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According to research by University of California academics, Interactive Brokers (IBKR) systematically gets worse execution than other retail brokers for US stocks because wholesale brokers they use give them a worse price.
Including these execution costs, TD Ameritrade is the cheapest broker in Singapore for trading US stocks. However we continue to prefer IBKR due to better data & tools it offers. IBKR also gives better control on FX conversion, which is important in our view.
IBKR is still the cheapest and best broker for nearly all other markets they cover.
On 25th Aug 2022 Christopher Schwarz of University of California at Irvine and co-authors published a paper comparing the execution quality of 6 brokers in US, including Interactive Brokers (IBKR).
The comparison was based on 85,000 intra-day trades that they executed over nearly 6 months using their own money. In total, they traded nearly US$15 million in 128 US listed stocks.
They don’t mention it in the paper but we estimate they must have spent nearly US$44,000 in trading costs while doing this study!
We find that execution prices vary significantly across brokers: the mean account-level round-trip cost ranges from –0.07% to –0.46% excluding any commissions. The dispersion is due to off-exchange wholesalers systematically giving different execution prices for the same trades to different brokers. Across brokers, variation in PFOF cannot explain the large variation in price execution.
They also found that the round trip cost was the lowest for TD Ameritrade (0.07%) and highest for IBKR Pro (0.44%) and IBKR Lite (0.46%). These costs are excluding any commissions charged by the brokers.
Table 1: Comparison of Roundtrip Execution Costs
| Broker | Execution Cost |
|---|---|
| TD Ameritrade* | 0.07% |
| E*Trade | 0.20% |
| Fidelity | 0.23% |
| Robinhood | 0.31% |
| IBKR PRO* | 0.44% |
| IBKR Lite | 0.46% |
| NBBO (Worst Possible) | 0.62% |
| * Only TD Ameritrade and Interactive Brokers (equivalent to IBKR Pro) are available to customers in Singapore. | |
Most of the brokers they compared offer commission free trading. IBKR, however, does charge 0.5¢ per share with a minimum of US$1 per trade for US stocks.
We estimate IBKR commission works out to about 0.03% of the traded value.
In our look at the best brokers in Singapore, we found that made IBKR one of the the cheapest brokers in Singapore for US stocks.
However our calculations only accounted for the disclosed commission charged by the brokers. We did not have any data on the execution quality at the time.
Based on this paper, it would seem reasonable to add a 0.22% (since the 0.44% is a roundtrip cost) execution cost for IBKR when calculating the all-in trading cost. This is over and above the FX conversion charge and the trading commission.
Most probably but there are a few caveats.
First, this analysis is only for US stocks. We don’t know how the brokers compare for other markets. Based on the available data, IBKR remains the cheapest broker for most other markets.
Second, we don’t have execution quality data for most other brokers in Singapore. Of the 6 brokers the authors tested, only TD Ameritrade and IBKR are available in Singapore.
The remaining brokers will also incur some execution costs although we don’t know how much. Even if we assume that they get the best possible execution, nearly all brokers in Singapore will remain more expensive that IBKR for trading US stocks.
Table 2: All-in Trading + Execution Costs for Retail Brokers in SG
| Broker | All-in Trading + Execution Costs* |
|---|---|
| TDAm | 0.06% |
| IBKR | 0.25% |
| POEMS | 0.28% |
| Syfe Trade | 0.30% |
| Tiger | 0.32% |
| moomoo | 0.37% |
| FSMOne | 0.55% |
| Saxo* | 0.63% |
| SC | 0.77% |
| UOB | 0.87% |
| OCBC | 1.32% |
| DBS | 1.45% |
| * For US Stocks, assuming 0.035% one-leg execution costs for brokers other than IBKR. 0.22% for IBKR | |
TD Ameritrade had the lowest execution cost of any broker in the study. The roundtrip cost was only 0.07% i.e. 0.035% for a single leg.
That’s much lower than the 0.22% cost at IBKR.
