Costs of trading

HobbyTrading · May 17, 2017

Fonz said:
I am a discretionary trader.
I day trade with 5% of my trading capital and swing trade (about 3 to 15 days) with the rest of it.
My day trading costs are about 40% of my total costs and represent 15% of my profits. I day trade with options. 85% of my option costs are for this day trading activity.
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So if you would not have had trading costs for day trading your day trading profits would have been 15% higher? This is a substantial impact. Are you sure you can't find ways to reduce those costs?
What about the other 60% of your trading costs? Do those have a similarly large impact on the profit of the swing trading?

Fonz · May 17, 2017

This is a big impact and it is why I am trying to find ways to reduce my day trading costs. So far, I try to eliminate the "predictable bad days" and don't trade those days and now I am looking for a very low commission broker on options.
Regarding the rest of the costs, they are actually already very low, specially the broker interest rate, regarding of how I trade.

HobbyTrading · May 17, 2017

Besides commission for options and stock is the cost you pay for market data number three on your list of costs. No matter whether you will have successful trades or bad trades you have to pay this. A careful review here could save you some.
Those professional market data costs are in a completely different league from what I have to pay as non-pro.

tommcginnis · May 17, 2017

Fonz said:
I wanted to share a very simple cost analysis that I do every year regarding my trading activities. As an "active" trader, I really have to take the costs into consideration.

Market data and platform fees per month:
Tradestation Platform, Tradestation Portfolio Maestro and Tradestation RadarScreen: Free
Prof. Market Data: $190 (indices, Globex, Amex+Nasdaq+NYSE real time)
TWS (Interactive Brokers) platform: Free
Prof. Market Data: $124.25 (Stock & option streaming)
Mluticharts: Free (lifetime licence)

Yearly commission on trading:
Futures: $1,578 (Tradestation) 300 lots
Overnight fees $135 (Tradestation)
Stocks: $6,412 (IB) 584,652 shares
Options: $13,580 (IB) Just simple calls and puts. 9972 option contracts
Interests (IB broker paid): $680 (I use high leverage for stocks)

Good:
Low commission on stocks & very low interest rate
Free platforms.

Less good:
Commission on futures (not the best but free platforms), professional market data fees which are unavoidable.

Bad:
Overnight fees, no big deal but probably avoidable.
Options: Even at $1.36 per contract, need to lower the costs.

I just found eoption. The option commissions are actually amazingly low. After doing the maths, I should pay: 1092 order X $3 (commission 1) + 9972 option contracts X $0.17 (commission 2) = $4,971.
If I go with them for option trading only, I will have won $8,609 more, next year just with this move!

Anyway, I just wanted to share this annual review of my costs of trading.

Anybody actually know or even trade with eOption? I still need to do some research before I open an account with them.

Good trades!
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One of the smartest sorts of threads I've seen started yet, in 2017. More later.....

Fonz · May 17, 2017

I created an LLC to segregate my short term trading activities and being a pro for the IRS. That way, wash sales don't apply (big deal for my swing trades) and in case of a big yearly loss (we never know for sure) I can deduct all of them, not just $3,000 per year. I can deduct a lot of business costs, like professional market data.
The only way I can reduce the market data costs is to get rid of Tradestation. unfortunately I really need them for the platforms, and having my capital into 2 or 3 different brokers make me feel better.

Handle123 · May 17, 2017

globalarbtrader said:
It's good to do this analysis, and good to think about how you can reduce your costs, but it's also meaningless to look just at the $ cost without knowing what your account size and risk or return target is. I can't be bothered to add this up, but your total $ cost looks like it's about $25,000 a year. Now that sounds like an awful lot of money to me, but you might have a $10 million trading account, in which case it isn't.

You may also want to include your market impact / slippage, as again this is a cost you will pay regardless of whether your trading is profitable or not.

