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Author: raleigh1208 Big red star, 1000 posts Old School Fool Global Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 50234  
Subject: Freetrade Alternatives—IB vs. MBT (Part 1) Date: 4/9/2005 2:50 AM
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Freetrade Alternatives—IB vs. MBT (Part 1)

In my previous post called Freetrade Alternatives—Software-Based Brokers, I reviewed the use of a software-based broker and asked the question whether Fools like you and me, who are “investors” as opposed to serious active “traders”, can reap lower cost trading, lower than that provided by browser-based brokers, without creating serious hassles in learning to trade online through a sophisticated trading platform offered by a software-based broker—i.e., are the lower costs worth the hassles? To me, the tentative answer is YES, and I've narrowed my review down to two software-based brokers, Interactive Brokers (“IB”) and MB Trading (”MBT”), which I'll compare and contrast below.

This review is ongoing, and I reserve the right to change my mind and revise this discussion after further review and research. I also reserve the right to be wrong—I've looked at so many websites of brokers lately and read the fine print that my eyes are blurry! If you see an error, please correct me, or if you see an important point I missed, just give a shout and I'll address it. Finally, remember that the broker that may be best for me may be wrong for you. My intent is to open the door for your research and your determination of which broker is right for you. My determination of a “winner” between IB and MBT in connection with a certain issue may be based on a factor very significant to me, but not significant or relevant to you and your circumstances. So for your own reasons you may declare a “winner” on an issue contrary to my pick. That's great—the more discussion the better!

My analysis below is based on my detailed review of the websites of IB and MBT, located at www.interactivebrokers.com and www.mbtrading.com. From the start, I'll say that reviewing the website of MBT was much easier, with the discussion easier to follow, than the more complicated website of IB. However, I believe part of the problem in reviewing the IB website is that IB is in business with customers around the world, so the references to various features of the IB system, such as the commission and fee schedules, break down the information into that for each region of the world. For example, the schedule of IB commissions for stocks, ETFs, and warrants, includes a breakdown of commissions for North America (the US and Canada) and Europe (France, Germany, Netherlands, Switzerland, and the United Kingdom). Similarly, the schedule of miscellaneous fees is broken down based on the base currency of the investor, so the fees of US Dollar-based customers are shown in a list that includes 7 other currencies from around the world. .

My analysis was also guided in part based on user comments from these Fool boards. I did searches for references in the various Fool discussion boards to IB and MBT and found great comments from Fool users of IB and MBT and those who had done research on the two, most of which was done over the last few weeks after the notice of the impending demise of Freetrade. These comments were very helpful, and I accumulated them into a Word document, which includes this discussion. Some of the comments I included verbatim, editing them to remove unrelated comments. I also sometimes put comments made in multiple posts by one author into one summary. I'll add to this summary as additional posts are made on the Fool boards. For anyone wishing a copy of my compilation of Fool comments about IB and MBT, please provide me your email address and I'll send you a copy in Word form. Remember you can email me directly by responding to this post and at the bottom of the reply box, check the box entitled “E-Mail this Reply to the Author” and uncheck the box “Post this Reply to the Boards”, thus marking it for email delivery only without inclusion on the discussion board. Another good site for discussion of the software-based brokers and customer experiences is the website www.elitetrader.com.

Now, back to my review of IB vs. MBT. The best place to start is again Barron's. In Barron's March 7, 2005 annual review and ranking of online brokers, IB topped Barron's list as the best software-based broker, but only by a narrow margin. MBT was 5th out of 12 software-based brokers, but was only behind IB by 3/10s of a point on Barron's scale. Based on that, these two software-based brokers are very comparable, but, like Barron's, I give the edge to IB, again by a narrow margin. While IB and MBT are substantially identical for many factors, there are a couple of significant differences, which I'll highlight as I run through these factors.

In Barron's review, IB was the only broker, whether browser-based or software-based, that earned a perfect score in the category of costs. Barron's emphasized IB's “rock-bottom fees and no platform charges”. Moreover, Barron's noted that IB's “low commissions—one cent a share or less—are only part of the story. IB's margin interest rates are also rock bottom”. I'll break down these costs, as well as required minimums and other fees and charges, below. I'll also give you my assessment of who wins, in the comparisons. However, as noted, these opinions are my own, I reserve the right to change my opinions or be wrong, and you may have a different opinion, based on what I outline below, or based on your own personal situation, so take everything I say below merely as your starting point in making your own determination of whether IB, MBT, both, or neither, is best for you, based on your particular facts and circumstances.

First, let's examine the two contenders.

BACKGROUND. IB is headquartered in Greenwich, Connecticut, having been in business for over 28 years. It's online trading system allows investors and traders to trade all types of securities on over 50 markets in 14 countries around the World. With $1.8 billion in capital, IB (with its affiliated group) was ranked as the 20th largest securities broker by Institutional Investor magazine. IB holds memberships on over 60 exchanges, market centers, and clearing houses around the world. Thus, IB is truly a global operation.

