secret)

Post by comeinvest »

Johno wrote:
comeinvest wrote:
Johno wrote: 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.
Johno, can you explain how you quantify the "drag" of higher margin requirements? Wouldn't the higher margin requirements only affect portfolio returns if your desired leverage is higher than the requirements? Even with 3 times exchange requirements for example on the ES future, quite significant leverage could still be achieved, right?
In this case though the goal isn't to have any net leverage. Assume the investor has X times ~$106k in cash to invest and can either invest it in X times 500 shares of the SPY S&P* ETF or go long X number of e-mini contracts*. In the latter case most of the cash is still available to invest elsewhere.

In the basic bank account version, there would be three categories of cash:
-in the bank account earning up to 1.05%, basically 'risklessly'
-on the brokerage side of the account with say IB or ToS as reserve against the maximum daily margin call of 20%, but otherwise available to invest in a bond ETF (with a sell order triggered by a drop in the e-mini). Say the investor is willing to take moderate credit/duration risk on this portion to get some return, for example Vang's short term IG corporate ETF VCSH, 1.6% SEC yield, 3 yr avg maturity.
-on the futures side of the account w. IB/ToS as margin earning zero (for example at IB Fed Funds-.50%, minimum zero)

If the three categories are 75%, 20% and 5% (~exchange required minimum maintenance margin) and assuming the futures implied borrowing rate is 0.5%, the 'net interest margin' so to speak is .05*0+.20*1.6+.75*1.05-.50%= .61% that you wouldn't get at all investing in the cash S&P ETF**, though you're taking small additional risk to get it (the risk of VCSH on 20%; and risk to the broker on 5%***) as well as jumping through some hoops, but that's self evident in the whole idea, thus not suitable for everyone, I've never said it was, hard to understand sometimes the defensive reactions (not by you). But that spread is not minor for the small risk, IMO.

If the margin amount is 15%, now the net margin is only .15*0+.2*1.6+.65*1.05-.5=.50%. That's what I mean by drag. Moreover, you've tripled your exposure to the broker. It's significant.

*each contract, at $50 per tick, is equivalent to around 2117.5*50=$105,875 of ETF at today's closing price, the SPY ETF comes out at about 500 shares per e-mini contract.
**as noted above the transaction costs of rolling the futures contracts is in same ballpark as the expense ratio on SPY.
***money posted as margin for futures will in general not be covered by SIPC.
Thanks for your explanations. I understand your point in your scenario. But have you looked at the big picture? Your scenario is what you call an "unleveraged" strategy, where you use the additional cash available from the futures position (vs. an investment in SPY) to attempt a "near risk-free" arbitrage play by buying a near risk-free short-term bond fund, plus a small actual arbitrage play originating from the "free" government subsidy in form of FDIC insurance. If you were honest to yourself, only the second portion is actual arbitrage, because the first is not risk-free. In case of a significant market drawdown or credit problem like during the GFC, your 3 year maturity may drop in value at the same time when the futures contracts will drop in value. Granted, because of your holdings in the bank account, although your strategy is not completely "unleveraged", you would probably not be forced to sell securities. You are deriving value from maxing out your available leverage to invest in the risk-free, liquid 1.05% interest bearing bank account that you can also liquidate in case of a market drawdown.
Leverage strategies other than this arbitrage play in this government-skewed market, would probably not be affected by the amount of futures margin requirement. In case of a drawdown, CME would probably increase margin anyway based of higher volatility, so a reasonable investor would have significantly lower leverage than the maximum allowed with futures. Also, another user on another thread in this forum reported that cash balances in the futures account and (negative) cash balances in the equities account at IB offset each other for purpose of margin interest calculations. I don't know if this is correct. If correct, then (at least in a taxable account) you could borrow the 15% collateral from your broker interest free to buy additional shares of the corp bond fund, or add to the bank account. I also don't know if in case of IRA accounts, the collateral cash would actually need to sit idling in the futures account, or if marginable equities can be used as collateral for the futures positions. I got conflicting opinions on this from IB and ToS representatives. Do you have any insight on how IB and ToS handle the accounting of the cash balances in the respective subaccounts in the equities+futures scenario, and whether equities can be used as collateral for futures in an IRA? According to ToS, marginable securities can be used as collateral, so in your case your corporate bond fund could be used instead of the 5% (or 15%) idling in the futures account even in the case of an IRA.
Johno
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Re: Interactive Brokers (Best Kept Secret)

Post by Johno »

comeinvest wrote:
Johno wrote:
comeinvest wrote:
Johno wrote: 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.
Johno, can you explain how you quantify the "drag" of higher margin requirements?
If the three categories are 75%, 20% and 5% (~exchange required minimum maintenance margin) and assuming the futures implied borrowing rate is 0.5%, the 'net interest margin' so to speak is .05*0+.20*1.6+.75*1.05-.50%= .61% that you wouldn't get at all investing in the cash S&P ETF**,

If the margin amount is 15%, now the net margin is only .15*0+.2*1.6+.65*1.05-.5=.50%. That's what I mean by drag. Moreover, you've tripled your exposure to the broker. It's significant.
1. If you were honest to yourself, only the second portion is actual arbitrage, because the first is not risk-free.

