Freetrade Alternatives—IB vs. MBT (Part 2)


In my previous post called Freetrade Alternatives—IB vs. MBT (Part 1), I started comparing and contrasting two software-based brokers, Interactive Brokers (“IB”) and MB Trading (”MBT”), in my search for the best Freetrade alternative for low-cost trading. In this installment I'll finish up with the good stuff you wanted to hear—initial investments, fees and expenses, methods for deposits and withdrawals, and similar procedural issues. Let's dive right in.

MINIMUM INVESTMENTS. IB requires a minimum of $2,000 to open an account. MBT also requires a $2000 minimum initial deposit, but this is only for cash accounts. Margin accounts at MBT must start with $5,000 (with a similar requirement for a futures account), and if a margin account falls below the $2,000 level, it will revert to a cash account. For both IB and MBT, the minimum for daytrading is $25,000. WINNER: IB.

COMMISSIONS ON STOCK TRADES. Both IB and MBT have similar commission structures, with no distinction between market and limit orders. Let's start with MBT, which has two different commission plans—per share pricing and per ticket pricing. Since the per ticket plan starts with a $9.95 base price, which can be beaten by browser-based brokers, let's concentrate on the per share plan. MBT charges $0.01 per share for the first 500 shares, with a $1.00 minimum charge per trade. The commission is reduced to $0.005 per share for each share traded over 500.

Thus, with MBT, trades of 100 shares or less will be charged a $1.00 commission. A buck a trade is great, and sure beats the commissions charged by the browser-based brokers, such as iZone at $5.00 a trade. Similarly, for trades of 300 shares and 500 shares, respectively, the MBT commission will be $3.00 and $5.00 a trade. Thus, for up to 500 shares, the MBT commission will beat the iZone $5.00 commission. If you buy in lots of more than 500 shares, however, then the MBT commission will exceed the iZone commission. For OTC bulletin board and pink sheets stocks, MBT charges a flat rate of $8.95 per trade, with no limits on the number of shares.

IB has only a per share plan for commissions on equity trades, which is identical to MBT's commission for basic equity trades—a cent a share, with a $1.00 minimum, for the first 500 shares, and a half-cent a share commission thereafter. Unlike MBT, however, IB caps the commission at 0.2% of the trade value, which can come into play with low price stocks for which an investor trades a higher number of shares. Again, for those of us who trade in 100 or fewer share blocks, the buck a trade commission can't be beat. Only if you trade in lots of more than 500 shares would your IB commissions exceed the $5/share commission with iZone. So for stock commissions, I'd have to say WINNER: IB because of the cap on the commission rate. However, we'll look at any minimum requirements for commissions below.

COMMISSIONS ON OPTIONS AND FUTURES. I don't trade options or futures, so can't speak very intelligently about them. I'll just cover the basic fees. Options at MBT are $1.00 per contract, per side, with no minimum ticket charge. There is a $0.01 per share fee to exercise option contracts. At IB, the option commissions are based on the premium. For a premium equal to or greater than $0.10, the price is $1.00 per contract; under $0.10 down to $0.05, $0.50 per contract; and under $0.05, $0.25 per contract. I guess this means, WINNER: IB.

For futures, MBT charges $2.00 for mini-Dow and $2.25 for E-mini, all per contract, per side, with no minimum ticket charge. IB charges $2.06/contract for CBOT/Mini Dow and $1.65/contract for CME/E-mini ES, NQ, and ERS options. These prices are all bundled prices (fixed rate per contract). IB also offers an unbundled plan (cost plus based pricing). The unbundled prices are on the IB website. IB also offers various other kinds of futures. I really don't know enough about futures to discuss these commissions, other than to say IB offers many more types of futures contracts (I told you earlier you can trade just about everything except the kitchen sink at IB).

BONDS. MBT customers can trade bonds (corporate, US government, and federal agency), but only by phone, and with a $50 per ticket charge. IB charges $1.00 for every $1,000 face value of bonds having a face value up to $10,000, with a $5.00 minimum per order. The rate drops to $0.25/$1,000 for the incremental face value of bonds with a face value in excess of $10,000. So it looks like WINNER: IB.

MUTUAL FUNDS. MBT customers can trade no-load mutual funds, but only by phone, and with a $50 per trade charge. Customers interested in buying load funds can call the MBT Trade Desk for pricing. IB customers cannot buy mutual funds, but can buy ETFs like any other stocks. So if you want to buy no-load mutual funds at a high charge, be my guest and say WINNER: MBT.