MBT is the newer kid on the block, having been started in 1999. Headquartered in El Segundo, California, it was formed to “improve” on the traditional online brokers, including IB, to better meet the needs of active traders in terms of trade execution, reliance on technology to avoid system downtime, and, as usual, customer service. Thus, MBT's claim to fame is improved technology and better customer service.

So it's a classic David vs. Goliath story, or the new gun vs. the old gun. For savvy investors, the new kid, MBT, may be the better option, provided its technology meets your needs. I don't have enough information to call a clear winner here, although in reading customer comments on the two, I came away with the impression that MBT's claim to fame in customer service is truly superior, with more personal contact and shorter response times when problems arise. The consensus seems to be that IB has more options in terms of technology and securities that can be traded, but MBT makes up for it in other ways, including customer service. WINNER—it's a tossup, with MBT getting the narrow edge, with better customer service.

TYPES OF ACCOUNTS. Both IB and MBT allow for accounts of all types, including individual, joint, and entity accounts, cash and margin accounts, and IRAs. Each has a type of “catch-all” universal account that will let investors do everything possible in terms of trading, whether stocks, bonds, options, futures, or any other securities available for trade, all from within the one account. WINNER—TIE.

INVESTOR QUALIFICATIONS. Both IB and MBT have extensive lists of countries from which they can accept investors. Other than residency requirements, I saw nothing on the MBT website imposing any particular requirements for minimum investor qualifications, in terms of knowledge or experience. For IB, its online registration form notes that its accounts are geared towards professional traders, so IB requires that investors have good or extensive product knowledge for any product he or she may wish to trade and prior execution of 100 or more trades of any product. I saw no mechanism for IB to verify information of this type, so I'm assuming it's up to you to determine whether you meet those requirements, knowing if you answer no you can't open an account. Thus, it's like Freetrade's requirement of 2 years of online trading experience, for which many Freetrade customers were very lenient in assessing whether they felt they met Freetrade's requirement. WINNER: MBT.

TYPES OF SECURITIES TRADED. IB has a monster list of everything that can be traded by IB customers, from stocks, bonds, and ETFs, to options, futures, and currency transactions. IB investors have direct access to 50 different markets in 14 countries. Similarly, MBT investors can trade stocks, bonds, futures, and options. IB does not allow investors to purchase shares of mutual funds, but investors can buy ETFs. MBT allows mutual fund purchases, but orders for no-load mutual funds (as well as bonds) must be phone orders, each with a $50 minimum charge per ticket. WINNER: IB.

TRADING PLATFORM SOFTWARE. As the name implies, software-based brokers provide their customers sophisticated trading platforms using proprietary software. This platform for trading is the key component of the interaction with these brokers. Therefore, in reviewing these types of brokers, you need to assess carefully the software and take it for a spin before committing to it. Both IB and MBT have demo versions of their software that you can try out before signing up. I urge you to kick the tires, so to speak, for the two trading platforms.

IB's trading platform is called the IB Trader Workstation, while MBT's trading platform is called the MBT Navigator. Both platforms are similar. You've seen those fancy stock screens with various boxes and other bells and whistles for tracking the market, watching a list of stocks, and trading quickly. The goal is for the active trader to have everything he or she may need handy to trade in and out of the market on a moment's notice, often with one click.

I don't know about you, but I get in trouble with one-click transactions, where an errant click can lead to unintended results. I can see me now—trying to do one thing with this software, and end up buying pork bellies, or stock from a company in Siberia! Fortunately, the software platform for both IB and MBT also allow you to bring up order screens more familiar to you, where you input everything, making the possibility of an unintended trade unlikely.

Nevertheless, trading stocks with a dedicated trading platform like the IB Trade Workstation or the MBT Navigator has a fairly steep learning curve. Before I would use it I'd want to be very familiar with the platforms and read all the help and user guides, as well as spend some time with the demo versions of the software.

When I looked at both of these platforms, they were much alike for me, with an overwhelmed feeling by me at first, until I got the hang of it. Experience with these trading platforms is a must, in order to feel comfortable. The learning curve is much steeper than that for trading stocks through a browser-based broker. So if complex computer screens with multiple boxes, flashing lights, and numerous pull-downs is not your cup of tea, you may be better off with a browser-based broker. However, there are alternatives, even with IB and MBT, as I discuss in the next section.

Based on my limited review of the websites and the demo versions of the trading platforms, I was slightly more comfortable with the MBT Navigator. So in terms of ease of use comfort with the software, I'll have to declare, WINNER: MBT, by a hair. MBT also touts the fact that third party quote programs, such as QCharts, eSignal, DTNiQ, and QuoteTracker, seamlessly integrate with the MBT Navigator.