2. Leverage strategies other than this arbitrage play in this government-skewed market, would probably not be affected by the amount of futures margin requirement. In case of a drawdown, CME would probably increase margin anyway based of higher volatility, so a reasonable investor would have significantly lower leverage than the maximum allowed with futures.

3. Also, another user on another thread in this forum reported that cash balances in the futures account and (negative) cash balances in the equities account at IB offset each other for purpose of margin interest calculations.
1. I don't see any issue of being 'honest with myself'. The numbers have been laid out and it's been clearly mentioned that there is some risk to the 20%. If that money were not put at any risk, there's still a net spread that's pretty big in the real world of market discrepancies, ~.29% if the bank account is 75% at 1.05% and all the rest earns zero. I just don't see practically that somebody who would go to the trouble of doing this at all would insist on zero credit and duration risk for the 20%, so I gave a practical example. The same goes for Rob's original example with 5 yr CD for 50% of the money. Nobody is under the impression these extensions of the concept are ironclad arbitrage: they are just practical examples with some risk but attractive risk/return, based on the fact that there *is* an underlying element of arbitrage: that best FDIC insured rates are high for the risk.

2. Again there's virtually no leverage in this strategy, just the theoretical maximum sell off in 20% of the money in a fairly safe investment (VFSUX is a fund similar to VCSH and dropped a maximum of around 12% during 2008-9, not in one day obviously). But for real leverage, see recent thread on 'Kelly Criterion'. I showed back test results of leveraging the S&P Total Return index financed at LIBOR+.25%, reblanced quarterly (a rough proxy for being long and rolling the S&P index futures). Maximum return was at leverage of only 1.9:1 for 1988-2014; for 2000-20014 it was at actually slightly less than 1. So the max allowable leverage according to exchange or broker margin requirement is no guide whatsoever to the optimal amount of leverage: I would have considered that well understood. But the point about required margin, not the same thing as total leverage, is that you don't get paid interest on it and it represents exposure to the broker. This is clear cut in case of IRA's, the subject of my original point. IB raised futures margin in IRA's, where it's most tax efficient to do futures. ToS didn't, so has a noticeable advantage.

3. As I mentioned, my example assumes IRA, where no margin loan is allowed. But even in a taxable margin account where you might offset the interest impact of 'dead' money in margin on future side by withdrawing cash on securities side, you'd still be left in credit exposure terms with the ( probably complex legal) question of whether you could net out what you owed the securities account (wound up under SIPC) on the margin loan against what the futures account owed you (not generally under SIPC), in case the broker failed.
TravelerMSY
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Re: Interactive Brokers (Best Kept Secret)

Post by TravelerMSY »

in_reality wrote:Do they offer brokered CDs?

I can't see any on their site.
Not directly but if you could find one in the secondary market you could buy it there.
saver007
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

Came across a thorough review of Interactive Brokers in the Dividend Growth Investor Blog. Thought i will post it here:

http://www.dividendgrowthinvestor.com/2 ... stors.html
TravelerMSY
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Re: Interactive Brokers (Best Kept Secret)

Post by TravelerMSY »

One thing not mentioned is IBs commissions are even lower if you're on their unbundled plan and you mostly add liquidity. You get most of the exchange rebates back. And their executions are generally better than their competitors. But most bogleheads aren't going to trade enough to notice.
Oliver
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Re: Interactive Brokers (Best Kept Secret)

Post by Oliver »

denovo wrote:This is one of the threads where I read where I start to think people are paid to come on this forum and promote certain products. :x
Actually IB is a great broker. (Unfortunately, no one has paid me to say it.)

I know upthread some have pointed out free ETF trades at other brokers versus $1 fee. I would much rather purchase the ETF I prefer and pay a $1 fee than purchase my second choice ETF.
Tylenol Jones
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Re: Interactive Brokers (Best Kept Secret)

Post by Tylenol Jones »

IB is great, but I've been always wondering how safe and stable it is compared to the other brokers given all this affordable active margin trading.
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galeno
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Re: Interactive Brokers (Best Kept Secret)

Post by galeno »

For us IB has been great. We cut our portfolio expenses in half (0.72% to 0.36%) because it offers us cheap and easy access to the Ireland domiciled ETFs: VWRD and IUAG instead of the equivalent USA domiciled ETFs: VT and AGG.

If and when a GOOD non-USA domiciled broker offers cheap and easy access to VWRD and IUAG we will switch. Until then we're sticking with IB.
KISS & STC.
jackmini
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Re: Interactive Brokers (Best Kept Secret)

Post by jackmini »

Should dividends be factored into these calculations? My understanding is that the S&P 500 futures don't pay dividends, so if you convert a 100% SPY position to a 2% futures and 98% cash you're capital should remain the same, but you'd be missing out on ~2.09% annually in dividends. If you put the cash into CDs or fixed income ETFs you'd need to beat that 2% before seeing an advantage yes? Or 2.5% more considering the costs of maintaining the futures contract?
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Taylor Larimore
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Boglehead investors keep costs low and investing simple

Post by Taylor Larimore »

Bogleheads:

Topics like this are meaningless to long-term, stay-the-course, one-company, mutual fund investors .

