Recently Interactive Brokers launched a new brokerage service called IBKR Lite. This brokerage will offer free commissions and unlimited trades on US exchange-listed stocks and ETF’s (exchange-traded funds). Here some of the key features that you should know about:
- Zero commissions on US exchange-listed stocks and ETFs
- No account minimums
- No inactivity fees
- Free market data for US exchange-traded stocks
- High-interest rates paid on idle cash balances (1.5% under Fed Funds rate)
- Low margin borrowing rates (2.5% over Fed Funds rate)
- Simple-to-use desktop Client Portal and IBKR Mobile trading platforms
- Trading non-US stocks, options, futures and fixed income at the lowest commissions
- Stock Yield Enhancement Program to earn money by lending fully-paid shares
The thought on your mind probably is: “Is there a catch?”
There is. There is a price you pay for “free trades”. Check this video to learn more about IBKR Lite, and what it means for retail investors, active swing traders, and day traders:
Should You Trade with IBKR Lite?
It depends on the type of trader you are! This is essentially Interactive Broker’s response to Robinhood, who offers a very similar broker service. If you are a “buy and hold”/long-term investor with only a few hundred bucks to your name, you could use IBKR Lite or Robinhood with few issues. But if you are an active swing trader or day trader, IBKR Lite will have some big drawbacks.
The Real Price of Free Stock Trades
The problem with IBKR Lite (and Robinhood) is execution. How can Interactive Brokers and Robinhood can afford to operate a commission-free brokerage?
They sell off their clients’ order flow. This means they essentially auction off your buy or sell orders to market makers, HFTs (high-frequency traders), and other institutions. Your execution speed is a lot slower because your orders are getting sent to all of these 3rd parties, and they giving you slightly worse fills.
It won’t be a huge difference in your fills. But if you are an active day trader with 100’s of executions a day like me, the slower execution speed and 1 or 2 pennies worse fills on every trade will be a huge issue over a long period of time. If you are an active stock trader, you need to be using a Direct-Access broker so you can have fast executions and good fills.
If you want to learn more about how and why non-direct access brokers sell off retail order flow, I’d recommend watching the short documentary “The Wall Street Code”. The short answer is that they do it so they can trade against retail traders, who will lose most of the time in the long run. You can check out the full documentary below:
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