Consumer Reports has issued their online brokerage rankings, and their list bears little resemblance to the Barron’s results. The Barron’s survey has such different criteria from Consumer Reports that this should not be much of a surprise.
Reading over the CR results, I don’t get the feeling that they did any hands-on testing. Also, their target customer is quite different from the target we use at Barron’s. The Barron’s customer profile is of someone who is relatively wealthy, has at least $100,000 in their account, is a moderately active trader, and is technologically savvy.
CR’s Money Lab graded firms on the services it says are “most valued by typical small investors.” They looked only at web-based brokers rated them based on grades for trading cost and scope, minimum trade fee, mutual fund programs, the amount of available no-transaction-fee funds, banking and asset management services, the availability of free research and education tools, and customer support.
In contrast, the Barron’s rankings evaluate the trade experience, broker’s technological offerings, usability of the site or software program, what can be traded online (with partial credit given for things that can only be traded via a live broker), research amenities, portfolio analysis and reporting (with an emphasis on tax reporting), the quality of help and means of access, and costs.
The Barron’s emphasis on the quality of the trade execution, smart-order routing technology (which finds the best bid or offer), and the absence of internalized orders and reliance on payment for order flow were necessary to earn a high rating. CR’s ranking scheme doesn’t consider this at all.
Our range of offering score considers how many stocks a broker allows their customers to sell short, looks at complex options trading, and the availability of mutual funds, futures, commodities and international trading. CR just counted up the number of no-transaction-fee mutual funds offered by each brokerage.
The Barron’s emphasis on portfolio analysis and reporting is also completely missing in the CR ranking. CR’s cost analysis looked only at the commissions for trading stocks and mutual funds, while Barron’s also considers options trading, margin fees, and any maintenance or software fees levied by the brokers.
I think a key difference is also the Barron’s emphasis on hands-on testing. We get a trading account with each broker, and run the sites and software offerings through a comprehensive script.
It’s not at all surprising that our results vary widely. The firm they ranked first, Firstrade, came in 10th in our web-based category and earned only 3 stars (out of 5) overall. FirsTrade got the second-lowest trading technology ranking, a mere 0.8 out of 5 points, of all of the brokers ranked. Their 2nd place firm, E*Trade, was 6th in Barron’s.
YOU’RE RICHER THAN YOU LOOK. Some readers have discretely inquired about the cost to trade 5,000-10,000 shares of stock or to buy 50-100 options contracts at an online broker. That’s a lot more action than the 500-share/10-contract benchmarks Barron’s uses to evaluate pricing in our annual review of the brokers ("Tools of the Trade,” March 5.) So let’s see what it costs the other half to trade.
First, these bigger-ticket items usually carry additional charges. And because they are larger, they also can lift the price of a given stock or option, which means you’re going to pay more for a market-based price. We recommend using limit orders for large blocks, or breaking them down into smaller chunks. Multiple orders might raise the cost of your trade, but you’re likely to get a better price, which will more than make up for the higher commissions.
Provided you keep enough money at the bank, trading 5,000-10,000 shares a pop will cost you nothing at Banc of America’s brokerage site, as well as Wells Trade from Wells Fargo Bank. That privilege, however, means you have to keep at least $25,000 in various accounts at BofA and an undisclosed amount at Wells. (To see a complete list of each online firm’s prices and methodology click here.)
Eleven firms have flat rates regardless of how many shares you trade: Just2Trade ($2.50), TradeKing ($4.95) ChoiceTrade ($5), FirsTrade ($6.95), Scottrade ($7), Terra Nova ($7.50), CyberTrader, Fimat Preferred Trade, OptionsHouse (all $9.95) and TD Ameritrade and E*Trade (both $9.99).
For up to 5,000 shares, thinkorswim charges $9.95. Bigger orders are charged 11/2 cents per share, which means a 10,000-share block will set you back $150. As a result, you’d probably be better off breaking that 10,000-share order down into two 5,000-share chunks ($9.95 each) at thinkorswim.
Many brokers tack on a per-share fee above their minimum. For example, optionsXpress charges $9.95 for the first 1,000 shares, then a penny per share for any additional shares. You pay $49.95 for 5,000, and $99.95 for 10,000 shares. Schwab and Fidelity will hit you the hardest for large blocks, as their 1½-cent-per-share fees kick in after 1,000 shares. You’ll pay nearly $150 for a block of 10,000 shares at either broker.
FOR THOSE WORRIED about market impact of a large trade, Interactive Brokers offers some protection, at least for large-cap stocks. It’s called Volume Weighted Average Pricing, or VWAP. You select the VWAP option when you order, and also indicate the amount of time you want to use to set the price. The price is then computed based on the average price, weighted by volume, for all the transactions in the stock over the time period you’ve selected through the close. VWAP prices are computed by Bloomberg, displayed after market close, and are guaranteed to be executed. Once a VWAP order is accepted, it can’t be canceled.
Interactive Brokers charges a penny per share for trades executed using its VWAP Dealing Network; currently over 1,200 stocks are on the network’s list. Outside of its VWAP network, Interactive Brokers charges a half-cent per share.
THERE’S EVEN MORE variation when it comes to trading large numbers of options contracts.
Only one brokerage, OptionsHouse, charges a flat rate—$9.95—regardless of the number of contracts. That makes it the best deal going. Others have either per-contract fees, or a base rate plus a per-contract fee, making them all significantly more expensive. Zecco, TradeKing, ChoiceTrade and Interactive Brokers can execute a 50-contract order for under $40, while it will run you $45-$50 at E*Trade, Schwab, TD Ameritrade, Fimat Preferred Trade, Terra Nova, Fidelity, MB Trading, Lightspeed, and TradeStation.
Siebertnet’s published rate schedule says that customers should call in with large block orders, and they’ll be personally managed by a broker. The fee depends on your overall relationship with the brokerage.
OptionsHouse is new enough that we don’t yet know its track record for price improvement and speed of execution, though. E*Trade turns out to be the cheapest “big name” broker from our list of the best online brokers: A transaction that includes 5,000 shares of stock plus 50 options contracts (such as a covered call or a protective put) would cost you $54.48. The same transaction at Schwab, the most expensive among the group, would be $120.40.
Published in Barron’s, April 16, 2007. TradeKing corrections ran in the April 23 issue and are included here.
Theresa W. Carey, author of "The Electronic Investor" column in Barron's, has been reviewing sites of interest to online investors since 1991. Welcome to InvestorBrain.com, which brings you news and reviews of tools for investing online.
Copyright 2005-2009, Theresa W. Carey. All Rights Reserved.
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