Interactive Brokers Review
Value For Investors
Value For Active Traders
Commission & Fees
Platform & Tools
In our Interactive Brokers Review we found their platform is extremely stable, the availability of shorts is fantastic and the overall experience was top notch.
Interactive Brokers is a US-based discount brokerage firm that caters to active traders and investors. Their business model is quite different from competitors TD Ameritrade and E*TRADE, who cater to a less active, less sophisticated customer.
The main distinction between Interactive Brokers and its peers is business model. Commissions are a much larger portion of IB’s revenue than the rest of its peers. For IB, 29% of their revenue comes from commissions. By comparison, commissions account for roughly 4% of Charles Schwab’s revenue.
Interactive Brokers Products
Trader Workstation (TWS)
As the first company to have used computer generated fair value sheets in 1978, Interactive Brokers now provides Trader Workstation, a trading platform that is optimized for faster trade executions and efficiency. The flagship trading platform offers a wide range of product-centered tools such as:
OptionTrader and Probability Lab – simplifies single and complex multi leg option trading
FXTrader – designed for forex traders
Mutual Fund/ETF Replicator – helps traders to locate lower cost ETF alternatives and mutual funds
The above tools are available to all clients thus bestowing them with the opportunity to trade with a wide range of financial products. Currently, Trader Workstation is available for the following platforms:
Desktop – designed for traders who trade multiple financial products. It offers more power, flexibility, a library of tools and asset trading layouts. The platform also provides access to high volume trades, in-depth news, technical research and risk analysis tools.
Mobile – designed for smart devices. It allows you to trade and monitor your Interactive Brokers account while on the go. Works with iOS and Android devices.
iBot – this is a text and voice based trading interface that understands plain English commands. The add-on is available on both Desktop and Mobile TWS versions.
WebTrader – the web based trading platform has similar functions as the desktop version. It has an intuitive interface and is secured by a firewall among other security protocols.
Interactive Brokers allows traders to trade stocks, options, futures, forex, bonds, ETFs, CFDs and many more. To get started, you have to create an account. Registration has been simplified by categorizing the accounts into the following groups:
Trader and investor accounts – designed for an individual investor, family office, small business, friends and family advisor.
Institution accounts – designed for registered investment advisor, hedge or mutual fund, money manager, proprietary trading group and incentive plan admin among others.
Registration is free and once your account is verified, you can begin trading. For beginners, Interactive Brokers offers a free trial account.
The free trial account is available to the user without any commitment. With the account, users can test trading strategies, access trading tools, add financial instruments, customize the interface and compare commissions among others.
Once you open an account, the following required minimums must be met before you start trading.
For Individual accounts, Trading Group Masters and Broker Masters – a deposit of $10,000 or non USD equivalent must be completed.
- Indian Residents with an Interactive Brokers India account – INR 100,000 must be deposited
- Non resident Indians with an IB India account – a deposit of INR 500,000 must be made
- Indian residents with an IB US account and IRAs – a deposit of $5,000 or non USD equivalent must be made
- Persons aged 25 years and under – a deposit of $3,000 must be made
- Advisors and broker clients – a deposit of $5,000 must be completed
Direct Market Access
Interactive Brokers offers IBKR Pro clients direct market access (DMA).
We frequently talk on the blog about the importance of having DMA, the ability to route orders directly to trading venues without a middleman. Traditional discount brokerages don’t provide this, and act as a middleman in your orders, choosing where to route them for you.
The difference between trading with a DMA broker like Interactive Brokers and a middleman broker like TD Ameritrade is displayed in the graph below.
When trading with a broker that doesn’t offer DMA, market structure experts call it “captive order flow,” you have no choice where to send your orders, and they often end up being executed at venues that aren’t favorable to you.
IBKR Pro clients have the choice of several trading venues: exchanges, ECNs and dark pools, and can choose where to route their order at will. At the time of writing, you have 30 routing choices, all offering unique advantages.
