When the penny was phased out, it was largely believed to be an insignificant little coin. For one Canadian discount brokerage though, they have cleverly fashioned this humble (and now obsolete) coin into a new offer that has become the Canadian discount brokerage industry’s worst pricing nightmare.

One of Canada’s newest discount brokerages, Virtual Brokers, recently announced that they are lowering their minimum commission on a trade from $0.99 down to $0.01 per trade as part of a new pricing plan, aptly named, “The Penny Plan”.   While physical pennies may be a thing of the past, the Virtual Brokers penny per share offering is very real and very compelling for investors looking to save on trading commission fees.

How low can you go?

Paying $0.01 commission per share is not new to Canadian discount brokerages or to Virtual Brokers for that matter.  Competitors to Virtual Brokers, such as Questrade, offer $0.01 per share trading and Virtual Brokers has been offering $0.01 per share as part of their “the 99”plan as well as their “per share” plan (learn more about ultra-low commissions plans here).  What is new, however, is that the minimum commission per trade has never been this low.

Questrade’s standard commission pricing plan is $0.01/share with a minimum charge of $4.95 and a maximum charge of $9.95 (+ECN fees).  Even on Questrade’s best pricing plan (the Advantage), the minimum cost per trade is $0.95.   While it is possible that pricing per share could drop to the sub-penny level, in reality this kind of pricing is generally offered for day traders who trade lots of volume (see Jitneytrade or Interactive Brokers for example).

How can Virtual Brokers offer this pricing?

Virtual Brokers is able to take an aggressive pricing approach because of their ability to clear their own trades using their own software.   Almost all other discount brokerages rely on paying a certain fee per trading ticket for the software that coordinates the actual order during a trade.  Rather than outsource that function, Virtual Brokers developed and deployed their own version in house and as a result, they’re able to pass through savings on a per trade basis that few other brokerages are able to match, let alone beat.

Who is the Penny Plan for?

Realistically, not too many investors are going to be buying 1 share at a time (and hence only pay $0.01 per trade).  Investors who occasionally rebalance their portfolio holdings (e.g. a couch potato strategy), investors with modest portfolio sizes and investors who trade small share lots (<495 shares) are the ones who stand to benefit the most from the pricing change.

Very active traders (for whom cost per trade is always a major concern) will almost certainly kick the tires on this offer as well.  At $0.01/share certain scalp trading strategies could become more appealing (e.g. trading the TSLA’s and AAPL’s) and day/swing traders might also take advantage of the fact that costs for commissions on the Penny Plan (like the 99 plan) are capped at $9.99 with no ECN fees.  So why aren’t traders beating down the doors to Virtual Brokers like a mad mob on a Black Friday sale? Well, with any good deal there are certain strings that make the offer somewhat less appealing for very active (scalping) intraday traders.

What’s the catch?

The biggest catch to this offer is that only trades placed using the VB webtrader platform qualify for the 9.99 (and no ECN fee) cap. For many active traders, the standard offering of this particular platform may not be ideal for making quick order entries and watching bid/ask levels.  In addition, while snap quotes are free on the VB webtrader platform, data fee packages for real time streaming quotes are not.  Packages starting at $18.25 per month and going up to $104.50 per month are available for those seeking real time quotes however it is the added cost of data that can dramatically increase the total cost of trading. In addition, the $9.99 cap also doesn’t apply to trades placed outside of normal market hours, anonymous/iceberg orders and trades routed to non-auto/managed routes.   For traders who like controlling when and where their trades go, unfortunately this plan could get pricey with large trading volumes. For most investors, however, only the monthly data cost could be a materially significant issue should they choose to enable this feature.   Here is a screenshot of the terms and conditions of the Penny Plan from Virtual Brokers’ site.

The Bottom Line

The Penny Plan for Virtual Brokers is great news for do-it-yourself investors and a huge disruption for other Canadian discount brokerages competing on price.    In addition to the pricing of this new offer, Virtual Brokers also allows clients to switch between the plans they offer. In other words, clients can switch between the Penny Plan, the Per Trade Plan or the Per Share Plan from one day to the next at no cost so that the client can match pricing plans according to their trading needs for the day.

In terms of price and flexibility, Virtual Brokers has certainly thrown down a challenge to the rest of the industry to demonstrate value to their potential and existing clients. Although what other discount brokerages will do to respond is unknown, one thing is for sure, those pennies investors may still have stashed away just got a lot more valuable.