Discover the Top 6 Edges Interactive Brokers Gives You

Interactive Brokers, Nasdaq ticker symbol IBKR, is a global online broker which offers their customers investment and trading services. Today, we would like to share with you the top 6 advantages that Interactive Brokers give you.

Advantage 1 The Biggest Online Broker in the World

Interactive Brokers LLC holds the title of the largest brokerage firm in the United States and has consistently earned the top spot as the leading online broker in the US, according to Barron’s rankings, for a remarkable 10 years in a row. Other competitors include Fidelity, Charles Schwab, and E-trade. E-trade is merged by Morgan Stanley in 2020.

Interactive Brokers is also listed on the NASDAQ stock exchange as the ticker symbol IBKR with a market cap of 50 billions. IBKR’s stock price is currently at an all-time high of 122.1, as of May 16, 2024.

Established in 1978, Interactive Brokers has a good reputation and is regulated by the Securities and Exchange Commission and Financial Industry Regulatory Authority.

IBKR on NASD Brokercheck

National Association of Securities Dealers (NASD) BrokerCheck is a FINRA (Financial Industry Regulatory Authority) tool that allows you to research the background of brokerage firms and investment professionals like stockbrokers. It provides information on their licenses, registrations, any disciplinary actions, and customer complaints.

As we can see in the Brokercheck with respect to IBKR, there have been reported 72 regulatory events and 21 arbitrations.

For instance, for the most recent regulatory event, IBKR was fined 475,000 US dollars on April 25, 2024, as a result of the fact that the firm incorrectly processed five corporate actions due to a combination of system and supervisory deficiencies, in violation of NASDAQ rule.

So, if Interactive Brokers does something wrong, regulators will punish them and all the records will be transparent on the internet, which is good for its clients and investors.

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Financial Statement Analysis of IBKR

Since we will put money into IBKR, why don’t we take a look at IBKR’s financial statement to see if they have a strong financial condition?

First, we look at IBKR’s quarterly sales. Its revenue mainly comes from interest income, which is the interest charged when customers trade with leverage. And the second largest source of revenue is commissions charged to customers who buy and sell securities. We can see in the graph that obviously the quarterly revenue has been trending up steadily since 2010. In the most recent quarter, the first quarter of 2024, its sales hit a record high of 1.2 billion US dollars, which is astounding.

One reason why Interactive Brokers can achieve such incredible performance is that its client counts surpassed 2.5 million users in 2023. And during the first quarter of 2024, Interactive Brokers acquired 184,000 new accounts, marking the second-highest figure since the meme stock surge in the first quarter of 2021. This quarterly addition is twice the number of accounts we acquired throughout the entirety of 2019. These new accounts brought in more cash, contributing to the growth of its client credit balances, which reached a record $104.9 billion US dollars. Additionally, our client equity surged by 36% to $466 billion, indicating that they are nearing the milestone of managing half a trillion dollars in client assets.

Second, we look at the quarterly operating income over time. It is the number of Interactive Brokers’ revenue minus all related operating costs including employee compensation and benefits, clearing fees, administrative expenses, etc. The operating income hit a record high of 0.8 billion US dollars in the first quarter of 2024, which is remarkable.

Third, we look at IB’s equity lever at the end of each quarter. Their equity also hits an all-time high of 14.6 billion US dollars at the end of March this year. The company’s net worth keeps going up, as they earn more than they spend each quarter.

In conclusion, with Interactive Brokers’ exceptionally strong financial position, I feel very safe to put my money in this broker.

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Advantage 2 Low Fees, Low Margin Rates and High Cash Yield on Idle Cash

Interactive Brokers Has Lower Margin Rates Compared to Other Brokers

With Interactive Brokers, clients can borrow at the lowest rates from a single integrated account compared to other brokers like Fidelity, Schwab, First Securities, etc.

In short, margin financing refers to borrowing money from a brokerage to buy stocks. If an investor has a high risk appetite, using margin can enhance investment performance, but it also comes with higher risks. Investors need to pay attention to requirements such as maintenance margin and margin calls.