I have never used a broker (or paid a commission) since we left Merrill Lynch in 1986.

Boglehead investors keep costs low and investing simple.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
matto
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Re: Interactive Brokers (Best Kept Secret)

Post by matto »

jackmini wrote:Should dividends be factored into these calculations? My understanding is that the S&P 500 futures don't pay dividends, so if you convert a 100% SPY position to a 2% futures and 98% cash you're capital should remain the same, but you'd be missing out on ~2.09% annually in dividends. If you put the cash into CDs or fixed income ETFs you'd need to beat that 2% before seeing an advantage yes? Or 2.5% more considering the costs of maintaining the futures contract?
Dividends are already factored into the futures price and work to 'oppose' the risk free rate. If dividends > risk free rate, then the futures price is a discount of the notional value. Otherwise, the opposite.
orenplen
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Re: Interactive Brokers (Best Kept Secret)

Post by orenplen »

Hi guys,
I am a non-US investor looking to buy and hold irish-domiciled etfs (iwda+eimi+wdsc), so IB seems like a great option with respect to fees.

My only concern, which is something that i have not seen discussed in this post is the issue of financial strength. While most other aspects are not probably deal breakers, i am curious to hear what you think about IBs low credit rating (BBB+). Do you feel safe investing your life savings in such a company?
saver007
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

IB is a conservatively run company still managed by its founder. Note that IB's excess regulatory capital (capital that is in excess of what is required by regulators) is about $2 billion, which is higher than its peers like TDAmeritrade, Etrade,Schawb or even Vanguard despite its peers having much higher client asset base. Meaning IB has higher cushion to absorb any potential losses.
ace1400
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Re: Interactive Brokers (Best Kept Secret)

Post by ace1400 »

I make regular purchases of index ETF, and my experience with IB has been that their executions much more than make up for their very small commissions when compared to "free" ETF trades from other brokers. When buying at IB, there is no drama, I can do a market order and it executes instantly exactly at the market price. Last time I got so fed up with schwab not filling limit orders at the market price, so I made it a market order - that one "free" trade cost me 1.5% over the actual market price.

IB one of the few brokers that does not sell your order flow to high frequency traders frontrunning your order. Look up "payment for order flow" to understand how brokers offer "free" trades. You pay via the spread.

-Ace
orenplen
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Re: Interactive Brokers (Best Kept Secret)

Post by orenplen »

saver007 wrote:IB is a conservatively run company still managed by its founder. Note that IB's excess regulatory capital (capital that is in excess of what is required by regulators) is about $2 billion, which is higher than its peers like TDAmeritrade, Etrade,Schawb or even Vanguard despite its peers having much higher client asset base. Meaning IB has higher cushion to absorb any potential losses.
Thanks,
However, the credit rating is supposed to be an integration of all financial factors. What you describe might be correct, but i guess other, also important, factors are involved.
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Qtman
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Re: Interactive Brokers (Best Kept Secret)

Post by Qtman »

IB is a good broker.
Don’t wear yourself out trying to get rich; be wise enough to control yourself. | Wealth can vanish in the wink of an eye. It can seem to grow wings and fly away | like an eagle. - King Solomon
jasonwc
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Re: Interactive Brokers (Best Kept Secret)

Post by jasonwc »

As an alternative, some may want to consider Robinhood. It's a relatively new entrant and can only be used from a smartphone (Android or iPhone apps) but it has a nice interface and has NO FEES for trading US stock, or US-listed ADRS, or ETFs. There is no minimum account balance required either for sign-up or to maintain the account. There are no recurring fees, annual fees etc. Robinhood is a member of FINRA and the accounts are covered by SIPC. Apex handles statements, which can be downloaded from the app.

Downsides: No automatic dividend re-investment (which allows for purchases of fractional shares) and it only supports taxable accounts (no IRAs, 529s, Trusts etc). No interest earned on cash. Presumably poor priority for trade placement (I use limit orders anyhow).
kstheory
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Re: Interactive Brokers (Best Kept Secret)

Post by kstheory »

The Catch to IB margin rates:

Interactive Brokers margin rates look attractive on the surface, but you have to also consider the tax effects of their securities lending practices. They have a very active lending department and generate substantial income for themselves that way. You benefit from a low margin rate but you will likely pay higher taxes.

When you receive substitute payments in lieu of dividends (and other distributions), they will be treated as taxable ordinary income, regardless of what their original character was. This includes qualified dividends, LTCG distributions, even tax-free muni income. This happened to me. About 50% of my expected income came to me in the form of substitute payments. I even received a substitute payment for a distribution from an MLP, which should not even treated as income.