Let me share my own figures and explain how I'd think about them:

Commissions £3,120 (almost entirely in futures)
Data £120
Net interest £600
Slippage £2,240

Total: £6,080

Even allowing for currency conversion you can see why I was horrified by your figures (and they don't even include slippage).

Now let's calculate those as a % of my notional account size (£400K):

Commissions 0.78%
Data 0.03%
Net interest 0.15%
Slippage:

Total: 1.52%

That is 1.52% I have to make every year before I become profitable. Your costs (around £20,000) would equate to 5% of my account. That sounds like an enormous amount.

Or to put it another way, I run my account at a target risk of 25% a year. So in risk units I have to make 1.52 / 25 = 0.061 Sharpe Ratio points a year before I pay my costs.

A fairly pessimistic guess at my long run Sharpe is 0.5 (equating to a return of 12.5% a year). So I'm giving up about 12% of my likely return in costs. If I was paying £20K a year in costs then I'd be giving up 40% of my returns in costs. That's ridiculously high.

That is the kind of units you should think about costs in.

This isn't what opportunity cost is.

Opportunity cost is the fact you really ought to charge yourself the money you could have earned if you weren't trading. You should also count the money you could have earned if you had invested (the opportunity cost of capital, with a commensurate level of risk as you have in your trading).

To take an example; an extremely successful day trader with a $100,000 stake might make an average of a 100% return a year, with a standard deviation of 20% - similar to the US equity market.

They also have to pay $20,000 in commissions, but that still leaves them with $80 grand.

However to get these returns they need to spend 10 hours a day shackled to a desk trading and researching for the next days open. If they weren't doing this they'd be holding down a white collar job with a $75,000 salary. I'll assume that the tax on trading and salary is the same but obviously you can factor that into your own calculations.

If they weren't trading then they could passively invest in the US stock market and earn an average of, I don't know let's be pessimistic, say 8% a year or $8,000. That is their opportunity cost of capital.

So their real return from trading is $100,000 -$20,000 - $8,000 - $75,000 = .... well it's negative. They would have been better off working for a living, and investing passively.

If I look at my own account (notional value £400K) then the opportunity cost of capital is around £32K. But because I trade in a fully systematic fashion I only spend an hour a week on it. Even if I assume I would spend that hour doing consultancy at my highest day rate that only comes out to £13K. So I really ought to be earning at least £45,000 a year to make it a worthwhile exercise.

GAT
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I lean on the loss of income to try to do better in another line of work as a expensive that has to be made up in new line of work, you are now having Health insurance, dental insurance you have to pay, loss of matching 401k, profit sharing, short/long term disabilities, bonuses not received and not even counting one's salary, so from the get go, you have more expenses you have to pay each month and it not different than data.

beerntrading · May 17, 2017

globalarbtrader said:
This isn't what opportunity cost is.

Opportunity cost is the fact you really ought to charge yourself the money you could have earned if you weren't trading. You should also count the money you could have earned if you had invested (the opportunity cost of capital, with a commensurate level of risk as you have in your trading).

To take an example; an extremely successful day trader with a $100,000 stake might make an average of a 100% return a year, with a standard deviation of 20% - similar to the US equity market.

They also have to pay $20,000 in commissions, but that still leaves them with $80 grand.

However to get these returns they need to spend 10 hours a day shackled to a desk trading and researching for the next days open. If they weren't doing this they'd be holding down a white collar job with a $75,000 salary. I'll assume that the tax on trading and salary is the same but obviously you can factor that into your own calculations.

If they weren't trading then they could passively invest in the US stock market and earn an average of, I don't know let's be pessimistic, say 8% a year or $8,000. That is their opportunity cost of capital.

So their real return from trading is $100,000 -$20,000 - $8,000 - $75,000 = .... well it's negative. They would have been better off working for a living, and investing passively.