As of February 2, 2024, users can borrow USD against their account holdings at an annual rate between 5.83% to 6.83%, even lower than credit cards, personal loans and home equity lines of credit. Traders will have higher borrowing costs starting from 13% from other brokers.

Why would someone want to borrow securities?

Traders who believe they can predict market declines engage in this practice, known as “short selling.” Essentially, a “short” position involves borrowing shares from a stock lending service and paying a borrowing rate for the duration of the short position.

Borrowers can use the borrowed securities to establish a short position. In short selling, they sell the borrowed security hoping to buy it back later at a lower price and return it to the lender. They profit if the price goes down. This is a risky strategy, but potentially profitable.

In short, with Interactive Brokers, you have an edge to open an either long or short positions with low-cost leverage.

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About the Fees You Have to Pay When Trading Stocks on IBKR, Fixed Pricing or Tiered Pricing?

Interactive Brokers (IB) offers two distinct pricing structures, unlike many other brokers:

• Fixed pricing
• Tiered pricing

There’s often confusion about which one to choose, so let’s delve into a detailed comparison!

Fixed pricing is straightforward and easy to understand: you pay a fixed percentage fee with a minimum and maximum cap. This model is standard across most brokers.

On the other hand, tiered pricing consists of several sub-fees:

• Regulatory fees (only when selling)
• Exchange fees
• Clearing fees
• Pass Through fees

Some of these fees are per share, some are flat, and others are based on the total value.

Additionally, tiered pricing varies significantly between exchanges.

The key difference between the two models is that fixed pricing is simple and predictable, while tiered pricing is complex and varies greatly between exchanges.

It’s worth noting that when you switch pricing methods, it typically takes one day for the change to take effect.

Ultimately, the cost per transaction is crucial to every investor. Therefore, we will compare Fixed and Tiered pricing schemes for US stocks since the United States hosts some of the greatest companies in the world.

Another thing to note is that you only pay the regulatory fees when you sell. But you have to pay the regulatory fees no matter if you are in the Fixed or Tiered pricing schemes or Lite account.

Buying US Stocks (Remove Liquidity) – Fixed vs Tiered Pricing

Let’s examine the fee difference between Fixed pricing and Tiered pricing when buying US stocks and removing liquidity.

First, we have to understand the concept of liquidity.

Interestingly, US exchanges charges commissions per share. Assuming we buy a stock with a share price of 100 US dollars each, purchasing $1000 worth of shares would mean acquiring ten shares.

What’s also intriguing is the variation in fees between buying and selling. Let’s start with the buying fees.

Under the fixed pricing model, the fee is 0.005 USD per share, with a minimum fee of 1 USD and a maximum fee of 1% of the trade value.

For tiered pricing, the commissions fee is 0.0035 USD per share, with a minimum fee of 0.35 USD and a maximum fee of 1% of the trade value. Additionally, there’s a clearing fee of 0.0002 USD per share, an exchange fee of 0.003 USD per share, and two pass-through fees, including NYSE pass-through fees of commissions times 0.000175 and FINRA pass-through fees of commissions times 0.00056. The FINRA pass-through fee has a maximum of 8.30 USD per trade.

Summing it up, the graph shows the fees for buying US stocks when removing liquidity.

As you can see in the graph, the fee is cheaper under Tiered pricing for smaller trade value under 10,000 US dollars. On the other hand, the fee is cheaper under Fixed pricing for larger trade value above 50,000 US dollars.

You can see the calculations of commissions in this Google Sheet document.

Selling US Stocks (Remove Liquidity) – Fixed vs Tiered Pricing

For sale operations, there are two additional regulatory fees:

• First, the SEC Transaction Fee of USD 0.000008 times the Value of Aggregate Sales
• Second, the FINRA Trading Activity Fee of USD 0.000166 per share, with a maximum of 8.3 USD

For value investors like me, we tend to buy stocks and businesses rather than sell. It’s like we are net buyers of food over time. That’s good because we pay less regulatory fees.

Another thing to be aware of is that you still have to pay the regulatory fees with an IBKR Lite account when you sell.

