Most online brokers offer margin trading accounts with margin rates commonly ranging between 2.5% to 8%, depending on (1) the broker and (2) the account’s debit balance. However, Interactive Brokers offers margin rates of 1.59% or less. How is this possible?
Interactive Brokers provides a platform that is tailored to active and experienced traders, who generate significant revenue despite low margin rates. Users who do not meet minimum activity thresholds are charged $10 per month. There are also fees for accounts with balances under $100,000. Interactive Brokers liquidates users’ assets with no warning in order to offset any owed debt.
In this article, I will go over the various reasons why Interactive Brokers’ margin rates are significantly lower than its competitors, and how it is able to do this whilst remaining profitable. I will also highlight why the broker may not be a suitable fit for inexperienced traders.
How do Interactive Brokers’ margin rates compare to its competitors?
Let’s look at the margin rates for five of the most used online brokers at present.
· Robinhood has a flat rate of 2.5%.
· Fidelity has margin rates between 4% and 8.33%.
· Tastyworks has margin rates between 5% and 8%.
· Charles Schwab’s rates vary between 6.5% to 8.33%
· TD Ameritrade’s margin rates are relatively high, with a low value of 7.5% and a high value of 9.5%.
In comparison, Interactive Brokers’ rates are 1.59% for balances under $100,000, 1.09% for balances between $100,000 and $1 million, and 0.75% for those over $1 million. Only Robinhood comes somewhat near these figures, yet it still is not in the same bracket.
How are Interactive Brokers able to charge such low margin rates?
It is important to understand that Interactive Brokers provides a platform that is designed for advanced traders. Insufficient skill, knowledge and funds can lead to significant losses when using the platform. Below are three reasons why providing low margin rates is possible for Interactive Brokers.
1. Low margin rates attract high-end traders
If many of the platform’s users are high-end traders, a lot of money is pumped into each trade. This means that small margin rates are still able to generate significant revenue for the firm. Similarly, Interactive Brokers earns significant commission revenue from its traders.
2. Interactive Brokers charges fees that other brokers do not
As the platform is used by many active traders, there is a minimum activity threshold that a user must pass in order to avoid paying a $10 monthly fee. Interactive Brokers also charges users if they wish to access market data, for example. Lastly, a user must also pay fees if their account balance is under $100,000.
3. Interactive Brokers has zero leniency towards debt
If a user leverages up by borrowing money from Interactive Brokers and the investment takes a turn for the worse, the firm automatically liquidates the user’s assets to ensure debt can be paid. This is another example of how the platform is tailored towards experienced traders. There is very little assistance for the platform’s users.
Opening a margin trading account with Interactive Brokers may be a good choice for active and experienced traders. However, the platform may do more harm than good for those with little trading experience. The low margin rates are attractive but can only be taken advantage of in certain conditions. They may be counterbalanced through additional fees and limited customer service.
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