The Real Price of Discount Trading: Keeping Your Trading Costs Consistently Low Is a Challenge, Especially with the Bewildering Number and Wide Range of Fees, Charges and Commission Rates Being Marketed. Here We Will Try to Help You Be a Better Shopper
McMahon, Chris, Modern Trader
All it takes is a quick flip to the back of this magazine to confirm that the cost of trading is plummeting. Consolidation in the brokerage industry and the rise of internet trading has created an environment of intense competition, pushing trading costs lower and lower.
Some futures brokerage firms are advertising fees of less than $2 for futures trading. But in trading, as with everything, there remains a wide range of possible fee structures and service levels for the retail trader and you have to know what questions to ask and to read the fine print to find what you need, get what you want and not overpay. But in trying to achieve that goal, it's easy to go too far in the other direction, paying next to nothing and getting exactly what you paid for.
"Back in the old days, the broker would take discretion and do all the trading and get input from the client about what the client wanted to trade and how much," says Joe Krutsinger, a registered information CTA and president of the trading system design firm that bears his name. "He really did do everything and that was all included in the fee. Nowadays we've got people who are trying to get everything for free. But free can be the most expensive thing you ever buy."
FIX PRIX, 'A LA CARTE & AUTOMAT
When shopping for a futures broker, the two most important things to know are: what you are paying for and what you are getting. At a minimum, a trader will pay an exchange transaction fee, a National Futures Association (NFA) fee, which is pennies, a clearing fee and a commission. And while a firm may advertise extremely low fees, that price may not apply to all exchanges or all contracts. Exchange transaction fees vary from exchange to exchange, from contract to contract and from pit to pit.
Electronic exchanges tend to be less expensive to trade in than predominantly open-outcry exchanges, and exchange transaction fees are not negotiable at the retail level. However, unless the broker is marking it up, the exchange transaction fees should be consistent from broker to broker for a specific contract on a specific exchange. Exchange transaction fees should be listed as a line item on your customer agreement and are easily verified by checking the exchange's Web site.
With this in mind, it is important to know if the quoted rate is all inclusive or a la carte. Additional charges can include electronic transaction fees, verbal order fees and mysterious 'brokerage fees,' above stated commissions.
"Everybody has some price they advertise, but when you go to buy it, you've got to pay more to spray the undercarriage," laughs Todd M. Lang, vice president of Field Financial Group, likening the process of shopping for a broker to shopping for a car. For self-sufficient traders, his firm quotes a $19 flat rate per round turn for verbal orders, a flat rate of $8.98 per side for electronic orders and a flat rate of $4.98 per side for e-minis. Those rates include exchange transaction fees, commissions, clearing fees, the NFA fee and an electronic transaction fee.
But this approach isn't for everyone. Andrew L. Gadzinski, founder and president of SuperFutures.com says one sign of a good brokerage is that it will offer different rates for each pit it trades in. "Get a good S & P rate, a good e-mini rate and make sure you are not paying New York prices for trading in Chicago," he says. His firm offers electronic trading for as little as $1.89 per contract, per side and trading in open outcry pits, such as those in New York for $8.25 per contract, per side, but those costs can fluctuate based on the size of your account, the volume you trade, your experience, platform and the contract you want to trade.
Both pricing models are legitimate and offer certain advantages to different types of traders. All inclusive prices eliminate the opportunity for ugly surprises, and some traders are willing to pay a little bit extra for that; while a la carte pricing allows for additional savings at the expense of more vigorous cost comparison. …