| Are you trying to save money on your trading | | | | get a slightly better price than the one you specify |
| commissions by considering a new online broker? If | | | | on limit orders at least some of the time. If I had to |
| so, then you'll need to sit down and compare their | | | | guess, I'd say that Thinkorswim gives me price |
| plans in a practical way. | | | | improvement on one out of three stock trades - |
| Here's how I would do the math: | | | | pretty good. On options trades, it happens |
| I would start out with my trading results from 2009. | | | | occasionally - not nearly as often as I'd like. |
| I'd be looking at my profit & loss numbers for | | | | If you never get price improvement, then you can |
| the year, and what I paid in commissions. | | | | do better elsewhere. |
| Let's say my profit for the year was $20,000, and | | | | So how can you calculate the potential effect of |
| that I paid $1000 in commissions on 100 stock trades | | | | crappy executions? Here's one way, albeit a rough |
| ($10 per trade). Note: I'm using round numbers here | | | | one: |
| to keep it easy. | | | | Take your trading results for 2009, and subtract a |
| If potential new online broker X charges $8 a trade - | | | | minuscule amount - 0.2% or less. |
| I'd save $2 a trade times, 100 trades. That's $200. | | | | Then, randomly select a few of your trades from |
| But is it enough to move the needle? After all, that | | | | 2009, and do the following to your profit or loss on |
| would improve my profits for the year by just 1% | | | | each: hurt your results by 5%. Either add 5% to your |
| ($200 divided by $20,000). That's not worth switching | | | | loss or reduce your profit by 5%. This is intended to |
| for - unless you are experiencing customer-service | | | | simulate the impact of the broker not being able to |
| hassles. | | | | get your most important trades done during busy |
| On the other hand, if you make 1,000 trades a year | | | | periods. |
| and could save $5 a trade, you'd save $5,000. That | | | | Take these numbers, and factor them into your |
| could feed a family for a year And if you're a | | | | estimates on how a new online broker impacts your |
| megatrader moving thousands of trades a month, | | | | P&L. If you'd save $300 on commissions with a |
| the savings could easily go into the six figures. | | | | possible $50 negative impact on the execution side, |
| So for active traders, the decision may seem pretty | | | | you really have no reason to switch unless you are |
| easy - go for a cheaper broker because they savings | | | | dissatisfied with customer service, or are getting hit |
| could be meaningful. | | | | with silly service charges. |
| However, there are other issues to consider, like | | | | If it seems like I'm overemphasizing customer |
| execution quality. Will your trades be completed in a | | | | service, it's because I am. Customer service should |
| timely fashion at the best possible prices? | | | | be your number-one concern when choosing an online |
| This is a tough issue to figure out, especially when it | | | | broker. Fancy charting packages and cheap |
| comes to highly-liquid markets like equities where | | | | commissions are great on their own - but you won't |
| orders can be placed and filled in the blink of an eye. | | | | care about them if you're left on hold for 45 minutes. |
| My rule of thumb is that on stock orders, you should | | | | |