TD Ameritrade was also the cheapest broker for US stocks before adding the execution cost. We estimated an all-in trading cost of 0.02% at TD Ameritrade in our original analysis. This is marginally better than the 0.04% all-in trading cost at IBKR.
Including the impact of execution cost, TD Ameritrade looks significantly cheaper than IBKR with an all-in trading cost of 0.06% vs. 0.26%.
Table 3: All-in Trading Costs – TD Ameritrade vs. Interactive Brokers
| Cost | TD Ameritrade | Interactive Brokers |
|---|---|---|
| Execution Cost | 0.04% | 0.22% |
| Commission | 0.00% | 0.03% |
| FX Conversion Cost | 0.02% | 0.01% |
| All-in Cost | 0.06% | 0.26% |
We still think IBKR is the best broker for most people in Singapore.
Despite being the cheapest broker for US stock, TD Ameritrade has a few significant limitations vs. IBKR.
First, TD Ameritrade does not offer access to any market apart from US. So if you need to trade any other market (incl. Singapore, London, Hong Kong) you need at least one more broking account. We think this is a big limitation.
While opening a broking account online is very easy these days with SingPass, spreading your investments around multiple brokers makes it harder to have an overall view of your portfolio.
Second, it does not offer the sophisticated data and tools that IBKR offers. It has a basic interface that allows you to trade and track your positions but nothing else. IBKR has the best tools and data access of any broker in Singapore.
And lastly, TD Ameritrade does not allow you to choose when to convert SGD to USD for trading and does not disclose the spread it charges for this conversion.
FX spreads are a very large part of the all-in trading cost for stocks, often larger than the trading commission. This is especially true for buy & hold type investors.
In our testing, TD Ameritrade automatically converted our SGD deposit to USD at a time of their choosing. To be fair, when we tried to reverse engineer the spread they charged, we estimated a very reasonable 0.02%.
However this is a very rough estimate since we do not know the exact time at which the conversion happened. It could be higher or lower. More importantly we do not like the uncertainty associated with such a major cost item.
Because of these 3 reasons we still prefer IBKR for most people.
However despite the uncertainty around FX conversion rates, TD Ameritrade is clearly the cheapest broker for US stocks after including the impact of execution costs.
So if you primarily trade US stocks and care only about costs, then TD Ameritrade could work for you.
Retail brokers in US must make sure that their customers get the NBBO (National Best Bid & Offer) quoted price or better for all their orders.
The NBBO quote for a stock includes the highest bid and lowest ask price across all exchanges in US. The bid is a price at which someone is willing to buy the stock and the ask is the price at which someone is willing to sell the stock.
The way retail brokers can improve upon the NBBO is by sending the trade to a wholesale broker or a market maker like Citadel Securities or Jane Street Capital.
Bloomberg’s Matt Levine has a very entertaining and insightful explanation for how this works here (highly recommended but paywalled).
But the basic summary is this. Let’s say the best bid for a stock on the exchange is $99.00 and the best offer is $101.00 with a mid-price of $100. This means if you want to buy, you pay $101 and if you want to sell you get $99. The difference between the two is the bid-ask spread.
The market maker gets a lot of buy and sell orders from different retail brokers.
Instead of sending these orders to the exchange they could fill the buy orders at $100.50 and the sell orders at $99.50 and keep $1 for themselves. They only send the orders to the exchange when they are not able to match them internally and don’t want to take the other side themselves. Everyone else gets a price improvement over NBBO.
In this example the execution cost is 50¢, the difference between the mid-price and the price the buyer or seller got ($100.50 or $99.50).
Put simply, the execution cost is the difference between the best price you could have got and the price you actually got.
What this study says is that IBKR is consistently getting your order filled at a worse price than some other brokers, like TD Ameritrade.
The authors concluded that IBKR has a higher execution cost because wholesale brokers seem to be giving them a worse price than they do for other retail brokers.
The paper does not discuss why the wholesale brokers would treat IBKR worse than others but Matt Levine again has a very interesting (and we think correct) suggestion.