Similarly, when you sell and remove liquidity, tiered pricing is still cheaper on a smaller transaction and fixed pricing is cheaper on a bigger transaction. Specifically, if, on average, you have sell transactions of less than 50,000 US dollars, you choose tiered pricing. On the other hand, if you’re kind of rich and generally have a selling transaction of above 50,000 US dollars, you choose fixed pricing.

Buying US Stocks (Add Liquidity) – Fixed vs Tiered Pricing

It’s a totally different story when you add liquidity to the market because exchanges give you rebates. The exchanges pay you some cash when you make other buyers easier to buy and other sellers easier to sell.

Under fixed pricing, the fees you pay is the same between adding or removing liquidity because there is no exchange fees under fixed pricing, thus no rebates incurred with exchange fees.

Under tiered pricing, you save much when adding liquidity. For instance, when you buy 100,000 US dollars of stocks, if you are in a rush and buy on the ask, you have to pay a fee of 6.7 US dollars. If you can be patient and place a limit buy order on the bid, you only have to pay a fee of 1.6 US dollars when your order is being filled by another rich trader who is eager to sell.

So, as you can see in the graph, when you buy US stocks and add liquidity, it’s always cheaper under tiered pricing compared to fixed pricing, no matter how big or small your trade value is. That’s mainly due to the rebates you get when you add liquidity to the market.

Selling US Stocks (Add Liquidity) – Fixed vs Tiered Pricing

Next, we compare the fees you have to pay between fixed pricing and tiered pricing when you sell and add liquidity. Similarly, it’s always cheaper for tiered pricing under all ranges of trade value if you can be patient and place your sell limit order on the ask.

As a result, if on average, your trade value is less than 10,000 US dollars, I’ll suggest you to switch tiered pricing for cost optimization. One thing to note is that IBKR sets its default to fixed pricing. So we’re going to tell how to switch to tiered pricing from fixed pricing.

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How to Switch to Tiered Pricing from Fixed Pricing

First, we log in to the IBKR web portal, and click the User menu, which is the head and shoulders icon in the top right corner.

Next, click Settings.

Scroll down to find the “IBKR Pricing Plan” under Account Configuration.

The default is fixed pricing, we switch to tiered pricing. And click continue.

Success! It may take one business day for the change to take effect.

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Interactive Brokers Market Data Subscriptions/Fees

As a value investor, I don’t pay these market data fees. When I buy stocks a few times a year, I use Webull to check real-time stock quotes, which is free and enjoyable.

Once before I bought stocks, I mistakenly clicked a button called “snapshot” which cost me 0.01 USD. I don’t want to pay that fee either. It just shows me a one-time real-time quote. In Taiwan, it’s free to have real-time quotes like the 5 best bids and offers, and transaction details including the time, bid, ask, matching price, and quantity.

If you want to trade actively, there is one thing to know first. There is a minimum equity requirement for the market data subscription, which is 500 US dollars or non-USD equivalent. Another thing to be aware of is that you should set your “Market Data Subscriber Status” to “Non-Professional”, as “Professional” is for advisors who manage other people’s money. “Professional” advisors have a higher cost of market data. For instance, the “US Equity and Options Add-On Streaming Bundle” for “Professional” costs 125 US dollars per month, which is pretty high. However, for retailer traders, the “Non-Professionals”, it only costs 4.5 US dollars per month for the same bundle.

if you want the streaming from Interactive Brokers, in my opinion, it is best to just get the “US Equity and Options Add-On Streaming Bundle” because it includes all three exchanges, the New York Stock Exchange, NASDAQ, AMEX, and options exchange OPRA. It’s 4.5 US dollars a month. But the catch is that, in order to get this you need to subscribe to the “US Securities Snapshot and Futures Value Bundle”, which is ten dollars a month but the $10 gets waived off when you do more than thirty dollars in commissions which is not hard to do.

So, if you’re trading US stocks actively and you want your live streaming data from Interactive Brokers for all three exchanges, then you probably want the “US Equity and Options Add-On Streaming Bundle”. That’s probably what you want.

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What is the Stock Yield Enhancement Program?

The Stock Yield Enhancement Program offered by Interactive Brokers is a feature designed to boost the returns on your securities holdings.

