Head of FX Strategy
Summary: This article looks at the impact of Saxo’s lower trading costs for both frequent traders and for buy-and-hold investors with a modest account size and relatively infrequent changes to a portfolio. For the frequent trader, lowering costs can make the difference between even having an edge or not. But even for the investor, a reduction of trading costs can vastly improve returns, especially for those adding modest new amounts to existing positions.
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 an aspiring active trader in Switzerland that is a Saxo Classic client that has a trading strategy for highly liquid US stocks that trade on NYSE and Nasdaq exchanges. Let’s say that the account size is CHF 8,500 (approximately USD 10,000. For simplicity’s sake, we’ll assume the trader has opened a USD sub-account to avoid currency conversions in our example.)
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 stock gains or losses on average per week 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 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 Switzerland each of the trades would have incurred a minimum USD 40 per trade (it is USD 20 times two for the buy-sell round trip), taking the edge down to a negative USD 16 from the no-cost theoretical edge of USD 24 per trade. In other words, the old commission structure would have cost all of the trader’s entire USD 24 per trade edge, requiring much larger trades to justify the commissions and maintain the edge.
But what do the results look like for this trader using new terms for Saxo Classic accounts in Switzerland? 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 80%, from USD 40 (USD 20 x 2) to USD 8 (USD 4 x 2) – again everything is multiplied by two to round-trip costs. This vastly improving the edge from USD -16 to USD +16 per trade after trading costs. This would mean an additional return of 32% 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.
As you can see, the lowering of trading costs drastically improves the profitability of a trading strategy, even when the USD 32 round-trip difference in costs is far smaller than 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 are 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.
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.
Example 2: The Buy-and-hold investor
Note: all examples below only include trading costs and no currency conversion costs.
Just as active traders and investors benefit from lower trading costs for more frequent trading strategies, so too does the buy-and-hold investor. Let us imagine that we have a buy-and-hold investor (with a Classic account) that has the same CHF 8,500 (about USD 10,000) as the above example. This investor wants to invest in ten US stocks with approximately equally sized positions of USD 1,000 each. Using old prices, the cost per trade would have been 0.4% of the amount of each position, or a minimum of USD 20. In this case, the minimum fee applies since 0.1% times USD 1,000 would be USD 1, far below the minimum USD 20 fee.
If we multiply that minimum USD 20 commission times ten positions, then the trader would have paid USD 200 in commission costs or 2.0% of the account value. But under the new commission structure, each position would incur a cost of 0.08% x the USD 1,000 position size or 1 USD minimum – in this case the USD 1 minimum applies, since 0.08% x USD 1,000 = USD 0.8. In other words, the trading costs have dropped some 95%, totalling a mere USD 10 or 0.1% of the account value.
Now let’s also say that over an average year this same investor has a 50% turnover rate in positions (5 positions sold and a new 5 positions acquired). Under the old cost structure that would have meant an additional +2.0% of the account value in commission costs (USD 200 for 5 round trip trades, or 10 x USD 20), totalling 4.0% of the account together with the cost of establishing the initial positions, assuming no increase value of the underlying positions. That 4.0% is over half of the average yearly return on the S&P 500 Index over the last 20 years of 7.5% (not including returns associated with dividends). Under the new pricing structure, the commissions would add up to 0.2% of the account, less than 3% of the average return of the S&P 500.
If we make further assumptions that this same investor wanted to increase the size of five of the existing investment positions by USD 250 each during the year, the old commissions associated with this USD 1,250 increase to the account size would have incurred another USD 100 in commission costs (5 new positions at USD 20 each), an 8.0% commission cost relative to the size of the added funds. Under the new costs, the USD 1,250 positions would incur a fee of only USD 1 each, or USD 5 in total, or only 0.4% of the added funds. The smaller the position added, the more the new pricing impacts returns.
The examples above have been applied on prices available for Swiss clients and thus numbers will change in other jurisdictions, but the overall conclusions still hold. Saxo classifies clients into either classic, platinum or VIP pricing structure.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
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