IB’s page on pricing offers detailed descriptions of each venue’s maker/taker fees.
While offering you numerous routing options, IB recommends using their SmartRouting system, which automatically chooses the best venue to send your order to. You can set custom criteria like the following (all taken from IB’s website):
- The exchange with the highest rebate.
- The listing exchange on the symbol.
- The highest volume exchange that has a rebate for adding liquidity.
- The highest volume exchange that charges the lowest fee for taking liquidity.
Order Types and Algorithms
As an IBKR Pro client, you can choose between over 100 different order types and algorithms to aid in your trade execution. IB breaks down the utility of each algorithm or order type into a few categories:
- Advanced Trading
- Algorithmic Trading
- Limit Risk
- Price Improvement
- Speed of Execution
- Time to Market
Each algorithm aims to solve a specific trading challenge. One example is Dark Ice, which hides your trade size to prevent any traders from trying to jump ahead of your large order.
Another example is a conditional order, which allows you to set orders which are only sent when certain parameters are met. Here’s an example from IB’s website:
“Clients could enter an order to buy 10 call options on MSFT with a specified limit price of 85-cents, but only when its share price <= $46.45 and Volume >25mm and the S&P 500 index was <= 2,000”
Interactive Brokers offers the lowest margin rates in the discount brokerage by a large margin. Their pricing structure is based on a benchmark rate plus a premium. The premium depends on how large the margin loan is.
Here is the basic breakdown of their margin rates, compared to their discount brokerage peers:
Interactive Brokers Commissions
After the recent cutting of commissions by the major discount brokers, IB didn’t respond by changing their business model, one which relies heavily on commissions. They instead split their customers into two categories: IBKR Lite and IBKR Pro.
Commissions for IBKR Lite clients are free, while Pro clients still pay commissions.
Pro clients can choose between two pricing structures: tiered or fixed.
Fixed pricing is simple. You are charged a flat rate of $0.005 per share, with a minimum of $1.00 in commissions per trade, in addition to minute regulatory fees from FINRA and the like.
All orders under the fixed-rate are executed with the SMART router, so you don’t get to choose your trading venue. Any exchange fees or rebates are either pocketed or paid by IB.
IB’s tiered pricing system is targeted at highly active traders who need the capability to route their orders to different venues. Traders on a tiered plan can choose between several different ECNs, exchanges, and dark pools to route their orders to, or can simply allow IB’s SMART routing system to take care of that for you.
Tiered commission pricing is based on how much volume you produce monthly. As you can see in the table below, this system is very favorable to highly active traders.
Traders on the Tiered plan receive or pay the full amount of exchange maker/taker fees if any apply.
IBKR Pro vs IBKR Lite
IB has recently joined the payment for order flow crowd in a way that won’t alienate their customer base of active traders. They created a new account type, called IBKR Lite. Trades are commission-free for Lite clients, with the caveat that Lite orders will be internalized by a market maker who is paying IB for the order flow.
Lite members don’t get access to the IBKR Pro platform, the >100 order types and algorithms, or direct market access.
Stance on HFT and Internalization
With their status as the discount broker catering to sophisticated active traders, it should serve as no surprise that they became staunch advocates of their clients’ interests when it comes to the topic of high-frequency trading.
In my opinion, IB did more than just pay lip service to the values of their clients. They actually got in the face of the trading industry and cemented themselves as a maverick.
Under the leadership of CEO and founder Thomas Petterfy, the company delisted from the NASDAQ exchange in protest of their capitulation to HFT practices by providing them unfair advantages through the creation of special order types and colocation. The company went on to list on IEX, the anti-HFT exchange profiled in Michael Lewis’s Flash Boys. Unfortunately, IEX has halted listing operations to focus on other opportunities, and IB subsequently re-listed with the Nasdaq.
