It is possible to reduce transaction costs, namely the commissions we pay. At least with Interactive Brokers, this is possible. How Does? By switching to a different pricing system. As you know, I use Interactive Brokers for my overseas investments. I was using the fixed pricing model. In this model, I was paying a $5 commission per transaction. Because I buy and sell Irish domiciled ETFs traded on the London Stock Exchange. However, I learned that I can reduce the commission rate I pay by switching to the tiered pricing model. I researched and tried: yes, the commission I pay is seriously reduced!
Tiered pricing model
First, the tiered pricing model is a pricing scheme based on trading volume. In other words, as the volume increases, the unit cost decreases. This cost is added to the expenses of exchanges, clearing houses, and regulatory agencies. In the fixed fee pricing model, all these items were included in the price. So in my case, it’s within $5 per transaction. In this model, all components are added separately to the total cost. In the table below, users can see the prices that users can pay for European regional exchanges. I buy dollar-based assets traded on the London Stock Exchange. Therefore, I have a cost range of $1.7 to $39 per transaction. This pricing model is more profitable if I can keep my transaction cost below $5. Because I am a small investor, my purchase amounts are modest…
Have transaction costs dropped?
The shortest way to answer whether transaction costs have decreased is to sit in front of the computer and try. 🙂 For this, I first needed to change the current pricing model in the IBKR interface. I came to the account settings section of the company’s customer interface. On the left side of the screen, I selected the IBKR pricing plan tab and ‘Tiered.’ Within a few business days, my new pricing plan was operational. Then I bought some VUSD, which follows the S&P 500 index.
First purchase
First, I entered 5 VUSD buy orders at around $83.5 each. As you can see from the screenshot below, the total transaction costs were estimated at $0.39 to $1.92. Unfortunately, we can only see the actual price after the transaction.
I took the screenshot below after the transaction took place. Accordingly, the amount of commission I paid was $1.92. The table above shows that the minimum commission amount per order was already $1.7. That’s well below the $5 I used to pay! Considering that I make an average of two transactions each month, I will likely save an additional $7-8 per month. 🙂
Profitability limit
The tiered pricing plan provided quite a savings for a volume trading order under $500. So, up to which volume can the tiered pricing model give a cost advantage over the fixed pricing model? I searched the internet for the answer to this question. I have concluded that it is advantageous for a transaction up to about 10,000 dollars. A few days later, I tested this limit with a voluminous transaction. I bought 100 VUSD for about $8,377. The commission I paid was $4.65. Indeed, the tiered pricing plan is less costly as long as my trading volume does not exceed $10,000.
Consequently
I switched from the fixed pricing model to the tiered pricing model for transaction cost minimization. As a small investor, I predict I can save around $100 in commissions yearly, as my trading volume is relatively modest. It may appear as a small number. However, if you are going to trade for 15-20 years, it is a severe figure. Especially if you return this cost gain to the investment, you can get a much greater value.
I hope this information will be helpful to you. Stay well.