So there will be a tax hit. Other brokers (who charge much higher margin rates) may offer offsetting payments or have a practice of making sure securities are not lent out across record dates. In my case, it was the equivalent of adding an extra percentage point to their margin rate. This brings in within the range of another online broker, but unfortunately that one doesn't have the range of products that IB makes accessible.
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indexfundfan
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Re: Interactive Brokers (Best Kept Secret)

Post by indexfundfan »

kstheory wrote: So there will be a tax hit. Other brokers (who charge much higher margin rates) may offer offsetting payments or have a practice of making sure securities are not lent out across record dates. In my case, it was the equivalent of adding an extra percentage point to their margin rate. This brings in within the range of another online broker, but unfortunately that one doesn't have the range of products that IB makes accessible.
Could you please share the name of the broker that offers margin rate in the 2.X% ? I haven't found one that is close to IB. Plus IB let's you enable portfolio margin, so that you have a much wider margin before they attempt to liquidate your assets.
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Johno
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Re: Interactive Brokers (Best Kept Secret)

Post by Johno »

jackmini wrote:Should dividends be factored into these calculations? My understanding is that the S&P 500 futures don't pay dividends, so if you convert a 100% SPY position to a 2% futures and 98% cash you're capital should remain the same, but you'd be missing out on ~2.09% annually in dividends. If you put the cash into CDs or fixed income ETFs you'd need to beat that 2% before seeing an advantage yes? Or 2.5% more considering the costs of maintaining the futures contract?
Sorry not to notice that for months :D but dividends are reflected in the futures price. A moment of thought will confirm this: under your theory it would be a money machine to own the S&P, hedge any price risk by shorting the futures, and just collect 2% in dividends for free. No, while the futures price converges to the index price at expiry it deviates before that just enough to compensate the offsetting facts that over the remaining term of the futures contract a) you don't receive/pay dividends if long/short the futures, and b) you don't have to borrow cash/have none to lend as you would buying or shorting the stocks in the index. IOW if long the futures you receive the equivalent of the dividends between now and contract expiration* and pay the financing cost** in the convergence of the futures price to the index price at the maturity date.

One thing which has changed since this post is the implied financing rate on the E-mini S&P futures is lately actually lower than it was, ~0.3% lately v >0.5%, despite the fact the Fed Funds rate is higher now after the Fed's single tightening move. The best deposit rates are about the same at ~1.1%, a significant spread for a *buy and hold, passive* investor to be long stocks via the futures, and invest the cash, rather than hold index ETF's, though much more practical in an IRA than a taxable account, and it requires understanding of some secondary risks, and some work.

kstheory's post about the tax impact of lots of substitute payments from IB on regular margin loans is interesting. I don't deal with IB on futures anymore because they raised their margin requirements, I shifted to TD for IRA futures transactions. I do keep ETF's at IB in a taxable account for standby borrowing capacity, but that tax issue would be a problem if I ever actually did borrow. However as indexfundman said, IB AFAIK would be still be cheapest by far among retail shops if you assumed the tax effect added a whole 1%. But again, the implied cost of borrowing via being long the E-mini S&P futures is more like 0.30% lately, and is virtually always lower than any retail margin rate.

*which is almost certain over the short period of the nearest futures contract.
**reflecting the market clearing buyer/seller's cost of financing stocks using the stocks are collateral, what large institutions pay, which is lower than the best rate at which individuals can invest in FDIC insured deposits, therefore an arbitrage, dividends accounted for.
iflyjetzzz
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Re: Interactive Brokers (Best Kept Secret)

Post by iflyjetzzz »

IB's a great broker but it does have some drawbacks. I don't think it's particularly suited for most Bogleheads.

I have >$100K in my account so I don't have to worry about the $10/mo inactivity fee.

I am able to earn money on my stocks by being enrolled in IB's Stock Yield Enhancement Program. Short sellers can borrow my stock and I get half of their daily borrowing fees.

I write a lot of covered calls so their low option fees are nice.

Executions are the best I've had and I've had accounts with multiple different brokerages.

Downsides: I cancel my Stock Yield Enhancement Program before every exdividend date to not get Payment In Lieu Of stock dividends. Even though I had disenrolled more than a week prior to the exdividend date, they gave me some of my dividend as Payment In Lieu Of.

IB has an 'exposure fee' for 'risky' accounts. They take a -30% scenario and if your account is >-$76K, they charge a daily exposure fee. I've been hit with that in the past because I write some deep out of the money puts.

If you only buy and hold mutual funds, there are better brokerages.
saver007
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

Just wanted to say that I am loving IB's stock yield enhancement program. I hold 10 shares of TSLA which is a pretty hard to borrow at the moment. Market stock loan fee rate for now is around 20 to 25%!! IB pays half that rate to clients that comes out to be 50 to 60 cents per day for the 7 or 8 shares that IB lend out . It is as if getting an extra dividend payment :sharebeer
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galeno
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Re: Interactive Brokers (Best Kept Secret)

Post by galeno »

We hold 60% VWRD. Gross yield = 2.27%. Net yield = 1.79%.

