My preferred brokerage: Interactive Brokers

Effective in many ways

In the investing circles that I am in, the question of preferred brokerages pops up every now and then. Even though the answer depends on the individual’s trading activities and preferences, one of the more consistent winners in this discussion is Interactive Brokers. It is also my preferred brokerage - I hold as many as 3 brokerage accounts with them - a joint one with my spouse, one for my pensions, and the third for a corporate entity my family controls.

If you read this and like Interactive Brokers and choose to open an account, I’d be grateful if you use this referral link to setup your account - I will get a small payment when you fund your account. Read on..

Affinity very often brings a bias. I also hold a small number of Interactive Brokers (NASDAQ:IBKR) shares, so take everything with a pinch of salt.

As a quick background, Interactive Brokers has been around since 1978, and has been public now for 17 years. It holds an estimated 2.5M accounts, and roughly half a trillion dollars worth of assets are invested and traded through their systems directly or indirectly - they sometimes power smaller brokers that use IBKR as their backend, while presenting users with a different interface, often with different payment structures. In any case, the point is that IBKR is a seasoned operator in this space.

Its Web and Desktop (Trader Workstation) interfaces are somewhat poor, but its Mobile App interface is extremely functional and intuitive to use. In fact, I exclusively use the mobile app for almost all order placements. I use the web interface only when I have to download a report or contact support, or perhaps filling out the occasional form.

For accounts outside of the US, there is no free trading, so I pay a fee for all transactions - starting at $1 for US trades and going up depending on the country, security and exchange. Interactive Brokers is by means not the cheapest trading platform available. However, it is perhaps the best trading platform available and here are some reasons to support that view.

(note: I have a Portfolio Margin account, and it is possible that some features listed aren’t available at lower tiered accounts)

Forex Management

IBKR has an extremely fluid currency management system. For each currency you trade in, it will create a currency account. And all transactions - buy, sell, dividend, interest etc, is settled in the currency of the transaction and not transacted back and forth to your local currency.

You can carry both positive and negative balances in any currency at any given time, so long as you have total assets that are in positive. This means that you can take trades without necessarily converting currency into that currency. Say you want to buy a stock in Japan, and you don’t have Yen, and you plan to close this trade in a month and don’t want to carry currency risk - no problem - enter the trade, carry the cost of the trade as a negative margin in yen, close the trade a month later and settle everything then. If your trade was successful, you will be left with yens, and if not, your account will show negative yens which you will have to settle using some other currency.

The interest rates charged on such negative margins on currencies are pretty minimal - they have never deterred me for a short term position.

Flexibility with Deposits and Withdrawals

IBKR allows you to deposit and withdraw money in whatever currency you want (the ones supported on the platform) so long as you have a bank account in that currency in the name of the account holders. This means if I have a SGD, GBP and USD accounts in my name, I can deposit and withdraw in those currencies directly, and not have to pay for forex fees in currencies other than my main currency, say GBP. This feature is super useful, given that forex and multi-currency accounts are now easily supported in most mainstream banks.

Access to Forex Order Book

Instead of marking up your forex transactions every time currency needs to change, which is what other platforms do, IBKR gives you access to the forex markets directly - and you can place either limit or market orders, and IBKR charges a flat fee (about $2) for each transaction. This is a significant cost saver for those trading in multiple currencies.

Access to markets

IBKR has access to a lot of markets - I have traded the following countries through them - USA, Canada, UK, multiple exchanges in EU, Switzerland, Israel, Singapore, Hong Kong, Australia and Japan. I have personally traded Stocks, ETFs, Bonds, Options, Index Options and Forex, though I believe you can do futures, commodity derivatives, crypto etc too. It also support mutual funds, but only for US resident accounts. It is pretty much a one-stop shop for publicly traded assets in the western world.

Margin Management

While margin trading is a generally bad idea, at times there are prudent uses of leverage. Portfolio Margin accounts in IBKR have a cool feature - it calculates your margin use based on your effective net positions, not on a position by position basis. Let’s say you are short a PUT option for tomorrow, but long a PUT option of the same security with same strike a week later, IBKR will calculate the margin as the net risk between the two, instead of calculating the first as being a full risk and not giving credit for the reduction of risk from the second security.

Borrow against holdings

Let’s say you have a portfolio that you are happy holding, but you need a small portion of the value of that portfolio for short term needs, the default option would be to sell some securities in the portfolio. That may not be desirable for both investing and tax reason. What you really want to do is to borrow against your holdings.

With some banking platforms, you might able to get an overdraft against your holdings, but that involves (a) a lot of paperwork and (b) freezing your holdings with the bank till you cancel the overdraft.

With Interactive Brokers, you can seamlessly borrow through a margin loan against the holdings, so long as you are willing to pay their interest, which is charged on a daily basis. Pull in the money you need, utilise it, put it back a few weeks later and pay up a small interest for that. Interest rates aren’t crazy - roughly 1.5% above benchmark rates.

SYEP program

For long term investors like me through my Coffee Can Portfolio, Interactive Brokers allows me to earn a small fee for allowing them to lend out my shares. This feature is called Stock Yield Enhancement Program (SYEP).

Normal, ISA, Pension & Corporate Accounts

In the UK, IBKR can either be set up as a normal account, an ISA or as a Pension account. I don’t have an ISA account with IBKR, but I have the other two. I also hold one in the name of a corporate entity.

Summary

After trying a few trading platforms, I have settled with IBKR, so much so that I even bought their stock after realising how good they are at providing a useful, effective and customer-centric platform. I hope this post helps you make the decision to open an account. If you do so, I’d be grateful if you use this referral link to setup your account - I will get a small payment when you fund your account.

Onwards and Upwards - Happy Investing!