Interactive Brokers Fees – How Does Interactive Brokers Make Money?

Interactive Brokers Fees – How Does Interactive Brokers Make Money?

Interactive Brokers has done their best to lower and eliminate fees for investors. Overall, Interactive Brokers provides one of the best trading platforms and market access across the board for one of the most compelling price points and margin rates across the industry.

With such great pricing, many experienced traders use IBKR to make the most of their large trading sizes and volume.

Nevertheless, how does the Interactive Brokers platform perform for the average investor, and does their cost model make sense for smaller, low volume, buy and hold accounts?

According to Forbes, IBKR “generates revenue from four primary sources – Net Interest Income, Commissions, Trading gains, and Other income.” 

For the purposes of this article we will discuss the basics of the IBKR commission structure, in addition to some of the more obscure avenues through which Interactive Brokers makes its money.

Interactive Brokers Fees: IBKR Pro

For large, experienced investors and traders, IBKR Pro offers unsolicited access to its advanced Trader WorkStation application, in addition to top of line research, early market access, and dozens of other algorithmic trading options.

The Pro plan is split into a fixed and tiered option, both of which offer traders a 1.5% interest rate on margin use that is lowered all the way to just .5% for the highest volume traders.

The fixed option offers traders a price of $.005 per share, maxing out at 1% of the total trade value, while completely eliminating exchange fees, clearing fees, and pass-through fees.

On the other hand, the variable option allows larger volume traders to pay just $.0005 per share when they exceed 100,000,000 shares traded per month. 

Despite commissions, neither IBKR Pro or IBKR Lite account holders have account minimums or are charged any inactivity fees, a rarity amongst brokerages. 

Interactive Brokers Fees: IBKR Lite

In contrast with IBKR Pro Plans, IBKR Lite users can trade US Stocks and ETFs commission for free at any volume. 

Nevertheless, Interactive Brokers does charge free Lite users higher rates on margin coming in at 2.5%. For traders looking to trade large volumes on margin, this hike could make a significant difference to returns.

Additionally, lite traders pay a flat per-contract fee for options at .$65 and .$85 per future contract, as opposed to Pro users that operate on a variable scale that lowers significantly per contract based on their overall monthly volumes. 

Although IBKR Pro does offer significantly lower rates for high volume traders, both the Pro and Lite options offer traders 100% free trading of any US mutual funds.

Moreover, perhaps the biggest difference between the IBKR Pro and Lite services is their execution of orders. Users of IBKR Lite will have their orders routed through market makers through the acceptance of payment for order flow.

Payment for order flow, on its surface, doesn’t seem to affect investors, but it may prohibit orders from being executed at the best prices, as market makers generally profit from the bid/ask spread.

IBKR Pro users do not have to worry about this process, as their orders are routed through an exceptional order routing system that completely excludes payment for order flow operations.

Interactive Brokers Fees: Cryptocurrencies

Luckily for all potential investors, Interactive Brokers takes a one fit all, streamlined approach to its cryptocurrency trading commissions that is completely based on a tiered volume structure.

For all crypto transactions, IBKR charges a minimum fee of $1.75 (but no more than 1% of trade value), while lowering percent trade value commissions from .18% of trade value to .12% based on per month trading volumes. 

This commission structure is completely transparent and concrete across the board, and IBKR does not add any spreads, markups, or custody fees to transactions. 

At the moment, Interactive Brokers offers clients the ability to trade Bitcoin, Etherium, Litecoin, and Bitcoin Cash through their platform, in addition to a plethora of other crypto-based indices and trackers. 

Furthermore, Interactive Brokers just recently launched their Crypto platform in 2021. It’s expected that their offerings will largely expand over the next several years. 

Research, News, and Market Data

For beginner investors, Interactive Broker’s news and research application can be extremely intimidating.

In contrast with other established online brokerages, IBKR offers an enormous amount of market data and research to its clients, although many require an additional subscription.

Many modern brokerages offer news to their clients free of charge through stock specific notices and updates. These brokerages do include some general market news but are largely focused on specific watchlists.

IBKR, on the other hand, has decided to allow its investors to pick and choose from the best and most prominent news organizations and journals from around the globe.

Many of these options are free of charge, but Interactive Brokers allows the purchase of others a la carte or in cost reduced packages.

For some prospective investors, these offerings may seem over-expensive compared to other brokerages, but IBKR retains only 5-10% to cover administrative costs, paying the rest to associated vendors.

Conclusion

In this article we covered Interactive Brokers‘ commission structure, in addition to their revenue from news partnerships and payment for order flow agreements. For our full review on all aspects of Interactive Brokers, click here.

For potential investors, IBKR offers a compelling argument on multiple fronts, depending on a trader’s individual circumstances.

Experienced traders will find Interactive Brokers to offer one of the most cost effective pricing structures available with incredibly low margin rates and variable commissions. 

Furthermore, beginner or novice traders may find IBKR’s Lite program a great place to experience and learn an advanced trading platform, while paying 0 commissions on trades involving US stocks and ETFs.

Although somewhat complex, for prospective traders seeking more information on the differences between the Lite and Pro offerings, Interactive Brokers offers a simplified video synopsis. 

Overall, Interactive Brokers does profit from commissions and payment for order flow, but the company maintains a large focus on generating revenue through net interest income. 

The practice of growing new interest income revolves around acquiring and maintaining a great relationship with clients, as a firm can only grow interest on further funds from its investors.

In our view, this relationship will incentivize IBKR to remain at the top of its class for providing a cost-conscious, advanced, full service trading platform for its investors.