Interactive Brokers for cheap, boring Australians
Every serious trader I talk to swears by Interactive Brokers (IB).
Ridiculously low & transparent commissions, access to every market, endless customization, comprehensive online operations.
The secret is that Interactive Brokers is not just for serious traders. It is also the best broker for Australian long-term investors that are fee-sensitive and can tolerate a moderate learning curve.
Why consider IB?
- Lowest commissions of any broker in Australia ($6 / 0.08%).
- Access to low-fee ETFs listed on US exchanges. Why buy the VGS on the ASX (0.18% fees) when you could buy VTI (0.05%) and VXUS (0.11%) on US exchanges instead.
- Outstanding foreign exchange. This is where most financial institutions screw you. We know about great choices like Currency Fair, but IB blows everyone out the water with 0.2–0.4 pip spreads plus 0.1 pip commission (1 pip = 0.01%). INSANE. All on the same platform used to trade so no wire-juggling required.
- One investment account to rule them all. Trade & hold stocks from basically any exchange, and cash balances from any currency, in 1 account.
- Everything is online. Even large wires and signing regulatory forms. For example, the sign-up flow pre-fills your W8-BEN form for a digital signature.
- 2-factor authentication by default.
The problem with IB is they don’t hold your hand. At all. The learning curve is rough. And there are some unique restrictions to the Australian product that are not well explained.
This post is a brain-dump of what I’ve learnt about IB, to save others some time.
I am not a professional trader, and I do not work in financial services. I buy and hold boring ETFs. The target for this post is other Australian long-term investors who want the lowest fees and the best tool for the job.
I don’t provide any financial advice — I recommend https://www.bogleheads.org/ as a great starting point for that.
On to the tips…
- Market Permissions: Start with just Australian Stocks and US Stocks unless you know you need more. You can add more permissions in real-time later through the Account Management portal.
- Pricing: Choose Fixed Pricing. Tiered is for crazy serious traders.
- Set your base currency to AUD.
- Account Management. Administration including wire transfers.
- QuickTrade. Accessed via Account Management. Works fine for simple trades, but its very basic.
- WebTrader. A horrible web version of TWS. Don’t bother. Either use QuickTrade or figure out TWS.
- TWS — Trader WorkStation. The core trading platform. Cross-platform java application that you download & run. The UI is a decade old and daunting, but the power is incredible. I enjoyed taking the time to figure it out.
- TWS for Android. You can trade here too, but I love it for checking balances, because it allows read-only login without 2 factor. Slick modern design. There’s probably an iPhone version too.
Understand the Australian restrictions.
IB & Australian regulators had a well-reported falling out (*) a few years ago, so there are restrictions on IB accounts for Australia residents. They are:
- Cash accounts only (no margin accounts).
- Cannot convert Australian dollars directly into other currencies.
I don’t use margin so the cash restriction doesn’t bother me.
It also turns out that the foreign exchange restrictions are not so bad in practice. Read on…
- You can still convert other currencies to AUD.
- You can fund the account using other currencies, and maintain cash balances in those foreign currencies.
- You can buy foreign listed stocks with either AUD or other currencies. There are some rules to how this works…
- …IB will always execute the trade in the currency the stock is listed in, and if you have cash in that currency it will use that cash first. If you don’t have enough cash (or you have 0 cash) in that currency then IB leaves you with a temporary negative balance in that foreign currency. After a few seconds/minutes IB will automatically execute a FOREX trade to cover that negative balance from your AUD since IB is obligated to liquidate assets to cover negative balances.
- Proceeds from a stock sale and from dividends remain in the currency the stock is listed in, and are not automatically converted back into AUD (unless of course IB need to liquidate assets to cover negative AUD balances).
- …so you can workaround the forex restrictions by buying and then selling a foreign stock, although taking a small hit on the buy/sell spread. This is no good for a currency speculator but fine for occasional access to foreign cash.
(*) Should I be worried about IB if they couldn’t get all the necessary Australia licenses? Maybe. I was. But when I research IB I see a massive, well established brokerage that operates locally in dozens of countries. Most pro traders I talk to both in Australia and the USA mention IB as a default option. Make your own decisions, but in my opinion the restrictions in Australia look like a long-term negotiation between an international operation and ASIC, rather than a sign of a fly-by-night operation.
I’ve read rumors that accounts registered in the name of an Australia corporation (instead of Australian person(s)) do not have these restrictions.
Keeping your cash balance positive
- IB will prevent a trade from being submitted (and also cancel pending trades), if they calculate that the trade would result in negative balance.
- …this calculation is done based on the limit price you set for the trade, or market + 5% if you placed a market order. A good reason to prefer limit orders.
- …if there is FOREX involved in the trade then this calculation is done on the current exchange rate. Note a risk here — IB will execute a foreign denominated trade and then transfer your AUD to cover, so there is a window of seconds/minutes between trade execution and cover where the currency could move against you and you’re left with a -ve total cash balance. A FOREX buffer of say 20 pips should be enough to protect against this.
- If your total cash balances ever goes negative, IB liquidates assets (sells shares) to cover, without asking you. The common way for this to happen is leaving a tiny balance before the monthly fee hits.
- If your IB account is > $100k then there is no monthly fee, and data subscriptions lapse after 3 months without being used. Therefore, if you had $100 in cash last time you logged in, your cash balance will never go negative.
- Rarely need to speak to humans because they handle everything online.
- But when you do, wait times are long — 15 minutes is common.
- …after the wait, every single person I have dealt with has been super cluey and answered my questions precisely and quickly.
FXCONV vs IDEALPRO for foreign exchange
Direct FOREX orders are needed to move proceeds from a foreign stock sales & dividends back into base currency (AUD).
- Foreign exchange trades look just like a regular trade. Enter “AUDUSD” as the symbol.
- Always use Trader Workstation, and click advanced to set the trade type to FXCONV (instead of IDEALPRO). Need to do this every time. WebTrader doesn’t let you change this option.
- FXCONV is for a one-off currency conversion. IDEALPRO is for a speculative trade, so IB leaves a virtual FX balance until the position is closed (the reverse FX trade) later. You want FXCONV.
- If you accidentally trade as IDEALPRO and are left with that annoying virtual FX position in your portfolio, then in TWS, Account -> Account Window, right click the virtual FX position, adjust the position to 0. This doesn’t execute another trade, just removes the position.
- IB passes market data costs directly to you. So by default you get 20 minute delayed quotes, and a bewildering array of data sources to choose subscriptions from.
- No FOREX data for Australians. This is a regulatory restrictions. Use xe.com instead, they supply real-time forex mid-market, and for forex you don’t generally need to worry about spread because it is so liquid.
- I use market data so I can set accurate limit prices. I guess you could get away without it (and take a slightly higher trade execution risk), but I don’t fully understand this trade-off and I like having the data.
- If you want Market Data for ASX then you have to pony up AUD$25 per month for the single ASX feed. It’s one of the most expensive feeds. Ugh. There is CHI-X for $7 a month but they are a tiny portion of ASX volume.
- For US stocks here are the 3 main feeds, might as well get them all because they’re reasonably priced:
- NYSE (Network A/CTA) (NP/L1) USD$1.50
- AMEX (Network B/CTA) (NP/L1) USD$1.50
- NASDAQ (Network C/UTP) (NP/L1) USD$1.50
- IB automatically cancels data subscriptions if you don’t log into the trading tools for 3 months, so don’t worry too much about forgetting to unsubscribe when you are not trading, especially for the US feeds.
Hope this braindump was a useful start.