Interactive Brokers Review
For the year 2020, Barron’s ranked Interactive Brokers as the number one overall online brokerage, number one online brokerage for international traders, number one online brokerage for retirement investors, and number one online brokerage for active traders. Let’s talk about why.
What is Interactive Brokers?
Interactive Brokers LLC (NASDAQ: IBKR) is a brokerage founded in 1977 by Thomas Peterffy, who is the current Chairman of the Board. It is headquartered in Greenwich, Connecticut, and has over 2,100 employees in 15 countries. The company places almost 2 million trades a day and brokerage account holders have over $200 billion in customer equity.
Who Is Interactive Brokers For?
Interactive Brokers is a great platform for advanced investors who want access to a wide array of securities and asset classes, including international investments. In fact, IBKR offers access to 135 exchanges in 33 countries around the world. Global investors gain access to international equities as well as foreign corporate and government bonds. IBKR clients can trade stocks long and short, penny stocks, mutual funds, bonds, options, forex, and even fractional shares. Unfortunately, Interactive Brokers does not offer access to cryptocurrencies besides letting you trade Bitcoin futures. Clients can open individual accounts and joint accounts, as well as IRAs.
The Trading Experience
Traders Workstation is the main screen from which IBKR users can access their portfolios and perform trades and research. The TWS is an extremely advanced tool that offers access to live news, charting tools, screening tools, third-party research, and portfolio analysis. While this tool is very powerful in the hands of an advanced investor, it is not meant for beginner investors or investors looking to employ a hands-off, buy-and hold strategy. The TWS is quite complicated and can be confusing to those looking for a simple, easy-to-understand user interface.
Commissions on Interactive Brokers
IBKR Lite users get to enjoy a commission-free investing experience. But for those who want to enjoy the perks that the IBKR Pro system has to offer, they will face either a flat-rate or tiered commission system. If you choose to utilize the flat-rate system, the fee is $0.005 (half a penny) per share traded. This fee has a minimum of $1, and maxes out at 1% of the trade value. Once you start placing trades in large volumes, the tiered system becomes the better option. If you trade under 300,000 shares per month, the fee will be $0.035 per share. As you trade more and more shares, the fee decreases, reaching a minimum of $0.0005 per share over 100,000,000 shares traded per month.
Keep in mind that, if you choose to use IBKR Lite in order to avoid commissions on U.S. equities, Interactive Brokers will accept payment for order flow for those trades. This means that, rather than connecting you to the best market maker in order to maximize price improvement on your trades, IBKR will accept payment from market makers in exchange for routing your trades to them. Payment for order flow is very common with brokerages and is not unique to Interactive Brokers, but it is worth noting that you can gain some of the best price improvement in the industry by using IBKR Pro, which utilizes an exceptional order routing system.
While IBKR Pro is a great platform for advanced investors, it does come with increased fees. The IBKR Pro commission fees were discussed above, and they are also accompanied by account inactivity fees. For portfolio balances less than $2,000, you must trade enough to reach a commission payment of $20 per month in order to avoid inactivity fees. For portfolios between $2,000 and $100,000 you must reach a commission of $10 per month. And for portfolios larger than $100,000, there are no inactivity fees.
Margin Rates on Interactive Brokers
Interactive Brokers is well-known for its impressively low margin rates. IBKR Lite users pay a margin rate of the benchmark rate plus 2.5%, while IBKR Pro users enjoy a rate of benchmark plus 1.5%. These rates apply for portfolio balances below $100,000 and decrease with larger portfolios.
ESG Investing on Interactive Brokers
For those investors who are interested in SRI, or Socially Responsible Investing, IBKR has beefed up its screening tools and introduced a new ESG grading system. The Impact Dashboard is a tool that allows you to screen for 13 SRI categories that are considered positive , such as environmental sustainability and social justice. You can also screen out negative categories such as guns and political campaign contributors. After you’ve tailored your portfolio to fit your values, you can receive a grade from the Impact Dashboard that indicates how well your portfolio lines up with the values you’ve chosen.
While Interactive Brokers is currently best for day traders and advanced investors looking for global trading opportunities, IBKR has been putting substantial effort into implementing changes that can accommodate newcomers and hands-off investors. For example, they have a robo-advisory service called Interactive Advisors that can analyze your risk tolerance and financial situation and invest your money for you. (If you're unfamiliar with robo-advisors, check out Wall Street Survivor's take on them here.) Interactive Advisors offers you access to plenty of pre-set portfolios that contain a mix of funds and individual securities. In addition to Interactive Advisors, IBKR has also released and improved IBot, an artificial intelligence-powered chatbot that can direct you to different IBKR resources and help answer questions.
Some of the unique features offered by Interactive Brokers are the mutual fund replicator, tax optimizer tool, and stock loan programs. The mutual fund replicator allows you to mimic popular mutual funds at a cheaper price by investing your money in ETFs or portfolios that are similar or identical to the mutual funds. The tax optimizer tool works wonders for your tax returns by harvesting losses and improving lot selection. If you choose to participate in a stock loan program, you offer your shares up to be borrowed by another investor so they can sell it short. Once you receive your share back, Interactive Brokers splits the short sale commission with you 50/50.
IBKR’s research and education tools are some of the best in the business, and they are constantly improving. Investors have access to screeners, charting tools, calculators, live news, third-party research, and even a trading idea generator. While education hasn’t always been the company’s strong suit, it has put much effort into improving these resources to be more welcoming to newcomers. Investors can learn about trading, take quizzes and tests to evaluate their knowledge, and even attend webinars to learn more.
While Interactive Brokers is typically very open and honest with its clients, it is worth noting that the broker-dealer got into some hot water with the SEC last year for failing to file Suspicious Activity Reports.
As mentioned above, Interactive Brokers is one of the absolute best platforms for day traders and advanced investors who wish to get quick access to global markets and some of the best order routing technology in the game. On top of that, IBKR is becoming an increasingly welcoming environment for new investors. As the company continues to put emphasis on its AI assistance, educational resources, and free services, it may even come to rival the current brokerages that act as hubs for beginner investors!