As I understand it, the commission on a trade is $.005/share. This works well for small trades, but for 5000 shares of a $5 stock the cost would be $25 vs. 8.95 with SCHWAB. Am I missing something? Thanks
3 Things:
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regardless of the number of shares in an order, IB makes available routing strategies that achieve much better fills than schwab. These better fills can easily overcome the commission difference.
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Because IB charges per share rather than per order, you are free to break your 5000 share order up into 50 orders of 100 shares and submit those orders over a period of time, whereas schwab will submit a single 5000 share order. With smaller stocks, a large order like that can easily move the price against you. HFT’s can see that order coming into an exchange and adjust their behavior to “take pennies” from you. IB provides many algorithms for automatically breaking up and trading large orders. This, combined with better routing, offers the potential to get much better fills, faster, cheaper, and without a large order on a smaller stock measurably affecting the price.
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The commission charged by IB decreases with volume and they partially pass-through rebates from the exchanges for adding liquidity, so there’s the potential to have much lower commissions.
It’s not directly related to commissions, but IB also offers much better margin rates, and a more powerful trading platform than any other brokers we’ve seen.
Thanks. I appreciate your reply very much. I assume these things are available on the IB website