Interactive Brokers: Who Survives The Brokerage Price War?

Friedrich Chen profile picture
Friedrich Chen


  • U.S. brokerages have been at a price war, and I speculate that eventually commission-free trading will become an industry standard. Brokerages will have to compete through better order execution.
  • Interactive Broker's has the best price improvement on trades in the industry through their SMART routing system. This makes Interactive Brokers a strategic investment compared to other brokerages.
  • Even if the IB Advantage disappears, Interactive Brokers is still the industry's low cost leader for margin loans.

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2017 was a wonderful year for retail investors. In February, Fidelity Investments announced that they would lower commissions on trades to $4.95, and Charles Schwab (SCHW) followed suit in the same month. E-Trade (ETFC) and TD Ameritrade (AMTD) both responded the following month by lowering their commissions on trades from $9.99 to $6.95. But the main culprit for downward pricing pressure in the brokerage industry has definitely been Robinhood Markets (also referred to as "Robinhood"), which has been offering its customers free trades.

To make matters worse, the price war has also started trickling into the options market. In 2018, Tastyworks (founded by Thinkorswim's co-founder Tom Sosnoff) revealed that they would be capping commissions on options trades at $10 a leg up to 100 contracts. This would bring down commissions for options trading down to $0.10 per contract. Robinhood also made history when they announced that they would be adding commission-free trading for options.

Increasing price competition has led me to speculate that the brokerage price war is foreshadowing a dystopian future for U.S. brokerages where free trades are the industry standard. But I believe Interactive Brokers (NASDAQ:IBKR) has significant advantages over its competitors that will allow it to weather a commission-free future.

SMART Routing, Price Improvement, and the IB Advantage

The IB Advantage is calculated as Interactive Broker's price improvement on orders over the industry average. All values are independently verified by the Transaction Auditing Group, Inc.
(Source: Interactive Brokers Website)

Interactive Broker's primary advantage over other brokerages is their proprietary SMART routing system, which provides the best trade execution in the industry. This advantage is also quantified and publicly reported as the "IB Advantage" semiannually.

IB Advantage US Stocks (100 Shares)(Data from Interactive Brokers Website)

At first glance, it looks like Interactive Brokers has not done a

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Friedrich Chen profile picture
I am currently not actively publishing articles on Seeking Alpha, but feel free to follow me on social media or reach out for business contact. My LinkedIn is the best way to reach me.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IBKR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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