Unbiased Interactive Brokers Forex Review

 

Overall Conclusion:

Interactive Brokers is a forex broker most suitable for experienced, well capitalized traders. The very low transactions costs, coupled with the powerful and flexible trading platform will make it an attractive choice. However, the account requirements and steep learning curve for the trading platform make it unsuitable for novice and small traders. Note also that Interactive Brokers has been fined multiple times by both the CFTC and the NFA, so this broker does not score as high as other forex brokers. Unlike most other forex review sites, Forex Scam Alerts does not receive compensation from Interactive Brokers.

 

Brief Background:

Interactive Brokers is a brokerage that facilitates trading of forex, stocks, options, futures, bonds, and more. Interactive Brokers Inc. was incorporated in 1993, but its roots go back to 1977. It was one of the early company to make electronic trade execution services available to customers. IDEALPRO launched in 2005, allowing retail clients to trade forex. Interactive Brokers serves countries all over the world.

Note: In August 2016, Interactive Brokers communicated to their clients that they were going to limit leveraged forex trading to "eligible contract participants" only. Among other things, eligible contract participants must have a balance of over $10 million. This essentially represents an exit from the retail forex market in the United States.

 

 Regulatory Action Against Interactive Brokers:

Interactive Brokers has had multiple regulatory actions taken against it by both the CFTC and the NFA. Interactive Brokers is an NFA member under NFA ID 0258600.

 

 Counterparty Risk:

Interactive Brokers maintains massive capital reserves, and there are few non-bank forex brokers who can match Interactive Brokers' financial strength. When last checked in April 2016, Interactive Brokers reported net capital reserves that were a whopping 10 times greater than what was required to comply with the strict US regulations. This amounted to more than $2 billion in excess net capital. This financial strength should play a key role in deciding how stable a forex broker is, and how unlikely they are to go bankrupt.

 

 Broker Type and Profitability:

Interactive Brokers uses the straight through processing, non-dealing desk business environment. It operates an ECN-like market structure. However, Interactive Brokers is not a true ECN. Potential clients should note that Interactive Brokers is the counterparty to client trades, though Interactive Brokers will typically offset client transactions with other counterparties. In theory this reduces the conflict of interest between Interactive Brokers and its clients. Liquidity providers include 13 of the world's largest FX dealing banks, who between them conduct up over 80% of the global interbank market transactions.

Since Interactive Brokers has operated in the United States, it has been required to report client profitability along with other US forex brokers. This reported profitability was subject to audits by the regulators, so it should be considered honest reporting. The reporting provided important insights into the results that actual forex traders were getting with Interactive Brokers. The reporting showed that Clients of Interactive Brokers consistently scored near the top of the list for profitability compared to other US forex broker clients. While Interactive Brokers doesn't allow leveraged forex trading in the US, this higher profitability for Interactive Brokers should be taken as a good sign for potential clients. In the end, it is client profitability that matters most.

With the straight through processing model, and the high client profitability compared to other brokers, Forex Scam Alerts has no concerns with Interactive Brokers business model.

 

 Spreads and Transaction Costs:

Interactive Brokers employs a transparent pricing model which has very narrow spreads that are not marked up. Spreads can be reported as low as 0.1 pips for the EURUSD, but are typically a little wider. They earn their revenue from a commission which is among the lowest available to forex traders. Commissions are typically 0.2 pips per trade with a $2.00/trade minimum, but can be as low as 0.08 pips/trade for very high volume traders. With high liquidity, low spreads and low commissions, retail forex traders will not easily find lower transaction costs elsewhere. The following is a snapshot of EUR.USD bid/ask spread during the Tokyo / Sydney sessions (snapshot taken from Mountain timezone). It shows spreads varying between 0.1 and 0.5 pips:

 

 Accounts and Funding:

Clients of Interactive Brokers can open accounts and fund them through a variety of methods including BPay, Automated Clearing House (ACH),  online bill payment, wire transfers and checks. Withdrawals can be done using the same methods excluding online bill payment. One free withdrawal is allowed per month, after which minor withdrawal fees apply.