MINIMUM COMMISSION REQUIREMENTS. MBT has no minimum monthly commission requirements. IB requires a monthly minimum of $10, which for us who trade in 100 or fewer share lots would mean 10 trades a month. So IB customers who have no activity in a month would be charged $10. If, for example, they have 3 trades, at $1/trade, in a month, they would be charged the remaining $7. Note as discussed below, IB has a charge for its market data feed of $10 a month, which is waived for customers who generate $30 of commissions in a month. But you are not required to purchase IB's market data feed. If you choose to pay the $10 a month for data, that $10 will count against the $10/month minimum commissions. So an investor who subscribes for the IB data feed at $10 a month, and has no trading activity in a month, will only be charged the $10 for the data feed and NOT another $10 for the minimum commissions that were not generated in the month. So customers who have alternative access to market data, would not buy IB's data stream, and do not want to pay a monthly minimum, would say WINNER: MBT. For customers who want the $10 data feed from IB, then the minimum monthly commission is a non-issue. Moreover, even with a $10 a month charge minimum, that's the equivalent of only two trades at iZone or one of the other $5/trade browser-based brokers. NOTE—for younger Fools, the IB minimum monthly commission requirement is only $3, not $10, if you are age 25 or younger.

REAL-TIME MARKET DATA FEEDS. The MBT Navigator software is provided free of charge by MBT, along with what are called “Level 1 ¾ Quotes” for free. These include real-time streaming of Nasdaq Level 1, NYSE quotes, AMEX quotes, INET book quotes, and ARCA book quotes. MBT says that Level 1 ¾ is like Level II, without market maker quotes. However, what the big print gives, the small print takes away. The free Level 1 ¾ Quotes are not available to accounts inactive for more than 30 days or accounts with balances below $2,000. For other data charges, futures quotes are free with a futures account; option chain information is free after 10 contracts/month, otherwise $10/month; and Nasdaq Level II quotes are free with a $25,000 balance or if you trade 10,000 or more shares a month, otherwise $24.95/month.

At IB, the IB Trader Workstation software is free, but the market data feed is not. However, the customer is not required to buy the IB data feed to trade. IB makes available at $10/month what it calls its US Securities and Commodities Bundle, which includes all of the US stock, options, futures, and bond markets. The $10/month fee is waived if you have more than $30 of commissions in the month. Subscribers to the US Bundle can also subscribe to NASDAQ Level II data for $20/month, in addition to several other data sources for different charges. Just about any market data feed you may want from around the world can be obtained through IB.

So investors who plan to trade at least one time a month and maintain a balance of $2000 in their accounts at all times will have greater access to basic market data at no charge from MBT. So for that, WINNER: MBT. Investors who plan to spend more than $30/month in commissions will be able to access basic market data at no charge from both MBT and IB. So for that, WINNER: TIE. But for other investors who will not spend $30/month in commissions, but who want basic market data with real-time quotes, they'll have to either use MBT or pay $10/month to IB for the feed. As noted above, if you pay the $10/month to IB, that amount will count towards your $10 minimum monthly commissions.

MARGIN INTEREST RATES. MBT charges margin interest, based on the Broker Call Money Rate, currently calculated at 6.45% APR. IB charges margin interest based on the Libor rate (2.667% for March), plus 1.5% up to $100,000, and Libor plus 1.00% for amounts over $100,000, up to $1 million, after which rates are reduced further. So clear WINNER: IB.

CREDIT INTEREST RATES. MBT pays credit interest currently at 0.80% APR. IB pays credit interest based on Libor (2.667% for March), minus 0.5%, for amounts over $10,000 and Libor, minus 0.25%, for balances over $100,000. Thus, IB's credit interest paid is at a higher rate, but IB pays no interest on amounts under $10,000. MBT pays credit interest at a lower rate, but I saw no thresholds. So WINNER: MBT if you carry credit balances, but Fools with excess cash should not be leaving it in their brokerage accounts, when rates at other places are better for cash (e.g., ING Direct currently at 3.00%).

INITIAL FUNDING; DEPOSITS. One drawback of Freetrade was that your initial funding of an account had to be by bank wire of funds or broker-to-broker transfer, which often incurred extra fees, which was a pain. Subsequent deposits, however, were much easier, including by free ACH transfers from your bank checking or savings account to your Freetrade account. Some other brokers also impose additional requirements for initial funding of accounts. Let's see what happens with IB and MBT; you'll be pleasantly surprised.

Neither IB nor MBT impose any extraordinary requirements for initial funding of an account or subsequent deposits. Both IB and MBT allow deposits by check (including personal check), wire, electronic funding/transfers from your bank checking or savings account into your new account, or DTC/ACAT transfer (all or part of another brokerage account into you new account). IB also offers several other alternatives, primarily relating to foreign transfers. There are no miscellaneous fees or transfer fees from either IB or MBT for these transfers INTO an IB or MBT account. So WINNER: TIE.

WITHDRAWALS. Here's where IB and MBT differ. MBT allows withdrawals of funds only by wire transfer or check. If you request a wire, MBT charges $15 for domestic wires ($50/foreign). Requesting a check by regular mail is free; MBT charges $15 for an overnight check. So if you want funds from your MBT account, you'll need to pay a $15 charge or else wait for a check to arrive by regular mail.