Here’s how it works in simple terms:

1. You own shares.
2. You allow IBKR to lend these shares to other traders who are willing to pay interest for them.
3. IBKR pays you 50% of the interest they earn.

About the Pros and Cons of the Stock Yield Enhancement Program

The Stock Yield Enhancement Program allows you to generate extra income from your fully paid shares. By loaning your shares to IBKR and receiving cash collateral, other traders can short-sell them. And you can earn interest. You can choose to opt out of the program and sell your shares whenever you want, without needing to be concerned about potential risks, as IBKR assumes all the risks if the shares are not returned because your loan is to IBKR.

From experience, the interest earned from lending stocks is determined by market demand and supply. If more traders want to short-sell one stock, the interest you can earn is higher, such as high volatility stocks or meme stocks.

On the other side, if a stock is easy to borrow to short-sell, the owners of these stocks earn low interest, such as low volatility index ETFs.

Is there a catch or risk involved in the Stock Yield Enhancement Program?

While it may sound too good to be true, there are risks associated with this program, as IBKR is transparent about.

The primary risk is that the borrower of your shares may not return them for various reasons. It’s important to note that the SIPC (Securities Investor Protection Corporation), which guarantees the stock portfolio of each investor via an American broker up to 500k USD, does not cover potential losses related to stock loans via the IBKR program. This means that this risk is real.

However, the SEC (U.S. Securities and Exchange Commission) requires Interactive Brokers to have a backup plan if a borrower fails to return the shares. IBKR’s plan is straightforward: for every loan of a certain amount of stock, IBKR matches it with the same amount in cash or U.S. government bonds. This ensures that if you lend, for example, 100 US dollars through this program, IBKR must have 100 US dollars in cash or US bonds in case the borrower defaults, guaranteeing that you will get your money back.

Another risk to consider is if Interactive Brokers were to go bankrupt, they might not be able to repay you for the shares you’ve lent but not been returned. This risk is also significant.

To mitigate this risk, it’s advisable to analyze IBKR’s financial health and its risk of bankruptcy.

Interactive Brokers’ Financial Stability

While I’m not an expert in due diligence, several factors contribute to my confidence in IBKR’s financial health, beyond just its yield enhancement program:

• 1. IBKR holds US$10.4 billion more than the regulatory requirements.
• 2. 75.5% of the Interactive Brokers group is owned by its employees, indicating a strong internal commitment to the company’s success.
• 3. Thomas Peterffy, the founder, remains the chairman of the board and the largest shareholder, aligning his interests with the company’s long-term success.
• 4. IBKR has built a strong reputation since its inception in 1977.

Given these factors, I’ve decided to trust IBKR and plan to test their stock yield enhancement program with large proportion of my personal wealth.

Requirements of the Stock Yield Enhancement Program

Cash accounts with equity over 50,000 US dollars at the time of application are eligible for the Stock Yield Enhancement Program. IRA accounts are also eligible to enroll.

So if you don’t have over 50,000 US dollars in your cash account, you can switch to a margin account and enroll in the Stock Yield Enhancement Program. The following are the steps to do it:

How to Switch from Cash accounts to Margin Accounts and Turn on the Stock Yield Enhancement Program

First, go the the IBKR web portal, and click Settings.

Click on the “Account Type”.

Select “Margin” Account from the drop-down menu.

Review the related agreements.

And sign your name.

And then we wait for the review process.

Swiftly, my request to change the account type to “margin” was approved within 2 minutes!

With a margin account, we can enable the Stock Yield Enhancement Program now by clicking on it.

Check the box of the SYEP.

Review the documents.

And sign your name.

Wait for the review process.

Surprisingly, my Stock Yield Enhancement Program Enrollment was Approved within only 2 hours!

I’ll update in the future on how much interest I earned in this program.

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Earn Interests on Your Idle Cash with Interactive Brokers

With IBKR, you have the opportunity to earn interest at market rates on your immediately accessible cash balances. Key points about IBKR interest rates are as follows:

• Accounts with a Net Asset Value (NAV) of USD 100,000 or higher earn the full interest rate.
• Accounts with a Net Asset Value below USD 100,000 earn interest on a proportional basis.
• No interest is accrued on the initial USD 10,000 of cash.
• Interest is only earned on settled cash balances in the securities segment, not in the commodities segment.
• IBKR Pro and IBKR Lite offer different interest rates.