Portfolio expenses: ER (0.25%) + Level 1 dividend taxes (0.26%) = 0.51%

1. Could we enroll our VWRD in IB's stock yield enhancement program?

2. If yes, how much additional net yield would we get?

3. What are the risks of using the program?
saver007 wrote:Just wanted to say that I am loving IB's stock yield enhancement program. I hold 10 shares of TSLA which is a pretty hard to borrow at the moment. Market stock loan fee rate for now is around 20 to 25%!! IB pays half that rate to clients that comes out to be 50 to 60 cents per day for the 7 or 8 shares that IB lend out . It is as if getting an extra dividend payment :sharebeer
KISS & STC.
Tylenol Jones
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Re: Interactive Brokers (Best Kept Secret)

Post by Tylenol Jones »

It seems it has been discussed in this thread viewtopic.php?t=117477
saver007
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

galeno wrote:We hold 60% VWRD. Gross yield = 2.27%. Net yield = 1.79%.

Portfolio expenses: ER (0.25%) + Level 1 dividend taxes (0.26%) = 0.51%

1. Could we enroll our VWRD in IB's stock yield enhancement program?

2. If yes, how much additional net yield would we get?

3. What are the risks of using the program?
You cannot enroll per security. You need to enroll per account.. So you cannot pick and choose which security IB will lend. Note that IB lend based on demand and other inventory of stocks IB hold. In my account only 10% of stocks are typically lent out.

If you have TWS installed, you can see SLB rates under Analytical Tools->SLB rates. I can see current loan rate for VWRD is .75% . IB takes half. (so net payment will be .375%.)

I believe risk is low since you get cash collateral of equal value in return for securities lend out which is marked daily. you can read more about it at http://ibkb.interactivebrokers.com/node/1838/
vstariradev
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Re: Interactive Brokers (Best Kept Secret)

Post by vstariradev »

I live in the EU and currently have less than $100 000 to invest so if I open an account directly the $10 fee would be a serious drain. Fortunately there is a local broker (Karoll) who has negotiated special conditions with IB UK. Karoll have reduced the monthly fee to $1 but charge higher trade commissions (8 GBP). Is anyone else using IB through a local broker and what is the status of ownership of the assets?
incidentflux
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Re: Interactive Brokers (Best Kept Secret)

Post by incidentflux »

asset_chaos wrote: Mon May 11, 2015 10:45 pm 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.
Kevin M wrote: Wed May 13, 2015 4:18 pm 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).

Kevin
indexfundfan wrote: Wed May 13, 2015 9:38 pm
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.
vstariradev wrote: Sun Dec 11, 2016 4:43 pm I live in the EU and currently have less than $100 000 to invest so if I open an account directly the $10 fee would be a serious drain. Fortunately there is a local broker (Karoll) who has negotiated special conditions with IB UK. Karoll have reduced the monthly fee to $1 but charge higher trade commissions (8 GBP). Is anyone else using IB through a local broker and what is the status of ownership of the assets?
A general reply to the above fine comments. I started with IB, then found ZacksTrade, very fortunate that ZacksTrade doesn't charge the 10$ monthly, but does charge 3$ per trade plus 1 cent per share. Best part they use IB as their platform and clearing house, so my account transferred for free over the weekend. Rough math would be, if you do less than 40 trades per year than ZacksTrade is cheaper than IB.
Also ZacksTrade has excellent customer service. Better for buy and hold investor/traders.

IBs apps and web platform are white label broker ready. Meaning IB's apps are called Handy Trader, but the IB branded app itself also works the same for ZacksTrade accounts.
denovo wrote: Thu May 14, 2015 3:47 pm This is one of the threads where I read where I start to think people are paid to come on this forum and promote certain products. :x
Not true, I get nothing. I was doing silly CFDs on eToro before a work colleague introduced me to IB (ZacksTrade).
dnaumov wrote: Thu May 14, 2015 4:10 pm IB is a phenomenal broker, especially if you happen to live outside the US. I live in Finland and have an account with the german branch of Lynx, which is owned by IB. If I compare the single cheapest local finnish discount broker against IB/Lynx, Lynx offers trade commissions and margin rates at 1/3 the level of the cheapest local broker. This, while offering access to double the amount of various stock exchanges all over the world.
Agreed. Things are worse with over pricing in the UAE and offering very limited products.
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Taylor Larimore
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"No Fees ? "

Post by Taylor Larimore »

As an alternative, some may want to consider Robinhood. It's a relatively new entrant and can only be used from a smartphone (Android or iPhone apps) but it has a nice interface and has NO FEES for trading US stock, or US-listed ADRS, or ETFs. There is no minimum account balance required either for sign-up or to maintain the account. There are no recurring fees, annual fees etc. Robinhood is a member of FINRA and the accounts are covered by SIPC. Apex handles statements, which can be downloaded from the app.
jasonwc:

How can Robinhood stay in business with "NO FEES" to cover expenses?

