SparxTrading

In the third part of our series comparing Questrade’s $0.95 trade commission plan to Virtual Brokers’ $0.99 trade commission plan we focus on how order types can impact the total cost associated with either trading commission plan.  If you missed the beginning our series, you can read Part 1 here or Part 2 here.  If you’d like to read the full report, you can access it here.

No Shoe-In

Self-directed investors have been bombarded with commercials comparing buying stocks to online shoe shopping or a thrill-filled ride.  Without knowing about order types and routing, however, investors placing orders for stocks online can themselves sporting pair of uncomfortable fees – ECN & exchange fees to be exact.

One of the important distinctions between Questrade’s and Virtual Brokers’ lowest commission cost plans is whether or not electronic communications network (ECN) and/or exchange fees are added to the cost of a transaction.  Indeed this is true of many Canadian discount brokerage commission plans currently on the market.  Virtual Brokers’ $0.99/$9.99 commission plan commission doesn’t pass along any ECN or exchange fees whereas Questrade’s $0.95/$6.95 plan does.

What this means for investors using Questrade’s plan is that they have to be aware of what order types they’re using (e.g. limit vs market order) to ensure they do not incur added fees.  It should be noted that Questrade does offer clients the option of having certain US market orders routed across different networks without having ECN or exchange fees.

Convenience vs Price

ECN and exchange fees can be thought of as a kind of ‘convenience’ fee.  If a buyer wishes to get an order of stock at the current market price they must have that order filled by someone on the spot. This kind of order, known as a market order, allows the buyer to place getting the order filled immediately as a priority over execution price.  Conversely, a limit order is when an investor sets the price that he or she wants to either buy or sell a stock at. If there is a buyer or seller that is willing to accept the price, the transaction happens and if not, the order goes unfilled.  Thus, limit orders prioritize execution price over order fulfillment.

Stock exchanges and ECN’s like limit orders because they provide visible and ‘stable’ price levels that the marketplace can use to place their bids/asks around. Limit orders, therefore, improve “liquidity” as they create an identifiable pool of either buyers or sellers. To incentivize liquidity, stock exchanges and ECNs usually pass along cash credits to whoever places these types of orders.  When market orders are placed, they remove liquidity by reducing the identifiable pool of buyers or sellers and so exchanges and ECNs pass along a small charge to those who place these types of orders. From a tactical perspective, however, limit orders are the equivalent of ‘tipping your hand’ and as a result can be exploited by other market participants (such as market makers) looking to uncover areas of strong support or resistance.

Most Canadian discount brokerages, unfortunately, do not pass these credits given to them by exchanges or ECNs when their clients place limit orders however they will readily pass along the ECN and exchange fees. Thus, plans in which ECN fees are included (i.e. ‘flat pricing’) might be more on a commission basis for certain types of orders but actually end up being cheaper for others.

In the second installment of our special series comparing Questrade’s and Virtual Brokers’ lowest stock trading commission plans, we take a look at what our study results showed us about the impact of market data to the overall cost of trading.  If you missed the first part, you can check it out here or if you’d like to read the full report you can access it here.

The Cost of Data

Of the different categories of cost to consider when looking at either Questrade’s or Virtual Brokers’ lowest trading commission plans, market data costs should be one that self-directed investors pay careful attention to.

Stock market data packages come in various levels of detail providing investors with a window into the action between buyers and sellers as they “debate” over what a stock or asset is worth.   Depending on the trading style, real-time streaming data may or may not be useful.  For example, longer term investors or swing traders may find streaming real-time quotes not to make a difference as to how they make their trading decisions and instead could use end of day data or snap quotes. On the other hand, for highly active traders, real-time streaming data is essentially a must-have in order to accurately place orders based on current market prices and to closely monitor trades.  Given the need for market data by active traders, discount brokerages use data packages as a way to generate revenue and incentivize the highly valuable active trading clients into certain types of trading packages.

While market data packages for Questrade and Virtual Brokers are not exactly identical in composition each discount brokerage does offer essentially the same market data access. In our pricing analysis we were able to create comparable sets of data packages between Questrade and Virtual Brokers in order to measure how market data costs impact the overall cost of trading.  We tested slightly tweaked versions of the “Package 2” from Virtual Brokers and Questrade’s Advanced Canadian plan (see table).   To ensure the data package for Virtual Brokers was equipped with streaming quotes, we added in the $35 per month fee for VB WebStreamer (their streaming data add on). Snap quotes on the VB Webtrader are standard (and free), however for our tests we assumed that the user would want/need streaming data.

As the table above shows, Virtual Brokers’ data plan in our model works out to be slightly more expensive on a monthly basis than does Questrade’s data plan.  For self-directed investors, these data packages demonstrate that in order to qualify for the lowest commission plan, they have to be willing to spend at least $1300 at Questrade and $1400 at Virtual Brokers annually on data (in the case of our model).  Even for modest portfolio sizes (e.g. <$25, 000) these are pretty hefty hurdles to overcome.

Rebate or Re”bait”

While both Questrade and Virtual Brokers offer rebates on data, these rebates require investors to trade certain minimum amounts per month to qualify.  For Questrade, there are two tiers of rebate, one for individuals who trade between 10 and 99 times per month, and another for those who trade 100+ times.  By comparison, Virtual Brokers offers its data rebate only after clients have made 150+ trades in the prior quarter (or 50+ times per month on average for 3 months).

