Be more flexible with our new pricing

Peter Siks

Summary:  Most investors invest with either fixed numbers (e.g., 500 shares) or fixed amounts of money (e.g., USD 5,000). This means that they buy (or sell) positions with one order ticket. But the new pricing Saxo offers more flexibility for you as an investor or trader. This article elaborates on this topic and gives you examples of how to use the new pricing in the most optimal way.

If you want to go long (read: buy) a position, most investors will give one order for the whole position. Assume you want to buy 500 shares of Unilever, currently trading at EUR 43.10. The market quote is EUR 43.09 – 43.10. Now there are several possibilities for the order:

Your order to buy 500 shares will be sent to the market, and the (expected) price you are going to pay is EUR 43.10. The assumption here is that there is enough liquidity at that price to fill the total order. If that is not the case, you will pay a little bit more for the last shares (probably EUR 43.105).

• Limit order at EUR 43.10 With this order, you will pay EUR 43.10 and not one cent extra. If the order is not totally filled at that price, the remainder will be in the order book on the bid side.
• Limit order at EUR 43.095 Here your order is in the middle of the market. This order will be the best bid, meaning that if somebody wants to sell, it will be to you.
• Limit order at EUR 43.09 With this order, you will become part of the bid price in the order book. If a big seller hits this bid, you will have bought the shares.
• Limit order at < EUR 43.09 With this order, you expect the shares to decline a bit and get a fill at a lower level.

This example may seem a little nitty-gritty, but we do talk about money. If the 500 lots order gets a 1 cent better fill, the ‘discount’ is EUR 5. Assume you trade 250 times a year; this one cent would add up to EUR 1,250 annualized.

How to make this more flexible?
With the new pricing at Saxo, there is no fixed amount charged, independent of the order size. The only charge will be a percentage with a minimum. In general, the minimum will be USD 1 for US stocks and EUR 2 for EU stocks. The percentage is dependent on the type of client you are. Saxo makes a distinction between Classic, Platinum, and VIP clients. The percentages are 0.08%, 0.05%, and 0.03%, respectively. In the examples that will be used, the percentage of Platinum client (0.05%) will be used.

What is the minimum size of the order not to be bothered by the EUR 2 minimum order charge? The math is pretty straightforward: EUR 2 divided by 0.05% = EUR 4,000. If we apply this to the Unilever example (where the total was 500 * EUR 43.10 = EUR 21,550), you can split the order into 5 times buying 100 shares without being affected by the transaction costs. This means you can ‘play around’ with the bid price per order to get the best price for the total fill.

When to apply this approach
When you want to trade a stock, it really can be worthwhile to split a big order into smaller pieces. You can buy some market, you can join the bid for some, and you can be bidding a few cents (or dollars) below the current market price. Another way to apply this is by buying a part of the desired amount now and the rest when the stock breaks out on the upside.

An example of a hypothetical situation:
Stock ABC trading at USD 10 and the high for the day is USD 10.40 and the low is USD 9.37. Yesterday's close was USD 10.20, and there is no specific news. Due to the high volatility is the bid-ask spread USD 0.03.

You would like to build up a long position worth USD 50,000 (500 shares). You decide to split the order into four chunks of USD 12,500 (100 shares per order ticket), and the current quote is USD 9.99 - USD 10.02. You buy the first 1,250 lots at the ask price of USD 10.02 (although you are willing to pay the ask price, you do this via a limit order. You want to avoid the scenario where the offer is no longer available and end up paying more than USD 10.02) You join the bid at USD 9.99 for 1,250 shares (if you get filled, a discount of USD 37.50 is realized if you compare it to USD 10.02)

Assume you get filled for the first 2,500 shares. Still, 2,500 to go. The price that you are willing to pay is totally dependent on your view of the stock and your trading style. Some traders will depend on their technical analysis of the price pattern, and they could be a buyer a few cents above the support level. Others will use yesterday's close as a trigger. If ABC shares cross the USD 10.20 level, they buy the remainder of the order. Other traders will make their purchase time dependent; could be half an hour before the close or at the close. Other traders will place the two remaining orders between the current price and the intraday low.

There is no Silver Bullet. There is no method that will give you the best outcome always. The takeaway is the increased flexibility you achieve if you split bigger orders into smaller ones. And it is good to know that the costs are no longer a hurdle to apply this flexibility.

What is the downside of splitting orders
You might not get a fill for the total amount of the desired size. But in reality, how many times did you actually buy a stock at the (intraday) low and it took off like a rocket? Personally, I believe much more that you are interested in a particular stock at ‘a certain level’. This means in practice that you want to be a buyer (or seller) at, let's say around USD 17.50. This creates the possibility to split your buy order into several smaller orders around this price. When the stocks trade at USD 18, you can put in a buy order at USD 17.70, USD 17.50, and USD 17.30 (each for one-third of the total). If the stock dips to USD 17.63 and goes up again, you are at least in the trade for one-third. The only scenario where the flexible approach would not be the best – compared to buy all at USD 17.50 – is when the stock would dip to USD 17.48 and then take off to the stars. The flexible approach would be long for two-thirds of the desired amount, where the ‘one order approach’ would get a total fill at USD 17.50.

Summary
The lower transaction costs at Saxo give you the opportunity to be more flexible in your trading. The entry and the exit of the trade can be done at different price levels without increasing the transaction costs. This opens the door to more tailored orders (and position management!) that better fit the current market environment.

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