Chapter 15
Your Key Vendor: Your Broker
IN THIS CHAPTER
Knowing what to look for in a brokerage firm
Choosing from the many brokers available
Watching out for scams
You can’t day trade without a trading account at a brokerage firm. It’s that simple. Although every trader needs one, and although the rates charged are similar, brokerage accounts are not commodities. Not only do different brokers offer different services, but most brokers also have tiers of services available for different types of investors and traders. You aren’t just buying a way to execute a trade but rather a set of services.
Some brokerage services will be worth the money and then some to you. Others will be inappropriate for your style. To help you get started on your research, this chapter covers the different types of accounts, with information on their features and benefits. After all, you want to make a good trade from the start!
Choosing a Brokerage
If you are going to trade, you need a brokerage account. What kind of broker you need depends on what you plan to trade (head to Chapters 2 and 3 for some of the basics of different types of securities and where they trade):
- If you plan to trade stocks, you need a full-service broker that belongs to Nasdaq, the New York Stock Exchange (NYSE), and other major exchanges.
- If you’d rather trade the stock market through the CME Group’s E-Mini index futures, or if you’re interested in other types of derivatives, then you need a futures trading account with a broker holding a seat on the Chicago Mercantile Exchange or other derivatives exchange.
Many day traders pursue two or three strategies, which may require holding different brokerage accounts. Having multiple brokerage accounts isn’t unusual. If you are going to trade both grain futures and tech stocks, for example, you may want one account with a futures brokerage that belongs to the Chicago Mercantile Exchange and another account with a stock brokerage that offers fast execution.
The following sections tell you what to look for when choosing a brokerage firm.
Getting proper pricing
All brokerage firms offer price quotes — a summary of the current bid and offer prices for selling or buying the security in question. But not all these price quotes are the same. Some are offered in real time, meaning that you see the prices as soon as your modem can transmit the change to you. Others are delayed, sometimes by seconds, sometimes by minutes. If you’re buying a bond with plans to hold it for ten years, the difference in price between now and 15 minutes ago probably isn’t material. But if you’re looking to day trade in the bond market, using short-term changes in treasury futures, a delay of even 30 seconds may be the difference between your strategy succeeding or failing.
Almost all day trading strategies need direct access in order to maximize profitability. Direct-access brokers allow you to see the price quotes in real time so that you can act on them immediately, and they allow you to work through different electronic communications networks rather than going through the firm’s own traders.
To help you with the pricing, some brokers offer access to liquidity pools, also known as dark pools, dark liquidity, or dark books. These pools are private execution networks that can sometimes wreak havoc with the market, but when used properly, they can improve the pricing on a stock trade. Brokers that participate in these pools may place your order in the liquidity pool, and then your order will be executed only if a matching trade exists. In this situation, the trade happens faster and often with better pricing than it would if it had been executed in the open market.
Unlike those brokerage services aimed at day traders, a traditional retail brokerage offers customers more research and advice and may even offer to improve order execution by waiting until market conditions are more favorable. That’s fine for investors but not so good for day traders.
In addition to different levels of market access, brokerage firms offer different types of price quotes with different amounts of detail. Read on for descriptions and pictures to see what you need for your strategy.
Faster, detailed price quotes are valuable to traders, so brokerage firms usually charge more for them. Don’t skimp on price services at the expense of your trading profitability.
Level I quotes
Level I quotes give you the current bid and ask, or bid and offer, prices for a given security. The bid, of course, is the price at which the broker buys the security from you, and the ask (also called offer in some markets) is the price at which the broker offers to sell the security to you. A Level I quote also shows the size of the most recent buy and sell orders.
Most brokerage firms offer real-time Level I quotes for free, but these numbers do not have enough detail for day trading.
Level II quotes
Level II quotes not only tell you what the current bid and offer prices are but also who the market makers are — the brokerage firm traders who are buying and selling the security — and what size orders they have at different prices (see Figure 15-1). This information can help you gauge the volatility and direction of trading in the market, which can help you make more profitable trades. Most brokerage firms that specialize in day trading offer Level II quotes in most markets.
Source: Nasdaq
FIGURE 15-1: A Nasdaq Level II quote.
TotalView quotes
TotalView quotes show all orders in the market for a given security, both attributed to market makers and anonymous (see Figure 15-2). This information gives traders the most detailed information about what’s happening in the market. Although all this detail may be overkill for some trading strategies, it’s vital to the success of most. You’ll have a better idea of how much information your trading strategies need after you test them, using the advice in Chapter 13.
Source: Nasdaq
FIGURE 15-2: A Nasdaq TotalView quote is the most detailed available.
