As a new client of a broker I'm given $300 of free commission on trading (basically on everything: stocks, options, futures etc).
Is there a way to capitalize this bonus by creating some combination of trades?
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10If there was some way to make money merely by making trades (there isn't), financial firms that have access to trades at close to zero marginal cost would use algorithms to do this until there was no profit to be made at human speeds.– EarthCommented Apr 16, 2020 at 20:55
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You've written a nice sound bite that you can't make money by making trades but the financial news suggests otherwise. A few examples. 2016: One junk-bond trader at Goldman Sachs earned more than $100 million in trading profits for the firm earlier this year. 2018: Goldman's traders made gains in excess of $100 million on 12 days in 2018. In the first quarter of 2019 they lost -25 to zero on 7 days. They made 0-25 on 15 days, 25-50 on 26 days, 50-75 on 10 days and 75-100 on 5 days. Those numbers represent millions of dollars. I'd say that they made mucho dinero from 'merely making trades'.– Bob BaerkerCommented Apr 16, 2020 at 22:12
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4@BobBaerker I don't think that's what the other commenter meant. I think it's probably more along the lines of your own answer, where trying to 'maximize' the bonus taking into account only the cost and not the merit, does not make sense.– jcmCommented Apr 16, 2020 at 22:26
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@jcm - I think otherwise because he specifically mentioned financial firms, zero cost to trade and shutting out retail (human speeds). If you still think so then we agree to disagree.– Bob BaerkerCommented Apr 17, 2020 at 0:10
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3@BobBaerker : There is only one thing to answer your example: survivorship bias– vszCommented Apr 17, 2020 at 4:38
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2 Answers
I don't think that there's a way to maximize this. Even more importantly, you shouldn't be attempting to do so. Whether you're investing or you're actively trading, you should place your trades based the merit of the trade rather than the cost of doing the trade.
answered Apr 16, 2020 at 10:59
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I have a potential answer.. but not sure of it's validity. When I first started investing I didnt feel like I could diversify very much due to transaction costs... Could the $300 be used as an opportunity to diversify?– rrauenzaCommented Apr 17, 2020 at 22:44
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@rrauenza - If you're paying commissions and if you have a small amount to invest, free commissions would be a way to diversify. But IMO, just buying a diversified ETF would accomplish that in far fewer transactions. I don't know how applicable it is today but a long time ago when I first started investing, I opened a number of no fee DRIPs, especially those that gave 5% discounts on dividend reinvestment and sometimes on new cash as well. That would be a good way to invest without fees. Commented Apr 17, 2020 at 22:57
Yes, you can maximize this by having a series of entries with very small stop-losses in the most liquid market with the tightest bid-ask spreads possible.
You will probably use a "bonsai" entry strategy, which enters a position at a particular price with a fixed (but not arbitrary) stop. You would re-enter that position every time price returned to your entry after being stopped out. For a small stop, this can realistically happen many times, even with what is a very good entry in the grand scheme of things. Transaction costs and slippage therefore become a primary limiting factor.
The other limiting factor, however, is the quality and resolution of your trading system itself. Tight stops, free trades, and minimal spreads will not help much if you're entering at the wrong places. Also, some systems will naturally not fit the time frames that allow for tight enough stops to take advantage of free commissions, and so must be ruled out.
Finally, even though you can maximize the utility of free commissions like this, often spreads and slippage are significant enough that the overall savings is not that great. Furthermore, a system capable of capitalizing on tight, series-of-entries positions will still require significant development costs and (likely) automation. Finally, its profitability will be hurt when your free commissions have expired. So, I can't really suggest targeting free commissions as an effective long-term strategy, even though it is (temporarily) possible to do.
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1So this strategy would save $300 in transaction costs that would otherwise be incurred. So would, say, buying 300 options with a $1 transaction cost each. I think that's the point of Bob's answer and the comments - there's no way to "save" more than the $300 over then what you'd normally pay. Commented Apr 17, 2020 at 13:18
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You've made some good points about trading strategy as well as position entry, exit and management but none of it addresses the question of maximizing the $300 in free commissions. If you pay commissions and you trade, you use them up. $300 free is just that, $300 saved. No more, no less. Commented Apr 17, 2020 at 18:01
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Well, sure - but I never interpreted the question to be about maximizing the money saved. That's $300 any way you look at it. My answer maximizes the return on risk during the trading period. Bonsai strategies tend to exhibit some of the best possible return on risk characteristics when combined with minimal spread/slippage/commissions, but can quickly go from superior to inferior with even a small increase in execution costs. Saving the same $300 under a more conservative entry strategy wouldn't provide as high overall return on risk.– rsandenCommented Apr 18, 2020 at 3:53