The rate of 4.83% is as of May 19, 2024, for Pro client, which is the benchmark rate of 5.33% minus 0.5%. It basically means you can earn the returns of the one-year treasury rate for only rich people because you need to have more than 10,000 US dollars of cash and a net asset value of higher than 100,000 US dollars to earn the full treasury rate, which is not an easy threshold for average people.

So, I would suggest if you want to earn yourself the high one-year treasury rate of 5.137%, just put your idle cash into a treasury note, as the short-term rates is higher than long-term rates of 4.5% now. This is also what Warren Buffett does with their piles of cash now.

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Advantage 3 Multi-national Assets to Invest in, even Cryptos

Interactive Brokers allows the purchase of stocks from 150 stock markets in 200 countries/regions and 27 different currencies, without time zone restrictions. You can trade stocks, ETFs, bonds, mutual funds, options, warrants, futures, CFDs, forex, metals, and cryptocurrencies. It includes stocks from countries such as the United States, China, Hong Kong, Japan, Germany, France, Canada, Australia, Italy, Russia, and more.

In September 2021, IB announced the introduction of cryptocurrency trading and custody services, enabling users to buy and sell cryptocurrencies including Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), and Litecoin (LTC).

Cryptocurrency trade execution and custody are handled by either Paxos Trust Company or Zero Hash LLC, depending on your account type and your country of legal residence. And Paxos is a cryptocurrency exchange and the issuer of the USDP stablecoin.

In 2023, IBKR added access to the Taiwan Stock Exchange, where it hosts some of the most valuable semiconductor companies in the world like TSMC, MediaTek, etc.

Additionally, Interactive Brokers also allows the purchase of warrants from countries such as France, Germany, Italy, the Netherlands, and Switzerland.

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Advantage 4 One Free Withdrawal every Month

There is no charge for the first withdrawal of any kind per calendar month; however, Interactive Brokers will charge withdrawal fees of 10 US dollars by bank wire for any subsequent withdrawal. The average withdrawal fee for other US stock brokers is at least 25 US dollars.

All withdrawals will be sent in the name of the account holder. You can not withdraw money to an account that is not the same name as your IBKR account.

Accounts that do not participate in the Secure Login System are limited in the amount of money that can be withdrawn. Account holders without a security device are limited to a maximum withdrawal of 50,000 USD per day and a maximum withdrawal of 100,000 USD in five business days.

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Advantage 5 Safe and Secure

Interactive Brokers is Audited by FINRA

FINRA, the Financial Industry Regulatory Authority, is a self-regulatory organization in the United States that oversees brokerage firms and their registered representatives. Its primary mission is to protect investors by ensuring the securities industry operates fairly and honestly.

Here are key reasons why Interactive Brokers audited by FINRA are important:

1. Investor Protection: FINRA sets rules and standards that brokerage firms must follow, which helps protect investors from fraud and unethical practices.
2. Compliance and Enforcement: Brokers audited by FINRA are regularly monitored for compliance with federal securities laws and FINRA’s rules. This ensures that they maintain high standards of conduct and transparency.
3. Dispute Resolution: FINRA provides a forum for resolving disputes between investors and brokers, which can help investors recover losses or address grievances.
4. Education and Resources: FINRA offers educational resources and tools to help investors make informed decisions and understand the risks involved in investing.
5. Market Integrity: By enforcing rules and regulations, FINRA helps maintain the integrity and stability of financial markets, which benefits all participants.

Choosing a broker audited by FINRA gives investors confidence that the broker is subject to stringent oversight and regulatory requirements, enhancing trust in the broker’s operations and practices.

SIPC 500K USD Protections

Regarding fund security, accounts are insured up to 500,000 US dollars to protect consumers against losses if the brokerage firm encounters financial issues. Interactive Brokers is a member of the Securities Investor Protection Corporation (SIPC). Securities in customer accounts are covered by SIPC with a basic insurance limit of $500,000, including a cash insurance limit of up to $250,000. Money market funds in the account are considered securities.

