I've seen a lot of talk lately about brokers, commissions, transaction taxes, and high frequency trading and such. Generally topics that relate to order execution. So I thought I'd share some tips. Most of you probably only turn over your stock portfolio annually or even less, so this stuff isn't a huge deal to you, but shaving a few basis points of your transaction costs could mean a few extra dollars here and there and who doesn't like a few dollars? If you do have high turnover or trade large volume this could be very valuable. First off I'm a huge advocate of Interactive Brokers. Their commission structure and execution tools are top notch, and I'm not aware of any other US broker that comes anywhere close to competing with them on those fronts. I mention IB because a lot of the things I'm going to talk about are only available to non-professionals through them in the US as far as I know. 1) Algorithmic Order Execution. Frankly, if you're not using algorithms to execute your orders you're behind the times and you're bleeding tiny amounts of money that you're unaware of. Very few institutional traders/professionals these days are NOT using algos to make trades. The idea of algorithmic execution is to break an order up into smaller component lots, usually of 100 shares, and fill the order over time and ideally at more favorable prices instead of in one bulk lot at a fixed price and point in time. This is most beneficial if you're submitting larger orders, because it masks your activity, which should reduce the impact your orders have upon the price of the stock. It makes it impossible for any predatory HFTs out there to target your trades and steal your pennies (too complicated for this, but true). Even for small orders there's just no downside. HERE is an example of a type of algo order called vwap, which is the most common algo order type and an effective choice in 99% of situations. Most algos like this also have the advantage of spreading your order out over time, so you don't have to worry about picking the perfect moment to submit a trade. By default an order like vwap will fill over the entire course of the day, but can of course be modified to the pace you desire. 2) "Flat Fee" vs "Per Share" commissions. I know it can be intimidating to try and figure out per share fee structures, but in almost all cases I've ever seen the per share fees will be lower. This is especially true for very small orders, like I imagine many retail investors like yourselves are making. There is absolutely no reason anyone should be repeatedly paying $10 (or even $5 really) to make small trades. In addition to already probably being lower cost you can get creative and (at least through IB) select a fee structure which passes some exchange rebates back to you if your order ADDS liquidity. I'll talk more about that in a moment, but it is possible to get some exceptionally low commissions by adding liquidity with your orders. warning: be aware of monthly minimums. If you hardly trade at all or have a very small account then you may be charged a monthly maintenance fee which negates any benefit of this. I think the monthly minimum commissions that need to be generated to avoid a fee is $10, but look it up. 3) Marketable vs Non-Marketable orders. At any point a stock will have a bid price and an ask. The difference between those prices is called the spread. If you submit an order to buy at the ask or sell at the bid, then you are submitting a marketable order. Your order will be matched with the already existing offer and the transaction will take place immediately. Market orders and limit orders at or above the current price are marketable orders. These are also called liquidity TAKING orders - they remove standing offers. If you submit an order to buy below the current ask, or to sell above the current bid, then your order is non-marketable. This is also called a liquidity ADDING order. The order will sit at the exchange and fill only if another party out there decides to come to your desired price for the transaction. Liquidity adding orders often generate rebates from exchanges. IB offers the option to pass some of that rebate on to you as mentioned earlier. Other brokers just pocket it. Its small, but beneficial if you trade a lot. Rebates aside you still don't want to be submitting marketable orders all the time regardless of order type or broker. If you cross the spread frequently, meaning you buy at the ask and sell at the bid, then you are losing to the spread on your trades. example: The bid is $5, the ask is $5.02. If you buy at the ask and later sell at the bid then you've lost $.02 on a trade where the price of the stock didn't move even a penny. That's a -0.4% loss just from lazy order execution, and in the event of larger spreads it can be much worse. If you don't need to fill the order as quickly as possible then it is generally better to use an order type that floats on the favorable side of the spread and allows other market participants to come to you for their fills. Sometimes you may feel like you got a worse price, sometimes better, but over the long run it is an advantage to add liquidity and be hesitant to cross the spread for fills. _______________________________________________________________ Those are my three big tips I guess. Optimal order execution is a challenge that probably isn't worth the time or effort for most low-turnover retail investors, but you can definitely reduce your transaction costs by a substantial amount if you're diligent and willing to figure things out. There's nothing terrible about using a conventional retail broker and paying the $5-$10 commissions if you trade very low turnover, or have a small account, or you get some additional benefits from the broker like banking services, research tools, etc. But I suspect there are a LOT of people out there flushing away $100s or $1,000s every year by being lazy in their execution and/or brokerage selection.
LOL. Well done debit. Can't put anything by this crowd. ET has always had some of the best snoops on the web! (The best I remember was some guy who started putting up massive numbers day in and day out on the P&L thread. Rearden caught on to his shenanigans and busted him for using demo account.)
Working hypothesis is, any post of more than a few sentences is an uncredited cut/paste from the Web. Sadly, there are many lowlifes on this site.
This guy has done this before. Copies questions and ideas from other areas of the web and posts them like their his own. Pretty much every thread he started is that.
The concept of trying to shave pennies with a limit order as an entry, all too often hits the reality of needing to get into the damn trade in the first place. A penny saved is worthless if it causes you to miss a trade.
What do you care of more guys: the source or the content? I saw a good piece and wanted to see your thoughts as this place is far more professional than reddit.