Futures Trading Transaction Costs

When trading futures there are 3 primary transaction fees that traders need to be aware of which are:

1. Spread

2. Slippage

2. Commissions

3. Exchange Fees

First lets take a look at the spread. Like when trading any other financial market, when trading futures you pay the spread, which is the difference between the rate where you can buy and the rate where you can sell. Also as with any other financial instrument, spreads in the futures market vary from contract to contract, depending on the liquidity in the market. Generally the more liquidity (meaning buyers and sellers) there are in a particular market, the narrower the spread. One of the reasons why most traders stick to electronically traded futures like the E Mini S&P, is because there is normally a large amount of liquidity in the market during active market hours, which keeps spreads down around 1 tick. As we have discussed in previous lessons, a 1 tick move in the E Mini S&P is .25 Points, which equals $12.50 per contract.

Next in line is something which is known as slippage, which is basically the difference between the rate where you place your order and the rate where your order is filled. Again here slippage is generally a function of volatility and liquidity in the market, meaning that the more volatile the market is and/or the less liquid a market is, the more likely you are to experience slippage. This is also another reason why active electronic markets, and specifically the E Mini S&P, are so popular, because of the huge amount of liquidity that is available during active market hours, and relatively small amount of slippage that is experienced as a result. An important thing to keep in mind here is that because slippage is a function of how much liquidity there is in the market, trade size is also a factor here, meaning that the larger the trade size, the more slippage that can be expected.

Next in line are commissions, which are the fees that the brokerage firm charges, per contract traded, to execute your trades. Commissions very widely from firm to firm, depending on the level of service and other amenities that you receive, and can also vary from contract to contract. One of the reasons why I have chosen to recommend Apex Futures, is because they offer some of the lowest commissions for electronic markets in the industry, and the level of service has from my experience also been top notch. Commissions for trading electronic markets like the E Mini S&P are $1.99 per side, meaning $1.99 to buy and $1.99 to sell. When trading any market it is important to understand whether a quoted commission rate is per side or what is referred to as “round trip” which means the rate for both the buy and the sell combined. A $1.99 per side commission is equal to a $3.98 round turn commission, which from my experience is among the lowest in the industry. The low commission rates available, are also another advantage of trading futures over stocks, as the more competitive discount brokerage firms generally charge somewhere in the neighborhood of $5 per side commissions.

The last transaction cost that we need to discuss, are exchange fees, which are a cost traders pay in addition to commissions in order to execute their futures trades. Like the name indicates, exchange fees are charged by the exchange, so unlike commissions, they are the same no matter what firm you trade with. The exchange fees vary depending on the contract that you are trading, but for the E Mini S&P are currently $2.28 round turn.