Interactive Brokers Group, Inc., which already provides one of the lowest-cost trading platforms, has announced the October launch of IBKR Lite, a new offering that will provide commission-free trades on US exchange-listed stocks and exchange traded funds (ETFs). This announcement comes on the heels of the launch of the dough app, which allows commission-free trading for a subscription fee of $1 per month.
IBKR Lite has a bit of a catch, but the firm is upfront about it. Trades placed on IBKR Lite are routed through market makers who pay Interactive Brokers for the order flow, rather than seeking best execution through IB's smart order router. The new offering will complement Interactive Brokers’ existing services, which will be rebranded as IBKR Pro. Commissions on asset classes outside U.S. listed equities and ETFs, such as options, futures, and equities on international exchanges, will be subject to the firm's regular pricing schedules.
IBKR Lite clients can access free real-time market data using their desktop Client Portal program as well as mobile apps for iOS and Android. Only IBKR Pro clients can use Interactive Brokers' extremely powerful Traders Workstation (TWS), which contains a wealth of analytical tools, as detailed in our review.
Dough, which is adding new clients from its online waiting list, runs on iOS and Android apps only, and focuses on personalization and education. Dough's clients will be able to place commission-free trades on their very engaging platform, which includes educational videos and articles, by paying a subscription fee of $1 per month. At launch, Dough only allows equity and ETF trading, but as a subsidiary of tastytrade, they hope to offer options trading by the end of 2019. We will have a hands-on review of this platform shortly.
Other services, most notably Robinhood, that offer free trading also route orders to generate payment for order flow, but they are not as up front about it. JP Morgan's YouInvest, similar to Merrill Edge, offer free equity trades to clients that maintain certain account balances at their parent banks. TradeZero has mostly free stock and options trading, combined with a platform that lets short sellers locate stock that they can borrow.
A year ago, Interactive Brokers' executive vice president, Steve Sanders, told us that his firm was not considering a response to the launch of free trading at YouInvest. At that time, he said, “We do not have any plans to drop our commissions and we don’t consider JPMorgan a competitor." The shift in corporate direction is explained by Thomas Peterffy, Chairman and CEO of Interactive Brokers, in a release. “In order to attract a broader audience, we wanted to remove any impediments to opening an IBKR account. With the addition of no commissions or fees to trade US exchange-listed stocks and ETFs, no account minimums, and no cost to maintain an account for IBKR Lite, we believe Interactive Brokers will offer the best pricing options for both professional and retail investors.”
But there are more costs to consider when using an online broker than commissions to place a trade. If you trade on margin, you should check out how much the broker will charge. IBKR Lite clients will pay margin rates that range from a high of 3.4% to a low of 2.2%, which is significantly lower than other online brokers.
If commissions continue this race to zero, brokers will find other ways to make money. Idle cash in customer accounts is a profit center, as some zero-commission brokers pay no interest on it. They also make money by lending securities to short sellers and keeping the loan proceeds. IBKR Lite customers, however, can participate in Interactive Brokers' share lending program, the Stock Yield Enhancement Program, and also earn interest on cash balances over $10,000.
Just remember: if you’re not paying for the service, then you are the product.