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Interactive Brokers LLC is a United States-based online brokerage firm, operating on most major worldwide stock, futures, bonds, foreign exchange, and options markets. Its official abbreviation is IB.

Characteristics

Interactive Brokers is a direct-access broker. It aims to suit active, self-help and online traders, in contrast to investors and non-active or helpless traders. It claims to offer discounted fee structure, high-level trading software.

It requires high reliance on electronic methods for order entry, processing, statement delivery and account management. Nearly every issue can be done via online. Verbal or telephone orders are at substantial surcharges based on commissions, and for close positions only, to discourage users from non-online trading.

It takes a strict and conservative approach on margin policy. Unlike other firms, no margin calls will be issued. Positions will be liquidated quick once accounts fall below the maintenance levels. On one hand, it lowers the risks of bankruptcy from customer default. On the other, it may lose some customers who like better and more flexible margin arrangements.

Customer services are rather limited, not meant to be comprehensive. Research and help is limited either. It is not a firm for hand-holding.

Account minimums

In order to open a new account, one must deposit $5,000. A minimum commission of $10/month is normally charged, and strict account eligibility criteria are enforced.

Any fees charged (not interest received) in IB are not across evenly on a pro-rata basis. For example, a customer opens its account at 20th. The whole sum of any monthly charges will still be applied.

Commission and fees

Interactive Brokers has different plans for different products. There are 2 commission plans - unbundled and bundled plans - for US equities and futures. For others, only the unbundled plan is offered.

As to bundled plans, it is usually flat-rate. As to unbundled plans, commissions are based on volume. Discounts are given in pro-rata basis. The fees are applied on a marginal basis for a given calendar month. For example, a customer executes 1,500 US futures contracts in a month, the IB execution costs would be:

• the first 300 contracts at $0.90
• the second 700 contracts at $0.70
• the third 500 contracts at $0.45

Nevertheless any fees in IB are not pro-rata basis as far as time is concerned. For example, a customer opens its account at 20th. The whole sum of any monthly charges will still be applied.

Interest rates

Interactive Brokers offers apparently one of the most attractive interest rates in the industry. It is charged at the benchmark rates minus 50 basis points for accounts over $10,000 in USD (Tier I threshold amount) and benchmark rates minus 25 basis points for accounts over $100,000 in USD as of 1 Aug 2006.

Nevertheless one should pay attention to other direct factors which may undermine interest receivables or rates. Since Interactive Brokers applies a few "tricks", so to speak, to offset parts of the benefits; its real interest rates are lower than its advertised ones. The point is it uses pro-rata basis to calculate interest earned and commission charges, which is very unusual in the industry. This is to encourage clients with larger balances, while discouraging clients with small balances. As IB's target client is the active, semi-pro or full-time trader, the exclusion on the first 10K deters clients with little capital to trade.

In the following paragraph, it is going to explain how this policy affect the interest calculation, and how it affects real interest rates.
(Note: The following has no implications on whether the interest rates are high or low, acceptable or not. One should not judge simply based on the size of the passage.)

Adverse effects of interest policy

The interest benefits are somewhat offset in several ways:

• There is never any interest for the first specified amount in "Tier I", even if your total sum of money is over "Tier I" threshold. For example, 'customers never gain any interest for the first $10,000 in USD in that case, over if they deposit more than $10,000
• Different interest rates are attached to different tiers/parts of the whole sum of money, ie some money will earn more interest, some less
• Each sum of money per sub-accounts (ie securities & commodities accounts) and per currency is counted separately in interest calculations. For example, if you have 2 sums of money in AUD and HKD, each sum has to surpass its own "Tier I" threshold in order to start earning interest for any extra money
• Due to the fact each sector (divided by sub-accounts and then by currencies) has its own balance, you may be charged interest payments in the end even if your total balance is positive (since you may have negatives in sub-balances).

The real interest rates, after consideration of the above factors, are much lower than expected.

Total actual losses explained

The following are interest lost for the specified amount in the first tier in different currencies. Add up the losses if you hold more than one currency (valid up till 18 July 2006):

It may cost you more if you have multiple sums of money in terms of currency or sub-accounts (ie securities & commodities accounts). For easy understanding and illustration, you may treat IB actually charging you (by taking your interest away) per year per sub-accounts AND per currency. You are being charged 2 times if you hold both securities and commodities sub-accounts, which is about US$530/year per sub-account. If you hold 2 currencies in 2 sub-accounts, you are being charged 4 times.

It was once small losses when the interest rates were low in the past, so few would care. Now the interest rates have been rising a lot. These losses become more serious.

Your own sum of money is divided by sub-accounts first and then currencies. Even if your total sum of money is positive, you are charged interest payment since one or several sub-balances are negative.

Formula of interest losses calculation

To sum up, the formula of calculating the total interest losses :

= interest losses incurred in securities account + interest losses incurred in commodities account
For interest losses incurred in securities account,
 = interest losses incurred per currency
 = actual interest losses incurred from each balance of USD, HKD, AUD and so on
For interest losses incurred in commodities account,
 = interest losses incurred per currency
 = actual interest losses incurred from each balance of USD, HKD, AUD and so on

Opinions on policy

Note: Everything below is summarized from various investment forums.

