Head of FX Strategy
Summary: This article looks at the positive impact of Saxo’s lower trading costs on traders leveraging strategies that involve many trades. Especially for smaller trade sizes, lowering trading costs can make the difference of even having an edge in the market. That’s because a trading system’s edge on a per trade basis is usually very small relative to the average profit or loss per trade, so a lowering of trading costs can have tremendous impact on returns.
For active traders and investors there are two main problems that must be addressed, 1) find a strategy or signal that has an edge, and 2) trade this edge at the lowest possible costs to maximize profits. The first problem is solved by careful research and experimentation with trading and investing strategies. The second problem is solved by choosing a trading platform with best-in-class, ultra-competitive prices, like those that Saxo now offers, especially for accounts and trades of modest size. Below we offer comparison of the old and new terms of Saxo pricing and the impressive scale of the impact from the new, lower prices relative to the old, using some specific examples.
Example 1: The active trader and the impact of lower trading costs
Let’s start with the example of two aspiring active traders, one in Denmark and another in Prague/CEE. Both are Saxo Classic clients employing the identical trading strategy for highly liquid US stocks that trade on NYSE and Nasdaq exchanges. Let’s say that the account size for these traders is USD 10,000 in both cases. For simplicity’s sake, we’ll assume our traders have opened a USD sub-account to avoid currency conversions in our example.
Trading size and number of trades: we’ll assume that our aspiring traders make 100 round-trip trades over a year, with each trade representing a USD 5,000 market exposure (half of the account). The average stock gains or losses on average per week 1.6%. Let’s further assume that the traders have found a trading edge that keeps the trading win ratio at 65% (during the past 10 years the S&P 500 Index has gained in 57.9% of those weeks). Taking all of these inputs into account, this results in an average expected return per trade, of 0.48% (or USD 24 on each USD 5,000 position traded on average). This may look modest, but it would mean a gain over a year of USD 2,400, or 24% of the base account size of USD 10,000, over 100 trades (without taking into account trading costs or compounding).
Under the old terms for Saxo Classic clients in Denmark each of the trades would have incurred a minimum USD 18 per trade (it is USD 9 times two for the buy-sell round trip), taking the edge down to USD 6 from the no-cost theoretical edge of USD 24 per trade. In other words, the old commission structure would have cost 75% of the trader’s entire USD 24 per trade edge.
For the Prague/CEE-based trader, the numbers are a minimum USD 10 per round-trip trade (2 x USD 5), taking the edge down to USD 14 from the no-cost theoretical edge of USD 24 per trade. In other words, the old commission structure would have cost 42% of the trader’s USD 24 per trade edge.
But what do the results look like for this trader using new terms for Saxo Classic accounts?
In Denmark, these are now set at either 0.08% of the position (in this case USD 5,000 x 0.0008 or USD 4) or a USD 1 minimum. With this pricing structure, trading costs for a position size of USD 5,000 would drop over 56% (from USD 18 (USD 9 x 2) to USD 8 (USD 4 x 2) – again everything is multiplied by two to round-trip costs), vastly improving the edge from USD 6 to USD 16 per trade after trading costs. This would mean an additional return of 10% on the account for the strategy over the course of 100 trades. The potential for improved returns would be enhanced further, of course, by compounding if the strategy is a consistent winner.
Prague/CEE will also enjoy the same trading costs as our Denmark-based trader, so trading costs for a position size of USD 5,000 would drop 20% (from USD 10 (USD 5 x 2) to USD 8 (USD 4 x 2) – again everything is multiplied by two to round-trip costs), improving the edge from USD 14 to USD 16 per trade after trading costs. This would mean an additional return of 2% on the account for the strategy over the course of 100 trades.
As you can see, the lowering of trading costs drastically improves the profitability of a trading strategy, even when the round-trip difference in costs (the USD 10 improvement for Danish clients and USD 2 for CEE-based clients for this example) looks quite modest relative to the average win or loss of USD 80 (the 1.6% average win/loss for this strategy’s trades).
In such an example, this is why lower trading costs can be as important as finding a trading edge for any active trader or investor. And for smaller positions, the percentage improvement in trading costs is even more dramatic. Take the same 100 trades and returns as for the above scenario, for example, but for someone only trading positions of USD 2,000, the differences are even more stark. Now, the traders would incur trading costs of USD 3.2 per round trip (0.008% x USD 2,000 x 2 for round trip), rather than the former terms of USD 10 for Denmark (a 68% reduction in trading costs), and former terms of USD 5 for Prague/CEE (a 36% reduction of trading costs).
As the illustration shows below, trading costs are like an entry barrier on the trading edge curve. The higher trading costs a trader are facing the fewer profitable trading strategies are available to the trader. As trading costs are reduced more trading strategies become profitable and thus it expands the opportunity set for the more active trader and investor.
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