When an account is opened, Interactive Brokers will also open a demo account that can remain active for as long as you remain a client. This permits the trader to practice different strategies before committing real money to trading. 

An additional, uncommon feature of Interactive Brokers accounts is that they let you trade forex, futures, stocks, options, bonds, and other instruments, all from the same account and the same trading platform. Experienced traders will recognize that these other markets open the door to many other trading opportunities. In particular, futures trading has many of the same characteristics of forex trading. Further, Interactive Brokers is noted for having powerful tools to enhance options trading, including spot forex options and currency futures options. Interactive Brokers makes trading in these other markets easy.

In general, Interactive Brokers targets active, experienced, sophisticated traders who know what they are doing, rather than naive traders dreams of getting rich quick. As such, Interactive Brokers has the following requirements:

1) The minimum deposit required to open an account with Interactive Brokers is $10,000 USD, or local currency equivalent. There is an exception for clients aged 25 or younger, who need deposit only $3,000 USD to open an account. This may be a barrier for small casual traders, but it won't be an issue for the typical serious trader or experienced trader.

2) Minimum commission per trade: there is a $2/trade minimum commission. Trades of less than approximately $100,000 is where this minimum will kick in. Traders who trade well in excess of this amount per trade will not have any issue with this minimum.

3) Minimum monthly activity requirement: in general, Interactive Brokers requires that a trader generate at least $10/month in commissions ($3/month for clients 25 or under). If commissions generated in a month are less than $10, Interactive Brokers will charge an activity fee to bring the total up to $10 for that month. This fee is waived for the first three months after account opening, or if the net account balance is greater than $100,000. With the $2/trade minimum commission noted above it takes no more than 5 trades per month to meet the minimum monthly activity requirement. 

Overall, Interactive Brokers scores well in this category with the caveat that novice traders with small trading accounts may find this broker unsuitable.

 

 User Interface:

Interactive Brokers' main trading platform is Trader Workstation (TWS). It is a powerful and highly customizable trading platform. It has many features including customized analysis tools for trading in other financial markets besides forex. TWS also has over 60 different order types that will trigger under a wide variety of circumstances, going well beyond most other forex brokers. All this adds a lot of complexity to the interface which novice traders may find intimidating. Also, one must be very careful when using the Interactive Brokers trading interface. There are many options and modifiers and if you have any of them set up incorrectly, you may experience unexpected behavior from the system. Further, TWS experiences several server outages where data is not available for several seconds or even minutes at a time. This includes a daily loss of data at midnight EST for several minutes. Interactive Brokers also recommends that users log out of TWS every night to avoid unstable system behavior. Our experience is that this unexpected behavior includes trades that don't get executes. This requirement is very problematic for algorithmic traders. For these reasons, we score user interface as yellow instead of green.

Having said all this, experienced traders will value the additional functionality and flexibility of TWS. The following is an example of a customized chart heavy TWS screenshot:

 

Other panels in TWS include a news window, research, account window, trade status, watchlist, alerts, and many others.

Interactive Brokers also has the following trading platform options:

1) Webtrader: a simplified trading interface that is accessible anywhere you have an internet connection.

2) MobileTWS: a trading app available for Android, iOS, and Blackberry operating systems. There is also a simplified version that is available for any other wireless device.

3) API solutions: Interactive Brokers makes its Application Program Interface available to connect through a variety of different methods. A trader can build their own trading interface using Excel, Visual Basic, Java, C++, or a number of third party trading platforms. Robust interfaces exist for NinjaTrader and Multicharts. Connection with MetaTrader 4 is possible with the help of third party software only.

 

 Other:

Interactive Brokers is very well capitalized, with close to $2 billion in excess capital above the regulatory requirements. While this level of capitalization is common among banks, it is much, much better than most companies that specialize only in forex trading.

 

Return to our forex broker reviews to see forex brokers with a better regulatory record.

 

Broker reviewed: Interactive Brokers
Review date:
Rating out of 5: 3.0
Reviewed by: