It’s not free if it comes with a fee – investors can pay a hefty price for so-called “free” commissions on their trades, according to Gerry Perez, the CEO of Interactive Brokers in the UK. He says it pays for individual investors to focus on their investment broker’s fine print and says the total transaction cost is the real bottom line that should matter most.
Perez has led Interactive Brokers’ UK business for more than 20 years and began his career as an options trader. He speaks regularly on trends in online investing and trading for individual and institutional investors.
According to him, “Individual investors should take into account all applicable fees being charged by the brokerage to be sure they don’t sacrifice their pounds to save pence — “free” commissions can be quite costly when you factor in the FX conversion fee.”
For example, when trading US stocks, UK investors may need to convert GBP to USD to execute trades. Some brokers, including those advertising “zero commissions,” may apply significant hidden FX fees to these currency conversions. This results in UK investors paying much more than expected for US stock trades.
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Interactive Brokers vs other brokers
Interactive Brokers’ transparent 0.03% FX fee, combined with low commissions, allows UK investors to trade US stocks with considerable savings.
The table below comparing the actual trading costs charged by some of the most well-known brokerage firms reveals as much:
Traders need to pay more attention to the hidden costs they take one when trading. A new study for example has revealed Robinhood’s customers face hidden costs far higher than those of other brokers.
The paper entitled ’Some Anonymous Options Traders Are More Equal than Others’ has offered a glimpse into brokers’ transactions costs. While brokers disclose how much they charge in fees, they shed little light on these transaction costs.
The study from three US academics looked at the options market. It revealed that at Robinhood, nearly 7% of the dollar value of options transactions is swallowed up by such costs. This is far more than at rival brokers.
Brendan Callan, CEO of Tradu, believes that unfortunately this is common practice in the market and traders are suffering as a result. He encourages retail investors to shop around for a platform.
“For years, active retail traders have been getting a bad deal from major trading platforms,” Callan said. “Most trading platforms are very transparent about their fees, but they are less up front when it comes to commissions and spreads. This is despite them being just as much of a cost and a drag on performance. As a result, traders have unwittingly long suffered from high and often hidden trading fees, negatively impacting their returns.”
Callan said retail investors shouldn’t stick with their current provider simply out of habit. Instead, they should focus on platforms that offer seamless access to multiple markets, highly competitive and transparent fees, professional-grade tools, and outstanding customer service – this is the least they deserve.
