- Review of: Interactive Brokers
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In the ’90s and ’00’s, the brokerage business was dominated by one trend: the rise of the online discount brokerage. Prior to 1995, most trades were placed by calling your stock broker who charged a massive commission. The customers expected these brokers to provide trading advice, and buy/sell recommendations. Such firms were later known as “full service” brokerages to contrast them against the discount brokerages the internet made possible. Discount brokerages allowed you to connect through computer software (via modem initially, eventually via the internet) and execute trades without human intervention. As a result, they could charge much lower prices — now as low as $4.95 per trade.
There is another type of brokerage which may initially appear to be a discount brokerage but is in reality something fairly different. For lack of another term, I will coin “prosumer brokerage” by analogy to prosumer electronics — electronics that straddle the gap between professional tools and consumer electronics. These brokerages have a look and feel more or less like discount brokerages, but have features and pricing that mimic professional trading environments. Interactive Brokers is by far the most popular of these prosumer brokerages. Depending on your level of expertise and trading activity, they could be a very good or very poor choice for your needs.
|Stock Trades||$0.005/share, $1 minimum|
|Mobile App||Yes — Apple iOS and Google Android|
|Customer Service||Phone, Live Chat and Email|
Interactive Brokers offers the widest product range I’ve ever seen for any retail broker. They’ve got US stocks, futures, bonds, options on all of the above, as well as nearly every popular foreign stock, bond and futures market. When products are traded on numerous markets (such as with many US stocks), Interactive Brokers will hold memberships on multiple markets and offer “smart” routing to direct your order to the most advantageous market. Alternately, if you have a preference for one exchange (perhaps due to cost+ pricing) you can bypass smart routing and direct your order to your preferred exchange yourself.
Interactive Brokers Account Types
- cash accounts that can enter only long securities positions, long option positions, and covered short option positions (if that makes no sense to you, don’t worry)
- margin accounts that allow the purchase of securities on margin, short security positions, futures positions and naked options positions
- portfolio margin accounts that allow the same positions as “regular” margin accounts but use a different method for calculating margin requirements that is typically far more favorable for the customer in the sense of allowing more leverage. A minimum account balance of $100,000 is required for portfolio margin, and foreign accounts may not be eligible.
Margin accounts require you to pass a credit check I think, or at least to answer some question about net worth. It’s been a while since I signed up for mine.
Before enabling futures and options trading, IB asks the account holder some questions about trading experience. If you answer you have no experience, I’m not sure they will enable these features.
Interactive Brokers’ trading platform is Trader Workstation, TWS for short. It is Java based and will run on any computer system with a modern JAVA environment (Windows, Mac, Linux, most UNIX-likes). I have personal experience running it on Windows and Linux, and both worked fine. TWS is a very complicated piece of software — its basic functions are order entry, bookkeeping and charting. In addition it contains a kitchen sink of other features: news feeds, trading assistants for specific types of trading (especially options stuff), algorithm support for unusual order types, etc. If some of this stuff causes your eyes to glaze over, that’s OK — you don’t have to use it (and I don’t).
Overall, TWS is somewhat clunky (its appearance hasn’t changed in 10 years), but it is usable.
The security features built into TWS seem to be better than most. Account login requires a physical token (a credit card sized card with lots of numbers), which they mail to your house and which must be activated and used every time you login. Connections are encrypted with standard SSL encryption if you so desire.
The physical token is a bit of a pain, but it would serve to keep random hackers (even one who somehow intercepted a login/password pair) out of your account. There are also fund transfer restrictions that should help prevent someone from transferring money out of your account without your authorization.
Third Party Connectivity
While TWS has a lot of functionality, it’s not the best available software for many applications. For my bread-and-butter futures trading, I use NinjaTrader, which is an add-on charting, trading and automation package that includes several features I like. Third party packages like NinjaTrader connect to Interactive Brokers indirectly via the application programming interface or “API” feature of trader workstation. The API also allows you to program your own automated strategies that run in conjunction with the TWS software if you so desire — obviously you need to know exactly what you’re doing before diving into something like that. There are large numbers of third party packages available that do all sorts of things, and I’m not going to dig here into what all’s available.
For most users, the API just means TWS and third party products will probably work together OK. Since Interactive Brokers is the most popular prosumer brokerage, tools vendors pretty much have to support them. There will likely be some minor wrinkles — for example certain tools may work with only certain TWS versions. But in general you can get everything to play together.
Issues around trade execution (how quickly your trades execute, on what exchange, and at what price) are very complicated. In general my experience has been that IB offers good execution for most things — better in general than discount brokerages. But they are generally not quite as good as other firms specifically designed for the best execution on one or a small number of exchanges. So if, for example, you trade only stocks, you might get slightly better execution via a stock-only prop desk with dark pool access, exchange co-location, cost+ pricing, etc. But in general IB is pretty good and is very good considering the huge number of exchanges they operate on.
Interactive Brokers offers a very functional “demo” account feature along with each real account. This account has $1M of fake money, and instead of executing trades in the market, executes them against Interactive Brokers’ simulation engine. Compared to most other paper trading environments, the Interactive Brokers demo account is very realistic in terms of the price trades execute at and things like that.
This allows you to learn the features of TWS and test out trading strategies in a more realistic environment without risking any real money.
Interactive Brokers customer service has been consistently professional and helpful the five times I’ve had to deal with them. Deposits and withdrawals have gone smoothly. I have heard this same positive sentiment echoed by other customers.
On the negative side, I have heard a few inexperienced traders say they got a hint of “your ignorance isn’t our problem” attitude from Interactive Brokers. I don’t know the details of any of those incidents or who was in the right.
Brokerage stability is a very complicated topic. History shows it’s easy for apparently healthy financial firms to blow up in a startlingly short period of time — rather than go into the details here, I suggest you read my comments on the MF Global fiasco. Brokerage customers, especially those who exceed SIPC limits (or equivilent outside the US), are wise to be cautious. My general perception is that Interactive Brokers is less likely to take your money than most brokerages based on the following reasons:
- They have a fairly substantial amount of firm capital “protecting” the customer accounts (about $4.5B last time I checked).
- Interactive Brokers carries substantial supplemental insurance beyond SIPC via Lloyds of London.
- Interactive Brokers has survived several negative market events without imploding or showing imprudent losses, including the 2008 crash, the “flash crash,” etc.
One contrary piece of evidence is that Interactive Brokers’ stock price (IBKR) has not fared particularly well the last few years. This is a traditional warning sign of broker financial distress, but in this case I think they’re still well outside the danger zone. I am keeping my eyes on the stock price though, and if it breaks $10 or so, I’ll start investigating why.
If you have an appropriate level of expertise to use the Interactive Brokers software, and their pricing model is attractive for the type of trading you do, then they are frequently the best available brokerage choice. There’s a good reason Interactive Brokers is the most popular prosumer brokerage — in an industry full of cranks and the professionally unsatisfied, Interactive Brokers has mostly happy customers.
That said, new traders will likely have a fairly negative experience with them due to the platform complexity and general “know what you’re doing” attitude.
Full disclosure: I have been an Interactive Brokers customer for about 10 years and have overall had a positive experience. I have no other financial relationship with them.
This review written by W from Off-Road Finance.