Interactive Brokers

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Interactive Brokers LLC is a United States-based online brokerage firm, operating on most major worldwide stock, futures, bonds, foreign exchange, and options markets. Its official abbreviation is IB.

[edit] Characteristics

Interactive Brokers is a direct-access broker. It aims to suit active, self-help and online traders, in contrast to investors and non-active or helpless traders. It claims to offer discounted fee structure, high-level trading software.

It requires high reliance on electronic methods for order entry, processing, statement delivery and account management. Nearly every issue can be done via online. Verbal or telephone orders are at substantial surcharges based on commissions, and for close positions only, to discourage users from non-online trading.

It takes a strict and conservative approach on margin policy. Unlike other firms, no margin calls will be issued. Positions will be liquidated quick once accounts fall below the maintenance levels. On one hand, it lowers the risks of bankruptcy from customer default. On the other, it may lose some customers who like better and more flexible margin arrangements.

[edit] Account minimums

In order to open a new account, one must deposit $5,000. A minimum commission of $10/month is normally charged, and strict account eligibility criteria are enforced. If the account value is less than $2000 then the minimum monthly fee is $20.

Any fees charged (not interest received) in IB are not across evenly on a pro-rata basis. For example, a customer opens its account at 20th. The whole sum of any monthly charges will still be applied.

[edit] Commission and fees

Interactive Brokers has different plans for different products. There are 2 commission plans - unbundled and bundled plans - for US equities and futures. For others, only the unbundled plan is offered.

As to bundled plans, it is usually flat-rate. As to unbundled plans, commissions are based on volume. Discounts are given in pro-rata basis. The fees are applied on a marginal basis for a given calendar month. For example, a customer executes 1,500 US futures contracts in a month, the IB execution costs would be:

the first 300 contracts at $0.90
the second 700 contracts at $0.70
the third 500 contracts at $0.45

[edit] Interest rates

Interactive Brokers offers one of the most attractive interest rates in the industry. It is charged at the benchmark rates minus 50 basis points for accounts over $10,000 in USD (Tier I threshold amount) and benchmark rates minus 25 basis points for accounts over $100,000 in USD as of 1 Aug 2006.

Nevertheless one should pay attention to other direct factors which may undermine interest receivables or rates. Interactive Brokers uses pro-rata basis to calculate interest earned and commission charges, which is very unusual in the industry. This is to encourage clients with larger balances, while discouraging clients with small balances. As IB's target client is the active, semi-pro or full-time trader, the exclusion on the first 10K deters clients with little capital to trade.

In the following paragraph, it is going to explain how this policy affect the interest calculation, and how it affects real interest rates.
(Note: The following has no implications on whether the interest rates are high or low, acceptable or not. One should not judge simply based on the size of the passage.)

[edit] Effects of interest policy

The interest benefits are somewhat offset in several ways:

There is never any interest for the first specified amount in "Tier I", even if your total sum of money is over "Tier I" threshold. For example, 'customers never gain any interest for the first $10,000 in USD in that case, over if they deposit more than $10,000
Different interest rates are attached to different tiers/parts of the whole sum of money, ie some money will earn more interest, some less
Each sum of money per sub-accounts (ie securities & commodities accounts) and per currency is counted separately in interest calculations. For example, if you have 2 sums of money in AUD and HKD, each sum has to surpass its own "Tier I" threshold in order to start earning interest for any extra money
Due to the fact each sector (divided by sub-accounts and then by currencies) has its own balance, you may be charged interest payments in the end even if your total balance is positive (since you may have negatives in sub-balances).

The real interest rates, after consideration of the above factors, are lower than expected for lower account balances. Higher balances > $50,000 earn rates significantly higher than most other brokerages.

[edit] Total actual losses explained

The following are interest lost for the specified amount in the first tier in different currencies. Add up the losses if you hold more than one currency (valid up till 18 July 2006):

Currency Base	Interest-Free Amount in Tier I	interest Lost Per Year
AUD	15,000	-863.70
CAD	14,000	-597.10
CHF	13,000	-179.40
EUR	8,000	-224.80
GBP	6,000	-272.88
HKD	78,000	-3,099.72
JPY	1,190,000	-1,309.00
KRW	10,000,000	-420,000.00
MXN	100,000	-6,850.00
SEK	80,000	-1,880.00
USD	10,000	-529.80

It may cost you more if you have multiple sums of money in terms of currency or sub-accounts (ie securities & commodities accounts). For easy understanding and illustration, you may treat IB actually charging you (by taking your interest away) per year per sub-accounts AND per currency. You are being charged 2 times if you hold both securities and commodities sub-accounts, which is about US$530/year per sub-account. If you hold 2 currencies in 2 sub-accounts, you are being charged 4 times.