At IB your withdrawal options are wider. Like MBT, you can withdraw funds from your account by wire or check. Unlike MBT, however, at IB you can withdraw funds by ACH transfer from your IB account to your bank checking or savings account. Once your ACH is set up, this is a much easier way to withdraw funds than requesting a wire or check. The first cash withdrawal each month from an IB account is free; afterwards additional withdrawals during the month incur charges of $10 for wires, $4 for checks, and $1 for ACH transfers. So clear WINNER: IB.

OK, so IB or MBT pulls a Freetrade and significantly raises its commission structure after it's hooked you in—how much will it cost to get out? To transfer all or part of your account from MBT to another broker will cost you $25 for an outgoing DTC transfer and $5 for an outgoing ACAT transfer (both are broker-to-broker transfers, and for MBT an ACAT transfer is a transfer of an entire account). I tried to find comparable information for IB but could not find it on IB's website.

IRA FEES. Both IB and MBT offer various types of IRAs for US residents, with a $2000 minimum deposit requirement. IB charges no annual custody fee or termination fee for IRAs, but does impose the $10 monthly commission minimum. MBT charges IRAs an annual fee of $35 and a closing fee of $20. WINNER: IB if an IRA would otherwise trade enough each month to cover the minimum commission; if not, then WINNER: MBT.

TRADE CANCELLATION FEES. MBT charges no fee for cancelled or modified trades. IB charges a fee of $1.20 to modify or cancel an option order, which will be offset with certain execution credits for option orders filled that same day of $0.25 per executed contract, but capped at $3.75 per executed trade. The IB example is a customer who enters 3 option orders, each for 2 contracts, and cancels all three orders. One option order for 20 contracts is later executed that day by the customer. Under this scenario the $3.60 cancel fee (3 x $1.20) is offset by the $3.75 execution credit (20 x $0.25 = $5.00, with $3.75 cap), so the customer is charged nothing. Small cancellation fees are also charged for certain futures orders. The cancellation fees do not apply to normal smart stock trading with IB. So WINNER: MBT for no cancellation fees.



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Well there you have it—the nuts and bolts of browser-based brokers and software-based brokers, and an in-depth analysis of two software-based brokers, IB and MBT. Are they worthy successors to the throne of Freetrade for the lowest cost trading? I believe both IB and MBT can claim that crown and provide Fool investors an alternative to the $5/trade brokers, particularly for investors who generally trade in 100 or fewer share lots, with the resulting $1/trade commissions.

If you trade more than 500 shares at a time, the commissions at IB and MBT will exceed the $5/trade flat commissions from several browser-based brokers, as discussed in previous installments of this review. Also if something other than the lowest cost trading is important to you, such as research, staff support, or local offices, you should stick with one of the browser-based brokers. Moreover, even if you are interested in the lowest cost to trade, if you are a novice investor, or an investor with little experience in investing online, I'd urge you not to start off with IB or MBT, but instead use one of the browser-based brokers until you feel you are ready for a change. If, however, you're comfortable with investing online, and make your own investment decisions, without the need to interact with a broker in person, then I would suggest you consider IB or MBT. Use this discussion as your stepping stone to do your own review of IB and MBT and determine if one of them, both, or neither, would be in your best interest for your investments, based on your needs and your investing style.

Well, what did I decide to do? I'm still thinking. I want to read as much as I can before the Freetrade demise about experiences others have had with IB and MBT. I intend to search more discussion boards, particularly those on websites for active traders, to get “real life” experiences with these two brokers. You can only take it so far reading websites, which always sound good. I want to know what others think about IB and MBT. I also want to know what you think about these two brokers.

When I started my research, I was first drawn to MBT. I liked the MBT website, their trading software, and of course their low commissions and fees, with no minimum monthly charges. But as I continued my research, I saw things about IB that I started liking more and more. I think the biggest factor in IB's favor, in my opinion, is the ability to run the IB software, or the “lite” html version, from any computer with internet access. Trading only through a computer using the proprietary software trading platform is very limiting to me. While IB has the $10 monthly minimum commissions requirement, it won't be a problem for me making 10 trades a month.

So at this moment I'm most attracted to IB, and if I had to make a decision right now, I would decide to transfer my account from Freetrade/iZone, and make that transfer to IB. But if MBT were to come out next week with a web-based trading screen, I'd probably be right back in MBT's camp. I'll continue to review my alternatives up until the Freetrade demise, and perhaps beyond, to see what's best for me, under my circumstances. I also look forward to the discussion within the Fool community that I hope will be generated in response to my review. Therefore, please provide me whatever feedback you may have after reading my review and particularly let me know of your prior experiences using IB and MBT.

And remember, I reserve the right to change my mind!

Fool on,

Raleigh1208