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
bondsr4me
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Re: Interactive Brokers (Best Kept Secret)

Post by bondsr4me »

Taylor
Maybe he’s a market maker.
stlutz
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Re: Interactive Brokers (Best Kept Secret)

Post by stlutz »

How can Robinhood stay in business with "NO FEES" to cover expenses?
They earn interest from customers' cash balances.

Even the big brokers like Schwab or Etrade earn a pretty small amount of their income from commissions. For example, in 2017 E*Trade's total revenue was $2.37B; of that $441M was from commissions.
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Re: "No Fees ? "

Post by drk »

Taylor Larimore wrote: Fri Feb 23, 2018 3:38 pm
As an alternative, some may want to consider Robinhood. It's a relatively new entrant and can only be used from a smartphone (Android or iPhone apps) but it has a nice interface and has NO FEES for trading US stock, or US-listed ADRS, or ETFs. There is no minimum account balance required either for sign-up or to maintain the account. There are no recurring fees, annual fees etc. Robinhood is a member of FINRA and the accounts are covered by SIPC. Apex handles statements, which can be downloaded from the app.
jasonwc:

How can Robinhood stay in business with "NO FEES" to cover expenses?

Thank you and best wishes.
Taylor
From the source:
How does Robinhood make money?

With Robinhood Gold, you get up to 2x your buying power and access to after hours trading for as little as $6 per month. This is the only product Robinhood charges you for, and is completely optional. Trading is still commission free.

Additionally, Robinhood earns revenue by collecting interest on the cash and securities in Robinhood accounts, much like a bank collects interest on cash deposits.
saver007
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

stlutz wrote: Fri Feb 23, 2018 7:56 pm
How can Robinhood stay in business with "NO FEES" to cover expenses?
They earn interest from customers' cash balances.

Even the big brokers like Schwab or Etrade earn a pretty small amount of their income from commissions. For example, in 2017 E*Trade's total revenue was $2.37B; of that $441M was from commissions.
Robinhood would probably never fully admit this, but they make money by selling client order flow. Select few firms -high frequency trading firms/hedge funds/liquidity pools - pay RobinHood for routing retail orders to them.

We can't see exactly how much money they collect from selling client orders as it is a private company but anyone can get an idea of the allure of this revenue stream by looking at the 10Ks of other public retail brokers like TD Ameritrade, Schawb,etc that also collect money for routing order flow and keep it without sharing to their commission paying clients.

For example, TD Ameritrade's 2017 10k shows their order flow revenue ($320 million) was about 30% of the trading commission revenue collected from retail clients (~1,058 million). This comes out to be approximately $2.5 per order in order flow revenue whereas their commission revenue per order was $8.33.

Schwab 2016 10k shows their order flow revenue comes to an extra 12% of the commission revenue collected (103 million order flow revenue whereas commission trading revenue was 825 million ).

This is very shady revenue stream IMHO as it creates a conflict of interest. Who are Robinhood's real clients? Is it the NO commission paying retail investors? Or the hedge funds that pays them for routing uninformed retail orders?

This order flow revenue stream also create a disincentive in brokers in getting clients the best price execution as possible. Rather than investing in smart order routing technology that connects to as many liquidity providing sources as possible, these brokers will be content with routing their orders to a few liquidity pools that pay them highest kick backs (payment for order flow) and spend their money on marketting gimiks.

IB is different in that it pass through order routing revenue back to commission paying clients on tiered pricing structure and route most of it orders to public exchanges that have transparent order routing payments. If I enter a limit order with IB, I get rebate back for about .002 cents per share.

Robinhood, like other brokers, can also make money from the idle cash balance in the brokerage account and lending cash to margined clients. Brokers can invest idle cash in government securities or just put it in other bank accounts that pays them interest.

Except for Interactive brokers, I dont see any brokers pays interest in idle cash balance in brokerage account (other than via money market bank accounts). IB pays fed funds rate minus 50 basis point (.92% cash) on brokerage cash balance above $10K for accounts with equity > $100K. IB's margin rates are also insanely low but its not a good discussion point in BH forum:)
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Re: Interactive Brokers (Best Kept Secret)

Post by stlutz »

Except for Interactive brokers, I dont see any brokers pays interest in idle cash balance in brokerage account (other than via money market bank accounts).
Vanguard and Fidelity both have sweep MMFs that pay interest on every dollar of cash. VG is the best here as Federal Money market has an ER of only .11% (the Fido option charges .42%).
lazyday
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Re: Interactive Brokers (Best Kept Secret)

Post by lazyday »

saver007 wrote: Sat Feb 24, 2018 12:20 amapproximately $2.5 per order in order flow revenue
If I enter a limit order with IB, I get rebate back for about .002 cents per share.
$2.5 per order seems much too high.

