Lower commissions: critical for trading success

Lower commissions: critical for trading success

Pricing 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  This article looks at the positive impact of Saxo’s lower trading costs on traders leveraging strategies that involve numerous trades. A reduction in trading costs, especially for smaller trade sizes, can prove the difference in terms of edge in the market. That’s because a trading system’s edge on a per trade basis is usually small relative to the average profit or loss per trade, so a reduction in trading costs can have a 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 cost to maximise 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 demonstrate the impressive impact of the new, lower price structure, using specific examples.

Example: the impact of Saxo’s lower trading costs for traders

Let’s illustrate the impact of lower trading costs with an aspiring active trader in Australia that is a Saxo Classic client and has a trading strategy for highly liquid US stocks that trade on the NYSE and Nasdaq exchanges. Let’s say that the account size is USD 10,000 (about AUD 15,000). For simplicity’s sake, we’ll assume in our example that the trader has opened a USD sub-account to avoid repeated currency conversions.

In relation to trading size and number of trades, we’ll assume that our aspiring trader makes 100 round-trip trades over a year, with each trade representing a USD 5,000 market exposure (half of the account). The average gain or loss per trade is 1.6%. Let’s further assume that the trader has 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 an annual gain 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 Australia, each of the trades would have incurred a minimum USD 16 fee (that is USD 8 multiplied by two for the buy-sell round trip), taking the edge down to USD 8 from the no-cost theoretical edge of USD 24 per trade. In other words, the old commission structure would have cost 67% of the trader’s USD 24 per trade edge. 

But what do the results look like for this trader using the new pricing terms for Saxo Classic accounts in Australia? These are now set at either 0.08% of the position (in this case, USD 5,000 x 0.0008 = USD 4) or a USD 1 minimum. With this pricing structure, trading costs for a position size of USD 5,000 would drop 50% (from USD 16 [USD 8 x 2] to USD 8 [USD 4 x 2]), vastly improving the edge from USD 8 to USD 16 per trade after trading costs. This would mean an additional return of 8% for the strategy over the course of 100 trades. The potential for improved returns would be enhanced further by compounding if the strategy is a consistent winner.

As you can see, the lowering of trading costs drastically improves the profitability of a trading strategy, even when the USD 8 round-trip difference in costs seems 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, lower trading costs are as important for active traders as finding a trading edge.

For smaller positions, the percentage improvement in trading costs is even more dramatic. Take the same assumptions as above, for example, but for someone trading positions of USD 2,000 (about AUD 3,000). This would incur a trading cost of USD 3.2 (0.0008% x USD 2,000 x 2 for round trip), rather than the former terms of USD 16, an 80% reduction in trading costs.

As the illustration shows, trading costs are like an entry barrier on the trading edge curve. The higher trading costs a trader faces, the fewer profitable trading strategiesavailable to pursue. As trading costs reduce, additional trading strategies become profitable, thus expanding the opportunity set for the more active trader and investor. 
The examples above are based on prices available for Saxo’s Australian clients. The old trading costs before pricing changes may vary in other jurisdictions. Saxo clients trade according to Classic, Platinum or VIP pricing structures.

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.