The wholesalers want to trade with retail orders, because in general retail orders are less risky than orders on the public stock exchanges; they have less “adverse selection.” If a market maker is trading on the stock exchange, and it buys 100 shares of stock, then there is a decent chance that the seller knows something it doesn’t. Perhaps the seller is a clever hedge fund that has done lots of clever research and knows that the stock is about to go down; if so, the market maker will lose money on the stock it bought.
…But if the market maker buys 100 shares directly from a Robinhood Markets Inc. customer, then it knows that it is not trading with a big pension fund or hedge fund or high-frequency trader. It’s certainly possible that a Robinhood trader is particularly well informed, or has a ton of stock to sell (or buy) and has broken up that trade into smaller orders, but it is less likely than it is on the stock exchange. So this is a more attractive trade for the market maker.
His point is that Interactive Brokers’ customers are more likely to be professional investors with better information than regular retail investors. As a result wholesale brokers charge IBKR a higher spread than they charge say TD Ameritrade, who mostly have retail investors.
If this is correct, IBKR will likely always have higher execution cost than other retail brokers.
Many retail brokers, specially the ones who offer commission free trading, get paid by the wholesale brokers to send them their customers orders. So Citadel, for example, will pay Robinhood if Robinhood send their customers orders to Citadel for execution.
In our example earlier, they made $1 by filling the buyer at $100.50 and seller at $99.50. Some of this $1 gets shared with the retail broker e.g. Robinhood.
A lot of people are suspicious of this arrangement since they are understandably concerned that if Citadel is paying Robinhood (or TD Ameritrade) for the order flow, then their customers must be the ones paying a higher price.
Interactive Brokers doesn’t take payment for order flow and uses this fact in their marketing.
In the study, the researchers found that surprisingly the brokers that accept payment for order flow actually get better execution for their customers, while the ones that don’t take this payment, actually get worse execution.
This again ties in to the explanation earlier. Only the more informed traders are likely to know or care about something like payment for order flow. So they all go to a broker like IBKR.
And because IBKR has more informed investors on average, the wholesale brokers don’t find trading against them as attractive and give them a worse price.
The researchers did not consider any other markets in their analysis. Payment for order flow is also probably less of a factor in markets outside US.
However we think its reasonable to assume that IBKR will have higher execution costs than other retail brokers in any market where they rely on wholesale brokers.
However their commissions and FX conversion spreads are so much lower than every other broker in Singapore that we think they will remain cheapest in most cases despite that.
Questions? Suggestions? See a mistake? Write to us!
Webull offers true 0 commission trading (0 platform fee too) but has high spreads to convert FX. The App is very similar to moomoo / Tiger with less gamification.
The "Zero Commission" offers for US stock by moomoo & Tiger cut effective commissions by 7-25% but do not touch FX spread which accounts for 80% of the all-in trading cost. Our pick, IB, is still cheaper by upto 90%.
Tiger Brokers has a full-featured gamified trading app but charges high FX conversion spreads.
Does execution cost only matter for market orders? Does it also matter for limit orders, where we have already set the price?
Execution cost should matter for limit orders too. See here for what a limit order is. Although it is commonly called a limit order, a more accurate name is “limit or better”. That means it is still possible for the order to be filled at a better price than you have set.
To take an extreme example, lets say you have a limit order to buy TSLA at $250 (current price 299.69!). If there is some bad news on the stock, it may open at, say, $200. That $200 price may have a bid of 199 and ask of 201. Despite a limit of $250, you could be filled at 200.50 at one broker and 200.25 at another. Since the mid-price is $200, the execution cost is $0.50 in one case and $0.25 in another. This will not be visible to you in most cases unless you go to the extra effort to track it, but it definitely exists.
In general, for retail investors, it may be a good practice to only use limit orders. If you just want to buy the stock around current price, ($299.69 for TSLA for e.g.), instead of a market order, use a limit order with a high limit, say $325. That will get you filled immediately, just like a market order but with no tail risk that the stock suddenly spikes to $400 and you get filled there.