100 cents/dollar * $2.5/order / .002 cents/share = 125,000 shares/order
SlowMovingInvestor
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Re: Interactive Brokers (Best Kept Secret)

Post by SlowMovingInvestor »

saver007 wrote: Sat Feb 24, 2018 12:20 am Except for Interactive brokers, I dont see any brokers pays interest in idle cash balance in brokerage account (other than via money market bank accounts). IB pays fed funds rate minus 50 basis point (.92% cash) on brokerage cash balance above $10K for accounts with equity > $100K. IB's margin rates are also insanely low but its not a good discussion point in BH forum:)
Fidelity and Vanguard all pay interest on idle cash balance, and allow you to transfer money in from a money market account (their rates are > 1% now) in the settlement period. So do Schwab and Merill Edge, with some restrictions.

I do agree that IB's margin rates are insanely low. Indeed, while I'm not inclined to trading on margin, it seems like their rates are so low you could use them to pay down higher interest loans, or even part of your mortgage (under the new tax law, fewer people are likely to benefit from mortgage interest deduction anyway). Just transfer some assets to IB to make balance up to 100K, then take out a margin loan. I expressed some skepticism in an earlier thread that IB could be used much by US resident buy and holders, but I'm becoming a convert !

Does IB allow 1099-Bs to be downloaded directly into TT (or other SW) ? Does it do a good job of tracking cost basis ?
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

stlutz wrote: Sat Feb 24, 2018 12:41 am
Except for Interactive brokers, I dont see any brokers pays interest in idle cash balance in brokerage account (other than via money market bank accounts).
Vanguard and Fidelity both have sweep MMFs that pay interest on every dollar of cash. VG is the best here as Federal Money market has an ER of only .11% (the Fido option charges .42%).
OK.You can also buy third party MMFs including Vanguards via IB but have to pay commission. IB interest I cited is on the pure cash balance parked in the brokerage account without buying MMF or sweeping to a money market account.
lazyday wrote: Sat Feb 24, 2018 3:38 am
saver007 wrote: Sat Feb 24, 2018 12:20 amapproximately $2.5 per order in order flow revenue
If I enter a limit order with IB, I get rebate back for about .002 cents per share.
$2.5 per order seems much too high.
100 cents/dollar * $2.5/order / .002 cents/share = 125,000 shares/order
looks like you ended up with an extra 0 on your calculation . .002*1250 shares=$2.5 right? .002/share is the rebate Nasdaq pays for adding liquidity.other exchanges pay different rates. exchanges usually pay for adding liquidity and charge for charge for removing liquidity.

Not sure exactly how the payment structure for Non-exchange liquidity providers that retail brokers like TD uses works.. they may pay more because its more lucrative uninformed retail order flow and might not differentiate between adding/removing order flow. I don't think these brokers disclose terms for order flow revenue.

You can see IB's exchange rebate/fees under US exchange fees section of https://www.interactivebrokers.com/en/i ... &p=stocks2
Also, the numbers I cited for TD's order flow revenue is on page 39 of 2017 10K (or page 50 of 148 of https://s1.q4cdn.com/959385532/files/do ... Report.pdf)
SlowMovingInvestor wrote: Sat Feb 24, 2018 9:22 am
Fidelity and Vanguard all pay interest on idle cash balance, and allow you to transfer money in from a money market account (their rates are > 1% now) in the settlement period. So do Schwab and Merill Edge, with some restrictions.

I do agree that IB's margin rates are insanely low. Indeed, while I'm not inclined to trading on margin, it seems like their rates are so low you could use them to pay down higher interest loans, or even part of your mortgage (under the new tax law, fewer people are likely to benefit from mortgage interest deduction anyway). Just transfer some assets to IB to make balance up to 100K, then take out a margin loan. I expressed some skepticism in an earlier thread that IB could be used much by US resident buy and holders, but I'm becoming a convert !

Does IB allow 1099-Bs to be downloaded directly into TT (or other SW) ? Does it do a good job of tracking cost basis ?

Yes, you can download 1099-Bs directly to turbo tax with IB now. cost basis tracking i don't know.. don't have good/bad experiences!

IB is a great fit for any informed investor (passive or active) with decent internet navigation skills and does not require personal service.

What is fidelty's and Vanguards interest rate on idle cash balance without sweeping to money market account or buying a money market fund?
SlowMovingInvestor
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Re: Interactive Brokers (Best Kept Secret)

Post by SlowMovingInvestor »

saver007 wrote: Sat Feb 24, 2018 10:36 am What is fidelty's and Vanguards interest rate on idle cash balance without sweeping to money market account or buying a money market fund?
I'm not sure I understand the distinction. Vanguard's settlement fund is a Federal Money Market Fund, with an interest rate of 1.31% right now. You can also hold idle cash in higher yielding Money Market Funds like Prime (1.5% + right now), or you can transfer money via ACH. Vanguard credits ACH transfers immediately.

Fidelity's core position can be cash, but can also be a government money market fund (yield around 1%). They have higher yielding MMs as well, and at least for me, they show those MMs as available cash when I buy an ETF or a mutual fund. They also credit ACH immediately.

