How to reduce commission in trading

Did you ever think how to reduce commission in trading? Did you ever calculate commissions that you pay to the broker for a possibility to conclude transaction? Do you know that with a use of proper tools, you can avoid the commission? Avoid or considerable reduce transactions cost. Hereinafter you will find advice.

All is based on examples from my trading reports.

Charges on the stock-market

Before you get know how to reduce commission you should know that at the broker or proptrading company you must take such costs into account as:

1. Commission.

2. SEC.

3. NASD/TAF.

4. NSCC.

In case of SEC, NASD, TAF, NSCC – these are lower costs, basically unnoticed for the trader. What’s important, a part of these costs will be charged only when you sell share or open a short position.

Crucial from the trader point is commission amount. Commission level is from a few to nearly 10$ per position. In alternative model of counting payments – the commission is being charged per share (usually with determined minimum). This scheme applies to brokers. In case of proptrading companies – the commission is calculated per share (without minimum). Usually varies in the range of several cents up to 1000 shares.

Basic condition: access to ECN and routes

In order to come down to concrete: Broker at which you trade (in case of proptrading companies this condition is always met) must provide you an access to ECN (Electronic Communication Networks) and a row of other routes.

All proptrading companies provide the access to large number of ECN. A bit lower number provides a large group of brokers enabling access to stock exchanges.

However, not all brokers have ECN in their offer. Don’t count on ECN in brokers providing access only to CFD.

Removing liquidity and adding liquidity to the market

In order to come down to concrete: Broker at which you trade (in case of proptrading companies this condition is always met) must provide you an access to ECN (Electronic Communication Networks) and a row of other routes.

Check whether your broker provides it!

What is removing and adding liquidity to the market. I will explain it on a simple example, which can easily refer to placing orders on the Polish stock exchange or Forex market.

Removing liquidity: when you use market orders. You open a long position filling the order at the best sale prices, or you open a short filling order at the best buy prices.
Advantages: your order is filled immediately.
Disadvantages: charged fee for this type of filling.

Adding liquidity: when you use limit order. You open a long position while waiting to fill your orders on the buy side or you open a short position while waiting to fill your orders on the sales side.
Advantages: most ECN pay to fill the limit order.
Disadvantages: it isn’t possible to use with strategies in which the speed of opening position is important at a specified price.

How it looks like on a real example

In order to come down to concrete: Broker at which you trade (in case of proptrading companies this condition is always met) must provide you an access to ECN (Electronic Communication Networks) and a row of other routes.

• Option 1: removing liquidity from the market. The most expensive option

An example of play on CLSN Company from 8.06.15: I opened a short position with 1500 shares at 2.68$. Close was at 2.64$. Take 4 of cent profit = 60$. It is counted profit as “gross” i.e. without deducting remaining charges.

I open/closed the position removing liquidity from the market. Therefore, there were charged extra costs for using ECN as remove liquidity. In the following Table this fee is marked in the window “Ecn Fee”. Adding the cost of opening/closing the position represented in this example: 5.4$.

Additionally I paid SEC, TAF, NSCC, Commission – with a total sum: 0.8849$.
Generally the cost of opening and closing the position amounted 5.4$ + 0.8849$ = 6.2849$.

In terms of shares, it was a cost of 0.002094$ per share.

• Option 2: I opened the position removing liquidity from the market, and I closed adding liquidity to the market. Option reducing incurred costs.

An example of play on CIEN Company from 8.06.15: I opened a long position with 1500 shares at 24.22-24.23$. Close was at 24.35$ – 500 shares, 24.40$ – 500 shares and 25.50$ – 500 shares. Take 4 of cent profit = 283. It is counted profit as “gross” i.e. without deducting remaining charges.

I opened the position removing liquidity from the market. Therefore, I was charged on a level: 2.7$.
The closed the position adding liquidity to the market. I earned thanks to that: (3.45$)
Additionally I paid SEC, TAF, NSCC, Commission – with a total sum: 1.5694$.
Generally the cost of opening and closing the position amounted 2.7 – 3.45$ + 1.5694$ = 0.8194$.

In terms of shares, it was a cost of 0.0002731$ per share.

• Option 3: adding liquidity to the market. Option enables additionally to earn

An example of play on BIOC Company from 2.06.15: I opened a short position with 900 shares of 3.47$. Close was at 3.43$ price. Take 4 of cent profit = 36$. It is counted profit as “gross” i.e. without deducting remaining charges.

I open/closed adding liquidity to the market. Therefore I earned additionally on opening the position from ECN. In this case I earned: (4.14$)

Additionally I paid SEC, TAF, NSCC, Commission – with a total sum: 0.5439$.
Generally the cost of opening and closing the position amounted (4.14$) – 0.5439$ = (3.5961$)
NOTE! In case of opening the position by adding liquidity to the market I incurred no costs. What’s more I earned additionally on this trade: 3.5961$.

In terms of shares, I earned on opening this position additionally 0.001997$ per share.

Summing up and how to reduce commission

Analyzing the final costs, which I incurred opening the position in 3 above described options:

1. Cost: 0.002094$/share. What for 1000 shares gives the cost: 2.094$

2. Cost: 0.0002731$/share. What for 1000 shares gives the cost: 0.2731$

3. Profit: 0.001997$/share. What for 1000 shares gives an additional profit: 1.997$

Cool right? You open the position, you don’t pay commission, and you even earn on it! Such things only on stock exchanges in the USA 🙂 We see a significant difference between option 1 and the other two. If your strategy allows you to use option 2 or 3 – use it!

Used by me routes in above examples are at cost of 1.8 $ /1000 shares. There are of course other (cheaper/more expensive). For own calculations you must also use the commission level, which you have in your broker. Take it into account. In case of more expensive brokers, option 3 – may turn out that works on the principle as option 2 – i.e. help you to reduce costs, but it won’t give additional profit.

PLEASE NOTE!

As you can see if you have possibility to fold the limit order, there is no need to react here and now for openly/closing the position – IT IS WORTHWHILE to benefit from what ECN gives and additionally earn on commission paid by individual routes. Of course, option 3 – i.e. earning on adding liquidity isn’t always so simple to play. If you must quickly close the position, nobody will pay attention to extra dollars from adding liquidity.

If your trading strategy requires responding to sudden changes, in such a case vast majority of the transaction will be carried out in an option number 1. That is only removing liquidity from the market.

Personally I use a few trading strategies. Majority of them meets just variant number 1. However, in case of many transactions, if there is a possibility to leave the position by adding liquidity – I use it. Very often scalping transactions I carry out only adding liquidity to the market.

I hope that above information will turn out to be useful. If you have some questions or doubts, feel free to add comments below the article.