From the February 2014 issue of Futures Magazine • Subscribe!

The cost of trading

Commissions

Once you’ve made the initial investment in technology and your starting bankroll, most of the day-to-day costs of trading will come from the commissions your broker charges. Brokers offer clients a service – access to the markets – and charge a fee for that service in the form of commissions. Additionally, brokers also collect fees charged by the exchanges and regulators.

Depending on your broker, commissions can be quoted in terms of per-contract, per-side or as a round-turn. A round-turn consists of both an entry and exit of a contract to end with no net position. Gompert says most traders will be quoted what their commissions will be round-turn, but on their statement see it charged as per-side (see “Scaling in,” below).

In addition to exchange and regulator fees, Sherrod says that some brokers also add fees for technology or data feed usage, or will set minimum trading requirements where you have to make so many trades on a quarterly basis to have access to the streaming technology. Check your broker agreement to see if these apply to you. 

Beyond the commission brokers charge for access to the markets, they also pass along the fees assessed by the exchanges and regulators. 

Exchanges make their money by charging a fee on each product traded. “In terms of exchange fees, in futures they are charged on every trade and they are charged per-contract, per-side. So when you enter a position, you’re charged, and when you exit a position, you’re charged,” Gompert says.

These fees are set by the exchanges, and brokers pass them along to the trader.  “You can find all of those fees on the exchange websites, but it varies depending if you are trading the E-mini S&P 500 or a commodity-based product. Firms do make an effort to be as transparent as they can in respect to what those fees are,” Sherrod says.

Finally, traders also will see a regulator fee on trades. In futures, that fee goes toward funding the National Futures Association (NFA), while in securities it funds the Securities and Exchange Commission (SEC). The NFA charges a fee on both the purchase and sale of futures contracts, while the SEC only charges a fee on the sale of securities. In both cases, the fee goes to keeping the regulator, or self-regulatory organization in the case of the NFA, running.

Looking ahead

The trading industry continues to change, particularly with the passage of the Dodd-Frank Act in 2011. As rules are finalized, many brokers expect to see their operating costs increase, particularly in regard to compliance costs.

“It’s a little bit too early to talk directly [about] what impact rules may have on the firms,” Sherrod says. “With some of Dodd-Frank, it could be that there are additional reporting requirements, there could be additional documentation of policies and procedures, some firms may have increased technology expenses to go with as well. Those three things may mean increased costs, but most of those are at the headcount level within firms, and [don’t] necessarily fall as a burden to the end-client.”

Gompert agrees with that assessment, but expects traders to see their costs increase in indirect ways. “The hardest thing to do in this business is raise commissions. The costs at brokerage firms are definitely going up because of increased reporting and monitoring requirements, so what we may see happen for both new and experienced traders is brokers will be less likely to negotiate better deals for activity or volume,” he says. “Typically, a guy [who] trades a lot of contracts frequently can negotiate a better commission rate for himself. We’re going to see those negotiations stall a little because broker fees have gone up.”

Where Gompert does expect to see costs rise as a result, at least allegedly, of new regulation is at the exchange level (see “Exchanges and regulators let traders down in 2013,”).

Both Sherrod and Gompert encourage traders to look at the services a broker offers in addition to the commission costs. Education is important, and having a broker that will help you through your first few trades can save you money by avoiding mistakes. “The savings you get on commissions may be eclipsed completely by the losses you take on mistakes,” Gompert says. “Having a relationship with an experienced, licensed professional who can coach you through the early phases of trading, that can end up saving you thousands of dollars in costly mistakes.”

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