Lower commissions: critical for trading success

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: 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 the UK that is a Saxo Classic client and has a trading strategy for highly liquid US stocks that trade on NYSE and Nasdaq exchanges. Let’s say that the account size is USD 10,000 (about GBP 8,000). 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 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 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 the UK each of the trades would have incurred a minimum USD 20 per trade (that is USD 10 times two for the buy-sell round trip), taking the edge down to USD 4 from the no-cost theoretical edge of USD 24 per trade. In other words, the old commission structure would have cost over 83% of the trader’s entire USD 24 per trade edge. 

But what do the results look like for this trader using new terms for Saxo Classic accounts in the UK? 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 60% (from USD 20 (USD 10 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 4 to USD 16 per trade after trading costs. This would mean an additional return of 12% 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 12 round-trip difference in costs seems 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 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. Take the same assumptions as above, for example, but for someone only trading positions of USD 2,000 (about GBP 1,600), which would incur a trading cost of USD 3.2 (0.008% x USD 2,000 x 2 for round trip), rather than the former terms of USD 20, an 84% reduction in trading costs.