Institutional and retail traders alike can benefit from reduced trading costs. Institutional traders are well aware of trading fees and try to reduce fees as much as possible while still balancing liquidity and attempting to maximize profits and minimize losses.
The retail trader using a broker while trading from home can also reduce fees, especially fees specifically related to trading - commissions. Using different order types and market centers, many direct access retail brokers now pass along credits to traders for providing liquidity to the market. This can reduce the cost of entering and exiting trades.
Over the long run, by altering our entry and exit strategy slightly, a lot of money can be saved in fees. Most volume is now traded through ECNs in the stock market. If you have access to a " Level II " screen, you will see the current bid and offer, as well as the volume that is being bid or offered by multiple participants on each ECN at that price.
It should be noted that you do not need to see a Level II in order to collect credits to offset commissions, you only need to know how and where to place your orders.
Let's take an example of a stock with a bid price of If you offer to sell or short sell at On the other hand, if you sell or short sell with a market order at The same works for the bid - if you bid at The debit for removing liquidity is almost always more than the credit for providing liquidity.
Therefore, it is very important to check with your broker on what the current credits and fees are, and if the broker will pass along credits to you. As of , ARCA provides a 0. If liquidity is removed, the charge is 0. When tabulating actual trading profits or losses, factoring in these costs can have a dramatic effect on the bottom line, especially for active traders. Each ECN will have slightly different credit and debit amounts. Some ECNs do not charge for removing liquidity, or the fee is very low.
This can also help in managing fees, as a low-cost ECN or free ECN can be used to remove liquidity, and when providing liquidity use an ECN that provides higher credits.
Trading Example Let's look at a simplified trade example using the above information. A stock has a bid of You want to purchase 1, shares.
If you had no other fees, bid at Please note there are other fees involved in trading, and this is a simplified example to show how fees can be reduced based on how orders are executed. The Downside and Upside There is a downside to focusing too much on credits.
While credits can offset some trading costs, for most traders receiving the credit is fairly insignificant on each trade, although it definitely adds up over many trades.
When the market is moving quickly, it is not always prudent to bid to get long, waiting to get filled simply to attain the credit. There are times when removing liquidity to enter a fast-moving stock will be required.
This is also important to remember when the market is nearing a stop price on your trade. If you are long a stock and the price is falling and closing in on your stop, offering your shares out on the offer price may not be logical, as the order may not get filled and prices may continue to fall.
The upside of trading while being conscious of managing fees is that not only will we gain credits, but we will also get a better price. By buying at the bid price or selling at the offer price , and collecting credits, we can increase our gross and net profit numbers over using market orders.
For more, read Trading Is Timing. The Bottom Line Whether most traders are aware of it or not, this is how the stock market works. Certain retail brokers are allowing their clients to partake in the credit and debit system, and some are not. Even though reducing trading costs can be alluring, it is important not to focus on it completely. Removing liquidity is needed in some circumstances to enter or exit trades quickly.
It is also important to note that different trading systems and styles will almost always remove liquidity and thus have inherently higher fees. That is fine; it is balancing execution, fees, profits and liquidity that is important.
This is up to each trader to work out in their own trading plan. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. How much a fixed asset is worth at the end of its lease, or at the end of its useful life.
If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded. Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as No thanks, I prefer not making money. Get Free Newsletters Newsletters.More...