First Trading Experience with OptionsHouse

I opened an OptionsHouse brokerage account a few weeks ago after noticing that it has lowered its online stock trade commission to $2.95/trade. That price beats what I currently get from other popular discount brokers, such as TradeKing, Firstrade, and even Zecco. However, since OptionsHouse requires some paperwork (such as a signed form and voided check, even though it used trial deposits to verify account ownership already) be sent in, the account was delayed several days (they even called me to let me know the account is available, which is nice).

Anyway, the account was successfully funded last week with $1,000, the minimum amount that’s required to opened an account, and I decided to test drive OptionsHouse to get a feeling how it works. I am glad I did it because there is  something that I overlooked before opening the account left me a very bad taste of the broker.

I mentioned in my previous post that when I opened the account, it showed all quotes are delayed 20 minutes, which I thought doesn’t make any sense. It turned out that the account has to be funded in order to receive real-time quotes. Since now my account is funded, I indeed get stock quotes in real time.

The stock I wanted to buy yesterday was CIT Group (CIT), which has been in the news quite a lot lately because the government refused to bail the small business lender out. At the time when I entered my order, the stock was traded slightly higher than $1.25 a share, so I entered a order to buy $797 shares of CIT at limit price of $1.25/share. The total cost is $996.25. Since I already subtracted the commission cost of $2.95, the $1,000 in my account was enough to cover both the commission and the cost of the stock. At least that’s what I thought.

However, once I hit the Preview button to preview my order, I got an error message, saying I don’t have enough buying power to make the trade. I thought I have enough money in my account, even though the trade itself will cost less than $997. I have been doing this with all other brokers and never had any problem with settled fund.

So I kept reducing the number of shares I wanted to buy to see when the error message will go away. 1 share less, 2 shares less, 5 shares less, 10 shares less, but none of them worked, until I put a much smaller 500 share to buy did the message disappear.

But I don’t want to buy just 500 shares. So I called customer service and asked why I wasn’t allowed to buy the stock I wanted to buy even though I had enough fund in the account. The CSR then told me something that I think is really ridiculous. He said, though I have $1,000 in my account and Stock Buying Power of $1,000 as OptionsHouse says I have, I don’t really $1,000 to buy stock. Instead, I only have $900 to buy stocks and have to leave $100 in my account to cover commission costs. And the reason for maintaining $100 in the account is that there are people trade at high volume and since OptionsHouse only takes commissions at the end of the trading day, not with each trade (at least that’s what I was told), the accounts could have deficits at the end of the day. So they want to have that amount of money as a cushion.

I told the CSR I didn’t see this information when I opened the account and asked where I can find it on their website. I was then pointed to their FAQ page (under Account Information), which has this:

Do I need to maintain a minimum account balance?

All accounts are required to maintain a minimum balance of $100.00 in order to place a trade. The minimum account balance is not the same as the minimum initial funding size. The minimum initial funding size is $1,000 for a cash account and $2,000 for a margin account.

I have traded stocks with quite a few brokers and if I don’t have enough fund in my account for both the trade and the commission, the trade just won’t go through. I am not an expert in this area, but I am really having a hard time imagine how hard it cold be to implement this. Yet, OptionsHouse decides to take an approach that’s annoying. When I asked whether I receive any interest for the money that’s idle. The CSR said “Yes, it’s in a money market account at 0.01% interest rate.”

Well, that’s a brilliant way to get $100 free loan from everyone using OptionsHouse. And the reason they gave me sounds just like a convenient excuse for holding customer’s money hostage. Nice Job!

But do I really have $900 to buy stocks? No, not really.

I went back to modify my order to bring the cost of trade down to below $900, but my order was once again rejected due to insufficient buying power.

But I already set aside $100 for the commission cost, how come I still can’t buy? Well, even though OptionsHouse says the $100 reserve is to cover commission, I still have to deduct $2.95 from $900 to just get the order through.

When I was complaining to the CSR about this, he basically told me this is how we do business and what are you going to do about it. While there’s probably nothing I can do about the way OptionsHouse does business, I can at least not lend you $100 free loan.

So I guess this may be the reason why OptionsHouse can afford to a commission that’s significantly lower than other brokers.

Update: OptionsHouse is offering 100 commission free trades for November and December 2009.

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