Lower commissions: critical for trading success Lower commissions: critical for trading success Lower commissions: critical for trading success

Lower commissions: critical for trading success

Pricing 5 minutes to read
John Hardy

Head of FX Strategy

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.

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