Fido and Vanguard's margin rates are significantly higher though. I am seriously thinking of opening an IB account, upping the account to > 100K, and then letting it remain mostly stable -- it seems to be a very good way to get credit if I ever needed it in an emergency without selling and incurring capital gains.
lazyday
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Re: Interactive Brokers (Best Kept Secret)

Post by lazyday »

saver007 wrote: Sat Feb 24, 2018 10:36 am.002*1250 shares=$2.5 right? .002/share is the rebate Nasdaq pays for adding liquidity.
Your other post said .002 cents, looks like you meant .002 dollars. I had no idea that rebates were so large.
You can see IB's exchange rebate/fees under US exchange fees section of https://www.interactivebrokers.com/en/i ... &p=stocks2
Found a "Rule 606" report. See bottom of page 3: https://www.interactivebrokers.com/down ... REPORT.pdf

Even these huge rebates are less than the commissions IB charges. So I wouldn't choose IB over Merrill Edge just because of the rebate alone. But if one had other reasons to choose IB... well it would be nice to be able to use limit orders again. I switched to market orders years ago because of terrible executions with limit orders, but rebates that large might make up for bad executions. And help explain them.

Does anyone know if marketable limit orders at a typical retail brokerage should give as much price improvement as a market order? I tried a couple times and was unhappy with the results. But maybe just bad luck, I didn't do it often enough to get a good impression.
saver007
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

SlowMovingInvestor wrote: Sat Feb 24, 2018 12:06 pm
saver007 wrote: Sat Feb 24, 2018 10:36 am What is fidelty's and Vanguards interest rate on idle cash balance without sweeping to money market account or buying a money market fund?
I'm not sure I understand the distinction. Vanguard's settlement fund is a Federal Money Market Fund, with an interest rate of 1.31% right now. You can also hold idle cash in higher yielding Money Market Funds like Prime (1.5% + right now), or you can transfer money via ACH. Vanguard credits ACH transfers immediately.
OK that is better yield!
I guess the difference is that you are taking a tiny bit credit and duration risks to buy those Mooney market Fund, albeit very tiny. You are not taking any extra risk for getting Interest on cash balance with IB.
Brokerage cash balance is like cash in a checking account. Not subject to withdrawal limits like in bank savings account or money market account.
[/quote]
I am seriously thinking of opening an IB account, upping the account to > 100K, and then letting it remain mostly stable -- it seems to be a very good way to get credit if I ever needed it in an emergency without selling and incurring capital gains.
[/quote]
Yea, I recommend it.
When I bought my last car, I took margin loan for a few days to boost my down payment and I was prepared to take more margin loan if the dealership didn't give me good enough rate.
Now IB even has a debit card, which will automatically take margin loan if there is not enough cash in the account!
saver007
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

lazyday wrote: Sat Feb 24, 2018 12:53 pm
Even these huge rebates are less than the commissions IB charges. So I wouldn't choose IB over Merrill Edge just because of the rebate alone. But if one had other reasons to choose IB...
Another kicker with IB is the stock yield enhancement program where IB would lend your long stock and pay client 50% of revenue collected from this loan. I got paid 18 dollars from this program last year.. It is not much but it paid all the commission I paid IB. (my commission cost was around $12 for 14 orders i entered).. so for a net revenue of $6! It is better than getting free trades!

You should give IB a try if you can move >100K there. IB's execution quality is way ahead of other retail brokers. I doubt any other retail brokers connect to as many exchanges and liquidity pools with smarter order routing logic as IB.Their prime clients are professional traders and hedge funds who consider execution quality and costs top concern in choosing a broker. ,
BTW, IB publishes a special execution statistics monthly to calculate all in cost for executing trades with them.. since no other brokers publish similar statistics, it is hard to compare IB execution quality with others. This report can be found https://investors.interactivebrokers.co ... stMetricPR
SlowMovingInvestor
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Re: Interactive Brokers (Best Kept Secret)

Post by SlowMovingInvestor »

Does IB ever offer account opening bonuses. or (at the least) refund transfer fees the way other brokerages do ?

I do know they offer referral bonuses, and I do have a relative who has an IB account whom I could ask to give me a referral, but I was wondering about bonuses to the referee ...
destin
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Re: Interactive Brokers (Best Kept Secret)

Post by destin »

How did IB fair the beginning of this month when many brokerage sites stopped working?
saver007
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

SlowMovingInvestor wrote: Mon Feb 26, 2018 12:15 pm Does IB ever offer account opening bonuses. or (at the least) refund transfer fees the way other brokerages do ?

I do know they offer referral bonuses, and I do have a relative who has an IB account whom I could ask to give me a referral, but I was wondering about bonuses to the referee ...
Never seen account opening bonus from IB. I don't know for sure but I doubt they will refund third party transfer fees.
Referer program is pretty good for referer.. $200 payout after a year..
saver007
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Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

destin wrote: Mon Feb 26, 2018 5:16 pm How did IB fair the beginning of this month when many brokerage sites stopped working?
I haven't heard about any IB outages during beginning of this month. Although it does happen every now and then...fact of life with any complex online systems.
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