Dealing with ECN Fees

Three times in the last few months, my friend asked me how much my broker (TD Waterhouse Discount Brokerage) charged me for ECN fees. Each time, I would tell him I do not pay ECN fees. He currently uses Questrade which is notorious for charging ECN fees above market fees. Just do a Google search for "Questrade ECN fees" and you will come across threads of angry and confused customers paying an extra $40 or more. Questrade's low commissions attracts customers, but they stay profitable by charging ECN fees, unlike many other large institutions that charge higher commissions ($19-29) to absorb the costs of ECN fees, as well as other potential fees.

Below is a table of some major North American exchanges and their ECN Fees. I've also included Questrade's ECN charges which I obtained directly from their website.

ECN Fee Structure for stocks $1.00 and Over; in dollars per share.
CDN Markets	Exchange	Questrade
Alpha (ATS)	0.00253	0.0037
Chi-X	0.0029	0.0037
Pure Trading	0.0025	0.0037
TSX	0.00341	0.0037
US Markets
BATS	0.0025	N/A
NASDAQ	0.0030	0.0030
NYSE	0.00302	0.0040
NYSE ARCA	0.00302	0.0040

¹TSX charges between $0.0033 to $0.0035 per share. The amount in the table is the median charge.
²NYSE and NYSE ARCA charge between $0.0029 to $0.0031 per share. The amount in the table is the median charge.
³Alpha (ATS) uses a three-tier system for Continuous Active fees. The value used in the table is the charge for equities between $1.00 and $5.00.

ECN fees only occur when you remove liquidity from the market. That is, when you buy at the ask or sell at the bid. You are essentially removing shares from the market that were for sale or purchase. But when you add liquidity (enters a buy below the ask or a sell above the bid) to the market, the exchanges do not charge you an ECN fee. In fact, if you provide liquidity, the exchange provides a rebate, but most retail investors will never see this return.

In Canada, the law requires brokerages to route equity orders to the exchange with the best possible fill. Fortunately, most exchanges have fees that are very similar, but it is possible to hit an exchange that charges substantially higher fees not included in the list above. There are over a dozen US stock exchanges you might not have heard of, such as the Miami Stock Exchange and National (Cincinnati) Stock Exchange, and hitting these exchanges can happen quite frequently. The National Stock Exchange accounts for about 20 per cent of the transactions for NASDAQ-listed stocks.

For traders, simply putting in a limit order a penny below the ask or above the bid will remove that ECN fee, but this is not practical for low-volume equities. Low-priced equities will also generate larger ECN fees since many will hold thousands of shares. A third of a cent adds up when you hold five- or six-digit shares. So before you start trading, account for all charges and commissions. ECN fees can add up over the long run.