Arguably, the amount of trading that has to be done in order to get a meaningful reduction in data is substantial at both discount brokerages. In Questrade’s case, trading up to 99 times in a month gets the same amount of rebate as trading 10 times per month – a rebate of $19.95.  In order to qualify for the best rebate, $89.95 per month, at least 100 trades or more have to be made in a month.  Similarly, in order to qualify for Virtual Brokers’ best commission rebate, clients have to make 150 trades or more in a quarter before they are eligible for a $60.75 per month rebate.  If an individual is trading at the activity levels that qualify them for rebates, they can expect to be spending thousands of dollars per year on equity commissions.

The Bottom Line

The take home lesson for self-directed investors considering these plans is that they should be mindful of the impact that data costs can have on the total cost of trading.  Even though low starting balances can be used to access these products, smaller portfolios have to work much, much harder to overcome the high cost burden the data fees introduce.  Perhaps the most important point for those considering these plans is that the advertised commission rates mask the actual cost of a trade substantially because of the high data cost.  In a future article we will outline the actual cost of a trade using these data plans to show the big difference that exists between actual costs and the advertised low commission rates.   Ultimately, whether or not these low commission plans are the most economical choices will depend heavily on portfolio size and trading activity.

Our next piece in the series covers the impact that order types can have on the cost of these two plans.

Correction Notice: April 22, 2013

This post has been revised to reflect the following corrections:

Table 1 has been revised to include MX level 2, ATS Level 1 and ARCA level 1 data. It was previously reported that Questrade’s data plan was $116.85 and Virtual Brokers’ data plan was $95.75.  Questrade’s streaming index quotes was reported at $6.95 per month but has been amended to $0 and thus the total for Questrade’s monthly plan as stated in the table is $109.90.  Virtual Brokers’ data package required the above mentioned add ons (plus a $1 for Dow Jones Index data) requiring an upward adjustment of $21.40.

Canadian Discount Brokerages Cut Commissions

Canadian discount brokerages are in the midst of a price war.  The newer entrants to the Canadian discount brokerage market, such as Questrade and Virtual Brokers, have driven prices for equity trade commissions to below the $1 per trade mark.  With Questrade’s recently announced $0.95 commission per trade offering, they now rival Virtual Brokers’ $0.99 commission rate launched at the end of 2011.

While the sub $1 equity commission pricing sounds alluring, especially in a landscape where standard commission rates at large bank-owned discount brokerages can still exceed $29 per trade, there are important details that consumers need to be vigilant about to truly understand whether the low advertised prices are a good deal or simply just clever marketing.

To determine which plan was actually a better deal, we undertook a comprehensive study of Questrade’s and Virtual Brokers’  lowest equity commission pricing packages, looking at both the fixed and variable costs of trading each plan.

In the first of a special series of posts based on this research, we provide analysis of the lowest cost pricing between Questrade and Virtual Brokers, and offer some of the important lessons and tips from our research.

For those interested in reading the full report, it is available for purchase here.

Commission Price vs Total Cost of Ownership

While advertising and marketing efforts are being deployed full force to let consumers know about the sub $1 equity trades at Questrade and Virtual Brokers, there is a strange silence when it comes to talking about total cost of each trading plan.

Providing such low cost trading certainly appeals to one of the biggest decision factors consumers use when choosing a discount brokerage: price.  But commission price, the feature most widely advertised, is only a small part of the cost story consumers need to consider when looking at Questrade’s Advantage plan or Virtual Brokers “The 99” plan.

One of the biggest lessons our research into both these offers showed us was that consumers need to be aware of the difference between equity trade commissions and total cost of trading.  Fees such as data subscription costs, streaming data fees, Electronic Communication Network (ECN) or exchange fees as well as commission fees factor into the total cost.  In our model we did not include the cost of SEC fees, taxes or margin interest. With so many different types of costs to consider, a good strategy to make sense of them is to compare each plan in terms of their fixed or variable costs.

A major fixed cost to consider when comparing either plan is the monthly data charge.  Variable costs, such as commission fees are common to both Questrade and Virtual Brokers, however other variable costs such as ECN or exchange fees apply only in certain cases to Questrade.  An interesting feature of both of these plans is that they offer rebates based on trading activity levels.  In the case of Questrade, they offer rebates in different tiers of activity, with the lowest ($19.95) being offered to those who trade between 10 and 99 trades per month, and the highest ($89.95) offered to those who trade 100 times or more in a month.  Virtual Brokers, by comparison offers a $60.75 rebate for clients who trade 150 or more times in a quarter (or 50 times per month for three months on average).

In our analysis, we looked at the main fixed and variable costs as well as rebates to figure out, on a total cost of ownership basis, which plan actually came out ahead.  While there was no clear ‘winner’ that in and of itself was a very interesting finding because it shows that despite having lower equity commissions, Questrade’s Advantage plan was not cheaper than Virtual Brokers’ “The 99” plan under several tested scenarios.

In our next part, we cover some of the findings from the cost of data and its impact on both plans.