The Surprising Costs of Day Trading: Is it Time to ACAT?

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High-frequency day-traders have grown accustomed to losing a large portion of their earnings to high-commission brokerages. Over time, a high-commission brokerage can cost a professional trader a staggering amount of money.

High-frequency day traders have grown accustomed to losing a large portion of their earnings to high-commission brokerages. Over time, a high-commission brokerage can cost a professional trader a staggering amount of money. Recent studies published in 2005 by the Securities Exchange Commission confirm that day traders who use high-commission sites must often turn over large profits each month to simply break even. For example:

  • A trader using a traditional brokerage with commissions around $19.95 per trade, trading 100 times per day, and 5 days a week, will pay $39,900 per month in commissions ($478,800 per year.)
  • A trader using a moderately priced brokerage charging commissions of $11.95 per trade, trading 100 times per day, and 5 days a week, will pay $23,900 a month in commissions ($286,800 per year.)
  • A trader using a discount brokerage, charging commissions of $7 per trade, trading 100 times per day, and 5 days a week, will pay $14,000 per month is commissions ($168,000 per year.)

Like all industries, the online brokerage world has been made much more complex by competing brokerages. Consumers face a variety of services, levels of membership, and a vast range of commissions per trade. Discount brokerages have launched a successful coup against standard brick and mortar operations. Savvy day traders have moved to discount brokerages and are reaping in the rewards.

According to the SEC, 78% of day-traders have a net worth of $200,000 or greater. Most day-traders no longer have a need for a “high-touch” service offering extensive research and guidance. The current trend in online brokerages is a bare-bones, minimal commission business model.

Recently launched SogoInvest has begun offering commissions between $1.50 and $3 per trade. By using the resources of its parent company, Genesis Securities, SogoInvest is able to slash the cost of trading immensely.

A trader using a discount brokerage, that charges a commission of $1.50 per trade, trading 100 times per day, will pay $3,000 per month ($36,000 per year.) That equates to a savings of $132,000 per year from a comparable discount brokerage charging $7 per trade.

Although numerous online brokerages have entered the marketplace, SogoInvest is one of the only online brokerages that is self-clearing and pays no third-party ACH fees, making the cost of operations virtually zero. According to company Chairman, William Yeh, “The business model SogoInvest has been founded on will be hard to replicate. Aside from being self-clearing, SogoInvest runs on a NASDAQ Platinum-Certified trading platform, which enables us to execute orders quickly. Since Genesis Securities handles 2-4% of the daily NASDAQ trading volume, SogoInvest is able to pass on the savings to its customers."

The price war among traditional and discount brokerages is at an all time high, with new brokerages emerging every year. Although there is room for both parties to continue operating as they have, savvy day-traders may leave for discount brokerages as the current trend catches on. Traditional brokerages will continue to cater to investors with long term low-risk portfolios, while the new breed of brokerage has been tailored towards the savvier, self-reliant investor. It’s up to the individual trader when choosing a brokerage. Everyone needs to take into account which services they need, and what fees they can afford. However, investors should not ignore how much their brokerage’s commissions can cost them over the long term.

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Jared Kreiner
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