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While Zero-Commission Trading Gains Popularity, Don’t Forget About Currency Conversion Fees

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With brokerages constantly adding to their service offerings, Canadians have many factors to consider when choosing the right trading platform.

To attract customers, brokerages are coming up with novel ways of differentiating themselves in an effort to separate from others in the market.

One key area that’s heating up for Canadian brokerages is commission fees.

The first company to offer $0 commission trading was Wealthsimple.

Prior to their launch in the Canadian market, all brokerage firms charged a per-trade commission.

Also known as a stock trading fee or a brokerage fee, a small charge used to be standard on trades of all stocks and ETFs.

The company announced a shift towards zero-commission trading in March 2019, and many of its competitors have followed suit since then.

It seems like the race to the bottom has begun.

National Bank Direct Brokerage followed suit two and a half years later.

Announced in August 2021, National Bank has coined themselves the “first broker of a Canadian bank to offer 100% of Canadian and US stocks, options and ETFs at $0”.

Another well-established Canadian bank broker that has partially incorporated this practice recently is TD Bank.

Through their TD EasyTrade platform, customers are now able to make 50 commission-free trades per year.

With the competition heating up, RBC has a launched a promotion offering 100 free trades to be used within 2 years of account opening.

The promotion only runs until March 2022, and a regular $9.95 commission will be charged following the end of this offering.

While brokerage firms have been responsive to the changing landscape and have tried to remain competitive, others such as Interactive Brokers (IBKR) have taken a different approach to stand out from the crowd in the Canadian market.

  • Lowest and most transparent commissions
  • Large number of tradable security types
  • Robust suite of research tools
  • Low margin rates, from 0.75% to 1.59%
  • Access to 40,000+ funds worldwide & 7,700+ funds with no transaction fees

Rather than offering commission-free trading in Canada, IBKR offers a tiered structure that reduces the amount of commission paid based on the number of shares traded.

The more shares bought or sold per trade, the lower the commission.

From there, they look to double-down on the low fees by offering a rock bottom currency conversion rate between CAD and USD.


Is Zero-Commission Really Zero?

While $0 commission trading is a great offering, there’s more to it.

Traders should always be considering all fees and charges when evaluating a brokerage platform.

When it comes to long term outlook, seemingly small charges can add up over time, impacting the amount of money that stays in your portfolio.

One of the best examples to illustrate this point is currency conversion fees.

As many stocks (such as those listed on the NYSE or the Nasdaq) trade in US dollars, purchasing them means that Canadians will need to convert currency from CAD to USD.

With some of the world’s most valuable publicly traded companies (e.g. Apple, Tesla, Google) traded on US stock exchanges, many Canadian traders desire to hold at least a few US stocks in their accounts.

This currency conversion fee is often one of the overlooked aspects of costs associated with trading.

The majority of platforms available to Canadians charge ~1.5% to convert between currencies.

Some allow you to hold USD while others do not.

While 1.5% may seem small, the fees can actually add up fairly quickly.

For example, purchasing $5,000 USD worth of a US listed stock would result in a $75 fee.

If the stock goes up to $6,000 USD and you decide to sell for a profit, another $90 would be charged to sell and then convert your funds back to CAD.

What originally was a $1,000 profit now shrinks to only $835 after incurring $165 in currency conversion fees.

While zero-commission trading took away the $5 to $10 in commissions usually charged per trade, these savings are small in comparison to what is being charged in other areas like currency conversion.

To illustrate the impact of currency conversion fees, Interactive Brokers recently published a comparison of their fees to those of other brokerages.

  • Lowest and most transparent commissions
  • Large number of tradable security types
  • Robust suite of research tools
  • Low margin rates, from 0.75% to 1.59%
  • Access to 40,000+ funds worldwide & 7,700+ funds with no transaction fees

While the conversations and comparisons between brokerages mainly rests on what their per trade fees are, for Canadians interested in trading in USD denominated names, trading fees or commissions only tell half the story.

The other half to be thinking about are those currency conversion fees.

When you’re looking for the right brokerage, consider the currency you’ll be trading in and the entire picture before choosing the right fit.

For me, Interactive Brokers as my primary brokerage makes the most sense. I pay the trading commissions, however, I benefit from a much lower currency conversion fee – only 0.002% of trade value (minimum $2 USD), vs the ~1.5% most other brokerages charge.

For those trading in many USD denominated names and that need to move CAD/USD and USD/CAD, commission fees per trade may not be the number one factor to be considering.

For those that only or mainly make trades in CAD denominated names, a $0 commission platform may actually be beneficial.

And while some traders will use a technique called Norbert’s Gambit to eliminate the currency conversion fees charged by many brokerage firms, this technique comes with both benefits and risks.

In short, this strategy involves using CAD to purchase shares of a company listed in both CAD and USD.

After making the purchase, you can call your brokerage and ask that they “journal” the shares over from CAD to USD.

This technique often involves journaling stock over from DLR.TO (traded in CAD) to DLR.U.TO (traded in USD).


Try The #1 Trading Platform in Canada


In Closing

$0 commissions have been a great offering from Canadian brokerage platforms.

However, this is just one part of the puzzle when it comes to choosing a platform.

Questions such as your trading frequency or your desire to hold either Canadian or US listed stocks are important.

Each brokerage platform caters to specific types of traders, and understanding which platform best meets your trading style is important.