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I have been trading options for years, but could not understand why Brokerages charge fee on basis of number of contracts.
Per Fidelity : Trade for just $4.95 per online trade, plus $0.65 per contract. Per Etrade : $6.95(or 4.95) plus 0.75/0.50
Is the cost for brokerage different if some one sells/buy 10 contracts or 1 contract ?
There are a number of things in life where the commission cost increases despite only a nominal additional overhead cost as the size of the transaction increases. Brokerage is one of them.
Brokers either charge a flat fee per trade with a bump of '$X" per contract (multiple contracts) or they simple charge a fee per contract. Why? Because they can.
The marginal cost of processing a trade of one more contract is absolutely negligible. But so is the marginal cost of processing one more trade!
Yet somehow the cost of developing and operating the entire trading infrastructure (which is much larger than the marginal costs times the volume of trade) needs to be borne by its users. Some principle for sharing this burden has to be arrived at -- and immediately it would seem at least as fair to do it in proportion to the number of contracts, as to the number of trades.
Due to listing rules, US exchange listed options may only be traded on an options exchange registered with the SEC.
All of the exchanges currently charge a fee per contract. Some (maker-taker exchanges) offer a rebate for posting in the book, which depending on your broker, may be passed on to the end-customer.
If they did not do this, but instead charged a fixed amount per trade, a customer could put in a marketable order for 10,000 contracts which would have to be executed on whatever exchange is at the NBBO at the time. If that was only an expensive maker-taker exchange charging $0.90 per contract, the broker would have to pay $9,000 for the trade.
While exchanges may not in fact charge this much (their fees can change monthly) and a customer may not be able to open a position of 10,000 contracts (due to maximum position limit rules, or adequate liquidity) you get the idea that if the broker could offer trading of options on a per-trade basis, they could lose money. As a result, they have to charge per-contract. Some brokers offer cost-plus pricing, where you pay a fixed amount plus or minus whatever the exchange costs or rebates.