Another occasion proved Peterffy’s true dedication to removing predatory forces from the market. That was when he took the stage at the World Federation of Exchanges in 2010, an event attended by the CEOs of the Nasdaq and the NYSE. Here’s a quote from his speech, quoted from Dark Pools:
“It is not so much anymore that the public does not trust their brokers. They do not trust the markets, the exchanges, or the regulators either. And why should they, given our showing the past few years? To the public the financial markets may increasingly seem like a casino, except that the casino is more transparent and simpler to understand.”
Interactive Brokers offers the most diverse product suite among the discount brokerage industry.
Here’s a non-exhaustive list of the products offered by IB:
- Stocks in over 120 markets
- Futures in over 35 market centers
- Forex (no spread markups)
- Precious metals
- Fixed income
- Mutual Funds
- Single Stock Futures
- Hedge funds
The other discount brokerages have pretty wide offerings as well, but IB is the only discount broker to offer warrants on stocks, an unpopular product issued directly by companies.
Trader Workstation Platform
IB offers the Trader Workstation platform to its IBKR Pro clients for free. The platform definitely looks dated, but it does have some powerful capabilities and is well suited for day traders.
The inclusion of keys in a trading platform is vital for day traders. The Trader Workstation platform offers virtually unlimited ability to program different functions with hotkeys.
The usual suspects like order creation and order modification hotkeys can be configured but there’s dozens of other programmable functions.
The TWS platform has four scanners:
- Mosaic Market Scanner
- Advanced Market Scanner
- Bond Scanner
- Complex Orders and Trades Scanner (for options)
The mosaic market scanner is well-suited to building a universe of stocks and narrowing them down with filters. This works best with strategies that require some amount pre-established criteria in the stocks you’re going to trade.
Advanced Market Scanner
The advanced market scanner allows you to apply filters to pre-defined scans like the NYSE Top 10 Gainers List. In the image below, we looked to see which ones have SSR and are shortable.
What Type of Trader Is It Best For?
Interactive Brokers is best for active traders who don’t trade low priced stocks, due to the per-share commissions. Between direct market access and SMART routing, the TWS platform, the special order types and algos, and the industry’s lowest margin rates, it’s very hard to match IB when it comes to active stock trading.
Interactive Brokers Advantages
- Competitive commissions rates with fixed and tiered pricing (see commission rates)
- International market access
- Can trade from multiple account types (IRA, single registered, Joint, etc.)
- Many different asset classes and investment/trading options
- A robust Trader Workstation (TWS) with MANY tools
- Direct market access
- Free real time paper trading account for practicing in a simulated environment (when main account is funded)
- A robust online education center with tutorials for using the software
- Institutional level research and tools available to retail traders
- Competitive platform pricing
- Great options analytics tools and pricing
- Smartphone app works wells
Interactive Brokers Disadvantages
- Higher required minimum equity to open trading account than some of the other brokers($10,000)
As noted above, commission structure can be fixed or tiered, based on volume and even where you are trading from. There are many nuisances to consider, but generally, for most retail traders, the fixed pricing will be the most cost effective. Traders who take large positions in excess of 10k shares will often look for fixed pricing to reduce their costs.
However, Interactive Brokers has always been a big advocate of transparent pricing and that means you pay for exactly what you use. If you use lots of order flow, you pay for it. If you don’t, you don’t have to pay for it.
This is not a bad way to price the commissions but can be more expensive for very aggressive traders who trade 100k-200k shares/day.
Interactive Brokers is among the Top Recommended Brokers by Warrior Trading. They are also a top choice for international traders looking got take part in the US stock and options markets.
It can be a great resource for new traders with decent capital. The tools and Trader Workstation can be overwhelming for newbs at first, especially since learning to use the software is a do it yourself kind of deal.
The cost of actual trading is for the most part, competitive if you aren’t trading big lots. The ability to switch between Forex, futures, options and equities from one screen and have multiple types of trades going can be very appealing to diverse traders.
Also, if you are like me, you can trade from your IRA or other account types not allowed at many other US based brokerages.