If I look at my own account (notional value £400K) then the opportunity cost of capital is around £32K. But because I trade in a fully systematic fashion I only spend an hour a week on it. Even if I assume I would spend that hour doing consultancy at my highest day rate that only comes out to £13K. So I really ought to be earning at least £45,000 a year to make it a worthwhile exercise.
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Sorry, I know what opportunity "cost" is, but I combined two related ideas into the same post--but point stands. I don't see how any of that factors into my decision making as a trader.

globalarbtrader · May 17, 2017

beerntrading said:
Sorry, I know what opportunity "cost" is, but I combined two related ideas into the same post--but point stands. I don't see how any of that factors into my decision making as a trader.
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It's important in making the biggest decision of all - is it worth trading?

GAT

beerntrading · May 17, 2017

globalarbtrader said:
It's important in making the biggest decision of all - is it worth trading?
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My existential doubt is sufficient without piling on imaginary costs.

TraDaToR · May 17, 2017

globalarbtrader said:
It's good to do this analysis, and good to think about how you can reduce your costs, but it's also meaningless to look just at the $ cost without knowing what your account size and risk or return target is. I can't be bothered to add this up, but your total $ cost looks like it's about $25,000 a year. Now that sounds like an awful lot of money to me, but you might have a $10 million trading account, in which case it isn't.

You may also want to include your market impact / slippage, as again this is a cost you will pay regardless of whether your trading is profitable or not.

Let me share my own figures and explain how I'd think about them:

Commissions £3,120 (almost entirely in futures)
Data £120
Net interest £600
Slippage £2,240

Total: £6,080

Even allowing for currency conversion you can see why I was horrified by your figures (and they don't even include slippage).

Now let's calculate those as a % of my notional account size (£400K):

Commissions 0.78%
Data 0.03%
Net interest 0.15%
Slippage:

Total: 1.52%

That is 1.52% I have to make every year before I become profitable. Your costs (around £20,000) would equate to 5% of my account. That sounds like an enormous amount.

Or to put it another way, I run my account at a target risk of 25% a year. So in risk units I have to make 1.52 / 25 = 0.061 Sharpe Ratio points a year before I pay my costs.

A fairly pessimistic guess at my long run Sharpe is 0.5 (equating to a return of 12.5% a year). So I'm giving up about 12% of my likely return in costs. If I was paying £20K a year in costs then I'd be giving up 40% of my returns in costs. That's ridiculously high.

That is the kind of units you should think about costs in.

This isn't what opportunity cost is.

Opportunity cost is the fact you really ought to charge yourself the money you could have earned if you weren't trading. You should also count the money you could have earned if you had invested (the opportunity cost of capital, with a commensurate level of risk as you have in your trading).

To take an example; an extremely successful day trader with a $100,000 stake might make an average of a 100% return a year, with a standard deviation of 20% - similar to the US equity market.

They also have to pay $20,000 in commissions, but that still leaves them with $80 grand.

However to get these returns they need to spend 10 hours a day shackled to a desk trading and researching for the next days open. If they weren't doing this they'd be holding down a white collar job with a $75,000 salary. I'll assume that the tax on trading and salary is the same but obviously you can factor that into your own calculations.

If they weren't trading then they could passively invest in the US stock market and earn an average of, I don't know let's be pessimistic, say 8% a year or $8,000. That is their opportunity cost of capital.

So their real return from trading is $100,000 -$20,000 - $8,000 - $75,000 = .... well it's negative. They would have been better off working for a living, and investing passively.

If I look at my own account (notional value £400K) then the opportunity cost of capital is around £32K. But because I trade in a fully systematic fashion I only spend an hour a week on it. Even if I assume I would spend that hour doing consultancy at my highest day rate that only comes out to £13K. So I really ought to be earning at least £45,000 a year to make it a worthwhile exercise.

GAT
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That's interesting GAT. For example in 2014, I started trading with around 200000$. At the end of the year, the commissions + exchange fees totaled 67000$. I used X trader and X trader pro and had a minimum monthly activity fee of 1000 GBP at Marex. My fixed costs were around 1500 $ per month, so my total trading costs were around 85 K$ =42.5% of account ...LOL