Interactive Brokers claim they do not have any hidden costs . The interest method is described on Interest Overview and Interest Methods. However it does not explain the full impacts of this interest policy. These are the hidden costs people tend to forget.

There are different opinions on the interest policy, like on Elite Trader and IB's own forum:

• Some do not care since they are dominated by margin interest rather than credit interest;
• Some care about the interest rates but think it is acceptable. After all, life is full of compromise. Nothing is perfect;
• Some care about the interest rates and think it is unacceptable. They complain about the fairness of the interest policy.
• Some find the fee is hidden or its weird calculation policy dishonest or deceitful.

IB claims that the fee is already advertised on the website, so they can't see why complainants called it hidden, nor find any dishonesty in its policy. IB ironically says why they don't complain at 1 free bank wire per month, lower commissions, higher interest rates earned over US$10,000 and so on, implicitly challenging why they make selective complains.

A few main reasons why people are angry at their policy are probably due to its weirdness and unfairness. They feel the adoption of this weird policy is to take advantage of the public ignorance or misunderstanding. Imagine if people are comparing interest rates of different firms, what impressions they will get.

Another reason is unfairness. It is thought to be unfair to charge from no interest to varying interest rates on different amounts. One flat rate should be used across the whole amounts. One says IB should rightfully pay interest on balances below $10,000. Otherwise, they are, quite frankly, being cheated.

Are people well-notified of effects of policy

If one goes deep on its website, Interactive Brokers documents its calculation method with examples in a separate page. However there is a difference between realising the calculation method and understanding the full impacts of this method.

In fact most underestimate the opportunity costs.

One existing customer comments it is how easy to miss the impact of the interest calculation. He simply thought the loss was US$500 at first, but he later realized that figure is not correct. It should be at least double since he uses 2 sub-accounts. He deems this policy is here for marketing purposes and misleading careless customers.

Summary

Next time, one should consider all these factors when comparing its rates with others. Simply comparing interest rates straightforwardly is wrong. You need to look at other related hidden costs/fees or unusual practices which will affect the interest receivables offered in each firm.

Nevertheless most third-party sources (eg in financial magazines) still do not learn from mistakes. They keep comparing interest rates among different brokerage firms on their "face" value which is very distorting.

Margin lending & short-selling rates

Margin lending rates are lower on outstanding debit balances with progressive discounts for larger balances. Interest credit is made for cash pledged as collateral for short selling. However the credits are very limited because the rates are usually benchmark rates minus 225 basis points, and for balances of considerably large size only (eg the threshold of receiving short-sell credits is US$100,000). Similarly it is credited on a pro-rata basis. That means there is never any interest for the first specified amount threshold, ie US$100,000 in this case.

Trading platforms and software

Traders Workstation

The Interactive Brokers interface, Traders Workstation (abbreviated TWS) is primarily designed for experienced and active day-traders. Inexperienced users/investors will be faced with a significant learning curve. Free demo accounts and papertrading accounts are available, but the demo accounts have all sort of bugs and errors. It is highly unstable. As the interface software is coded in Java, it is highly portable. The same version and interface runs on MS-Windows, Macintosh, and Unix-based computers.

Nevertheless the charting is limited and lack many useful functions. It lags far behind other charting companies like QuoteTracker, Sierra charts etc.

PaperTrader

Like many other firms, IB also offers the capability to papertrade. Papertrading is to help traders to practice trading without risking one's actual capital. As suggest by IB, one may use this test environment to:

• Familiarize the platforms and features without risk
• Learn market dynamics in new exchanges and products
• Simulate and test trading strategies
• Test Application Program Interface (API) applications

If people would like to learn trading, do not use the free demo accounts, use the paper trader. They have all sort of bugs and errors which make it highly unstable to test reliably. The demo is best served for learning the basics of Traders Workstation, while the paper trader should be used to test strategies in a real time environment.

WebTrader

WebTrader is an HTML based trading screen for use behind a firewall. It can be said as a very lite version of Traders Workstation, in which it offers very limited features and simple ways to manage your accounts and trades.

MobileTrader

MobileTrader, as its name might suggest, offer the capability to execute orders when you are not at the computers. You can access from any wireless device to manage your accounts and trades.

Notes and references

1. Interactive Brokers makes its claims in an e-brochure titled "Is Your Broker Telling the Full Cost Story?"
2. ^ From threads in IB forums of Interest on Cash Balances and What is exactly the monthly cost for...
3. Most people only point out the US$500 something dollar loss in the forum. They forget all others like sub-account and sub-currency effects and so on

External links

Third-party reviews of Interactive Brokers

• Independent reviews of Interactive Brokers by Elite Trader
• Many other reviews searched by Google

Comparison

• The Best E-Broker For You (with informational slide shows) at Business Week

Others

• Consumer Search reviews the quality of "reviews" produced by other people and websites
• Interactive Brokers

• Financial services companies