It was once small losses when the interest rates were low in the past, so few would care. Now the interest rates have been rising a lot. These losses become more serious.

Your own sum of money is divided by sub-accounts first and then currencies. Even if your total sum of money is positive, you are charged interest payment since one or several sub-balances are negative.

Note: the above numbers calling the figures "losses" have been calculated using IB's substantially higher interest rates - biased reporting at best.

[edit] Formula of interest losses calculation

To sum up, the formula of calculating the total interest losses :

= interest losses incurred in securities account + interest losses incurred in commodities account
For interest losses incurred in securities account,
 = interest losses incurred per currency
 = actual interest losses incurred from each balance of USD, HKD, AUD and so on
For interest losses incurred in commodities account,
 = interest losses incurred per currency
 = actual interest losses incurred from each balance of USD, HKD, AUD and so on

[edit] Opinions on policy

Note: Everything below is selectively summarized from various investment forums.

Interactive Brokers do not have any hidden costs ^[1]. The interest method is described on Interest Overview and Interest Methods. While IB does not pay interest on the first $10,000 in an account, it does offer above market rates compared to other brokers for amounts above the interest threshold.

There are different opinions on the interest policy, like on Elite Trader and IB's own forum:

Some do not care since they are dominated by margin interest rather than credit interest or carry larger balances and thus benefit from higher overall rates;
Some care about the interest rates but think it is acceptable. After all, life is full of compromise. Nothing is perfect;
Some with low account balances care about the interest rates and think it is unacceptable. They complain about the fairness of the interest policy.

IB aims to attract more active traders who tend to carry higher account balances. Since they do not target smaller accounts, there has been chatter from the less active but more vocal clients who are unable to deposit more than $10,000 USD.

[edit] Are people well-notified of effects of policy

If one goes to the interest link under fees and charges on the homepage on its website, Interactive Brokers documents its calculation method with examples in a separate page.

[edit] Margin lending & short-selling rates

Margin lending rates are lower on outstanding debit balances with progressive discounts for larger balances. Interest credit is made for cash pledged as collateral for short selling.

[edit] Trading platforms and software

[edit] Traders Workstation

The Interactive Brokers interface, Traders Workstation (abbreviated TWS) is primarily designed for experienced and active day-traders. Inexperienced users/investors will be faced with a significant learning curve. Free demo accounts and papertrading accounts are available, but the demo accounts have all sort of bugs and errors. It is highly unstable. As the interface software is coded in Java, it is highly portable. The same version and interface runs on MS-Windows, Macintosh, and Unix-based computers.

Nevertheless the charting is limited and lack many useful functions. It lags far behind other charting companies like QuoteTracker, Sierra charts etc.

[edit] PaperTrader

Like many other firms, IB also offers the capability to papertrade. Papertrading is to help traders to practice trading without risking one's actual capital. As suggest by IB, one may use this test environment to:

Familiarize the platforms and features without risk
Learn market dynamics in new exchanges and products
Simulate and test trading strategies
Test Application Program Interface (API) applications

If people would like to learn trading, do not use the free demo accounts, use the paper trader. They have all sort of bugs and errors which make it highly unstable to test reliably. The demo is best served for learning the basics of Traders Workstation, while the paper trader should be used to test strategies in a real time environment.

[edit] WebTrader

WebTrader is an HTML based trading screen for use behind a firewall. It can be said as a very lite version of Traders Workstation, in which it offers very limited features and simple ways to manage your accounts and trades.

[edit] MobileTrader

MobileTrader, as its name might suggest, offer the capability to execute orders when you are not at the computers. You can access from any wireless device to manage your accounts and trades.

[edit] Notes and references

^ Interactive Brokers makes its claims in an e-brochure titled "Is Your Broker Telling the Full Cost Story?"

[edit] External links