With both IB and MBT, as with any software-based broker, the focal point for trading is the trading platform. You'll need to view the websites for the computer specification requirements for the IB and MBT trading software. One glaring problem, if your not a Bill Gates fan, is that the MB Navigator is Windows-based software only; it will not work on an Apple Macintosh computer. So for you Mac fans, you're out of luck with MBT. On the other hand, the IB software is much more flexible, with Windows, Mac (OS X), and Unix downloads available for the IB Trader Workstation. The only other requirement is that since the IB trading platform is Java-based software, you need a fairly recent version of Java installed on your computer, which is a free download available from Sun Microsystems at www.java.com. So for this factor, WINNER: IB.


ALTERNATIVE TRADING MECHANISMS. With MBT, you're limited to use of the MBT Navigator to trade online, if you're a Windows user. The only other alternative I saw was a phone order, which is available at no extra charge. But that's it for MBT. (IB provides for phone orders only for closing orders, with an extra $30 fee unless the phone call was required because of IB technology problems).

IB, however, is much more flexible. With IB, you can always download the IB Trader Workstation to your computer and trade through the software trading platform residing on your computer (and IB recommends that method if you have a slower computer or internet connection). But you are not limited to the software. The IB Trader Workstation is also available through the IB website for browser-based use (with Java installed), with the software remaining on the IB server but running from your computer. In fact, IB recommends that you run the software through your browser in order to ensure you're using the most up-to-date version of the software; if you have downloaded the software to your computer, which you can certainly do, then you have to ensure you download any modifications made by IB to keep the software current. So for this factor, WINNER: IB.

But wait, there's more, and it gets better. I don't know about you, but if I do any trading during regular exchange hours, I generally have to do it at work, through my employer's computer. With Freetrade I merely popped up the website and logged onto my account, and quickly made the trades I wanted, and then got back to work, without taking much time. With a trading platform, however, that's much more difficult. Our IT department (like most) frowns on employees loading personal software onto company computers without their approval, so it's forbidden, unless the software is work-related for use in doing your job. I can just see me sending in the required form for permission to download proprietary trading software. Moreover, our company's network has numerous firewalls in place, which would conflict with the IB and MBT software. But once again, IB has come to the rescue.

In addition to the browser-based Trader Workstation software, IB also has an HTML-based version for trading called IB WebTrader, which is designed as a trading screen for use by investors behind a firewall or investors that desire a more entry level platform. It's like a “lite” version of the full software. The IB WebTrader is reached through the IB website. It does require the use of Internet Explorer 6, which will be a bummer for those of you using an alternative browser.

And if that's not enough for you, IB also offers the IB MobileTrader, which allows you to trade your account through a PDA, cell phone, or other wireless device. So whether you're on your primary computer, at work, or on-the-go, you can always keep up with your trading with IB.

You can demo the IB WebTrader from the IB website. I tried it out, and it provides a basic screen with pull-down menus for information about your account, orders, executions, news and chart information, and the stocks you may be tracking, i.e., much of the same information you'd get from the full software, but in a much smaller form and much less complicated setup.

While IB says the active trader would want to use the full IB Trader Workstation for trading, with IB WebTrader as an emergency backup, I don't think that would necessarily be the case for Fools like you and me who trade periodically but wouldn't be characterized as active traders. In fact when I used the demo version of IB WebTrader, I really liked it. In fact, I can see me using only the WebTrader for my periodic trading, without bothering with the much more complex Trader Workstation. The IB WebTrader is a very big plus for me, so on this issue, WINNER: IB, by a wide margin.

ORDERS AND BEST EXECUTION. If you thought it was difficult understanding the various types of orders you can place with your current broker, wait until you see the software-based brokers. IB has 30 (count-um 30!) different types of orders you can place, with MBT not being that far behind. While I'll stick with my basic market and limit orders, feel free to check out the IB and MBT websites if you're order-inclined. In fact IB has 6 ½ pages on their website describing the various order types. MBT has fewer order types, but is adding more each year. MBT does have what they call timer-triggered orders.

Both IB and MBT allow investors to place their orders directly with a specific exchange or market for the securities being trading. Thus, the active trader has numerous alternatives for trading not normally involved for investors using a browser-based broker. Additional fees may be charged from such direct orders, depending on the market used for the trade.

Nevertheless, both IB and MBT have special smart-order routing systems designed to provide the best execution for trades. No extra fees are charged for these smart-order systems. IB has the IB SmartRouting system, which searches for the best price available at the time of the order and automatically diverts all or part of the order to various markets to achieve best prices. In the March 7, 2005 annual review of online brokers Barron's particularly liked IB's SmartRouting system. MBT has a similar system, called the MBTX SmartRouter, and shows on its website the millions of dollars it claims it has saved its customers with SmartRouter. I really don't have enough information to declare a winner between these two smart-order routing systems, so I'll declare WINNER: TIE.

In terms of getting the best prices and fastest execution, I've read several comments from users of IB and MBT who have seen improvements in this area with software-based brokers over browser-based brokers. While this is not such a factor for Fools like me who wouldn't be considered active traders, it still is a factor to consider.

OK, I know what you're thinking—when is this guy going to get to the good stuff we really want to see—like initial investments, commissions and fees, deposits and withdrawals, and other things near and dear to us? Stay tune for the next installment.


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