Secure your Interactive Brokers Account by Mobile Two-factor Authentication

Let’s take a look at how to secure your funds on IBKR. Basically, Interactive Brokers protects your account by making it difficult for others to log into your account by having to verify your face, fingerprint, or phone number text message authentication.

Regarding transaction security, both the mobile and desktop versions use Apple’s Face ID for authentication when logging in, or SMS for verification, which is very secure. However, you should also be cautious of SIM card hacking attacks.

The following is how two-factor authentication works in Interactive Brokers.

When we want to sign in to the web portal, we enter the username and password.

After entering the correct password, a message from IBKR will show up instantly on your phone where you have to click on it to verify yourself.

In my case with an iPhone, I have to verify myself with the Face ID. You can also verify by SMS or fingerprint.

In short, the two-step verification process makes your account safe, but not difficult to log in.

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Consider Adding a Trusted Contact to Your Account

A Trusted Contact is someone Interactive Brokers can contact in the unlikely event that the broker is unable to reach you for an extended period. Interactive Brokers do not share account details with the Trusted Contact and the Trusted Contact cannot transact on your behalf. Your trusted contact person must be age 18 or older.

Why would you add a “trusted contact person” to your brokerage account?

Adding a trusted contact person to your brokerage account can be very helpful. If your brokerage firm can’t reach you, this person can help ensure your contact details are correct. They can also assist if there’s a suspicion of financial exploitation or fraud, confirm your health status if there are concerns, and verify the identity of any legal guardian, executor, trustee, or power of attorney holder related to your account.

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Advantage 6 Fractional Shares (Suitable for High Price Stocks)

Fractional shares refer to purchasing less than one full share, which is suitable for high-priced stocks like Berkshire Hathaway (BRKA), which costs around $620,000 US dollars per share. Interactive Brokers allows you to set how much money you want to spend without buying a whole share. For example, you can set a purchase of $200 US dollars worth of Berkshire Hathaway, which would buy you approximately 0.0003 shares of BRKA.

With fractional shares, no stock is too expensive because you can buy as little as 0.0001 share, up to 4 decimal places, or buy as little as 1 US dollar.

You can also buy fractional shares from US, Canadian, or European stocks or ETFs where available.

With respect to the fees associated with fractional shares, it’s basically the same as regular stock trading, 0.0035 US dollars per share under tiered pricing and 0.005 US dollars per share under fixed pricing. The only difference is that the minimum commission per order for fractional shares is 0.01 US dollars rather than 0.35 US dollars under tiered pricing and 1 US dollars under fixed pricing.

For example, under tiered pricing, a purchase to buy 0.5 shares of APYX at a stock price of 1.6 US dollars will be charged only $0.01 US dollars, calculated as follows:

• commissions: 0.5 share x 0.0035 per share = 0.00175 USD
• max (trade value x 0.01): 1.6 x 0.5 x 0.01 = 0.008 USD
• min: 0.01 USD

The commissions is 0.00175 US dollars, calculated as 0.5 shares times 0.0035 US dollars per share.

The maximum fee is 0.008 US dollars, calculated as 1.6 share price times 0.5 share, times one percent.

Since 0.00175 is smaller than 0.01, the minimum fee of 0.01 US dollars will be used as commissions.

For the second example, under tiered pricing, a purchase to buy 0.5 shares of AAPL at a stock price of 164 US dollars will be charged only $0.01 US dollars, calculated as follows:

• commissions: 0.5 share x 0.0035 per share = 0.00175 USD
• max (trade value x 0.01): 164 x 0.5 x 0.01 = 0.82 USD
• min: 0.01 USD

The commissions is 0.00175 US dollars, calculated as 0.5 shares times 0.0035 US dollars per share.

The maximum fee is 0.82 US dollars, calculated as 164 share price times 0.5 share, times one percent.

Since 0.00175 is smaller than 0.01, the minimum fee of 0.01 US dollars will be used as commissions.

The downside of fractional shares is that they do not come with voting rights, but you still receive dividends on fractional shares. Another important point is that if you want to transfer fractional shares to another brokerage, you must first sell them and convert them to cash.

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