Some Strings Attached
In our comparison of Questrade and Virtual Brokers under a variety of trading scenarios, we found that ECN or exchange fees made a significant difference as to which plan was most cost-effective. At extremely high trading activity levels, ECN fees can add hundreds of dollars a month in fees and can erase any advantage lower commission fees would have.
As the tweet from Questrade posted in the summer of 2009 suggests, traders should try to control their costs. For example, a market order placed using Questrade’s $0.95/$6.95 plan for 869 shares (of a stock greater than $1) on a Canadian exchange, ends up costing as much as the a trade for 999 shares at Virtual Brokers:
$6.95 (commission) + 869 shares x $0.0035 per share (exchange fee) = $9.99 per trade
The equivalent transaction using Virtual Brokers $0.99/$9.99 plan would cost:
869 shares x $0.01 per share = $8.69 per trade
Thus, exchange fees make market orders of Canadian securities more expensive at Questrade than at Virtual Brokers. If the order placed was a limit order, Questrade’s $6.95 cap would make it the cheaper option.
While Questrade offers a lower commission cost, it does so only with the subscription to a data plan and with a major string of ECN fees being tacked onto the cost of a trade. If small, infrequent market orders are placed or if they’re not used at all, then Questrade’s plan might be compelling.
Virtual Brokers, on the other hand, has a different set of strings attached to its deal. While they do offer $0.99 trading commissions without having to get a data plan, in order to qualify for the $9.99 cap investors need to be on the VB Webtrader platform and if they need a streaming data plan, an additional monthly charge is incurred. One potential bonus with Virtual Brokers is that clients can switch between plans without penalty and thus can time their orders around the most advantageous plan structure to lower their costs.
The Bottom Line
Ultimately what our analysis found that investor behaviour – the decision to use limit orders or market orders, and what underpins that decision (fear, greed or necessity) determines the cost-effectiveness of each plan. Rather than focusing on low commission rates, self-directed investors have an incentive to focus on their trading behaviour and needs. Knowing what your shoe size is before you go shopping is, after all, the better way to determine which pair will be the right fit.
In the final part of our special series we will take a look at additional interesting findings from our study from a total cost per trade perspective and provide some tips for investors to think about when considering these plans.