Evaluating types of platform
When you have an account with a brokerage firm, you have a way to get information about the markets and place your orders. The conduit is the Internet, but you need a way to get your orders to it. Some brokerage firms have their own software that you can use; others allow you to log in through a website. The following sections detail your options.
Software-based platforms
With a software-based platform, you must download and install the brokerage firm’s proprietary system onto your computer. When you’re ready to start your trading day, you connect to the Internet first, launch the software to see what’s happening, and place your trades. Software systems generally offer more features and analytical tools than web-based platforms, but you can only trade on a machine that has the software loaded on it.
Web-based platforms
With a web-based trading platform, you go to the broker’s website and log in to trade. With these types of platforms, you can trade from any computer that has Internet access, which is a boon if you travel or work from several different locations. In exchange, you may give up some of the analytic and backtesting tools offered through software-based platforms.
Note that web-based platforms may be designed to work on specific web browsers. Given the importance of having a stable connection and full functionality in a fast-moving market, if the firm recommends using Internet Explorer, accept that. Don’t cling to a preferred alternative.
What about mobile platforms? Some brokerage firms allow you to get price quotes and place trades through a mobile phone. This capability may be useful to some people, especially as a backup system, but relying on it solely is a bad idea for most day traders. Day trading is a business, and that means you need some discipline about setting regular hours and working from a regular workspace. You’ll probably need more information to work a trade than will fit on your phone’s screen (most day traders work off more than one full-sized screen, in fact). Finally, you need to take a break from the market to maintain balance in your life. If you’re making trades at your cousin’s wedding, you have a problem.
Opening an account
When you open a brokerage account, you must fill out a lot of paperwork to comply with government and exchange regulations. Basically, these forms help the firm ensure that you’re suitable for day trading; that you understand the risks of options, futures, and margin strategies; and that your trading money did not come from ill-gotten gains. (I explain all the laws behind these in Chapter 6.)
After you complete and sign the paperwork, you need to transfer funds. Most brokers require a minimum investment of $25,000 to open a day trading account (to meet the FINRA pattern day trading rules, although some brokers set lower or higher minimums). Write a check or set up a wire or Internet transfer from an existing bank, brokerage, or mutual fund account.
Discussing Brokers for Day Traders
Following is a list of brokerage firms with services for day traders. It’s arranged by specialty (stocks and general trading, options and futures, foreign exchange) and then alphabetically within each category. This list is not exhaustive. Also keep in mind that every year new firms are formed and existing firms are acquired or merged away, so be sure to do your own research. Also, this list doesn’t imply an endorsement of anyone’s services.
Each winter Barron’s (www.barrons.com) conducts a survey of online brokerage firms with updates on the latest features and rankings based on such criteria as technology, usability, additional features, customer service, and trading costs. Check it out when you’re ready to research.
Brokers for stocks and a bit of the rest
Day traders almost always work through online brokerage accounts. Many firms offering these accounts handle trading in almost all securities. The firms usually belong to all the exchanges, so you can trade almost anything anywhere in the world through them. These brokerage accounts often offer a range of news and charting services to help you plan your trading. In some cases, their offerings may be overkill; you may find them distracting and their services unnecessary. Some may not handle your security of choice well.
Brokerage firms don’t make money just on the commission charged per trade. Other sources of revenue include monthly service charges, fees for real-time quotes, interest on margin loans to customers, and the spread, which is the difference between what you pay for a security and what the firm paid to get it. So don’t let the commission be the critical factor in deciding among brokerage firms. Think about the services you need and the relative cost to you of different account offerings.
By the way, the brokerage industry has been consolidating — at an alarming pace. There are enormous scale economies in online trading, and the big banks and brokers are rolling up many of the independents. Being big has its advantages, including both the payoff from technology investments and the ability to get good execution on trades, but you may lose some niche services to a merger.
Ally Invest
Formerly known as TradeKing, Ally Invest offers a range of basic trading services in stocks, bonds, options, and foreign exchange, both online and through mobile applications. The basic platform is, well, basic and doesn’t have much in the way of features. The Ally Invest LIVE platform is where you’ll find the options tools that made TradeKing popular with active traders. The company’s most unique feature is the community offerings on its site, where customers can create blogs, track each other’s trades, share commentary, and send messages in hopes that they all make better, smarter trades. A lot of traders appreciate the support and the ability to share ideas through the community features.
For more information, go to www.ally.com/invest.
Charles Schwab Active Trading
Charles Schwab was one of the first discount retail brokerage firms, and it now offers just about every financial service one could want: financial planning, banking, and mutual funds. The Schwab Active Trading account includes trading demonstrations and education services that are particularly useful for active stock traders, although the firm has trading and support capabilities for options and ETFs, too. The platform works directly through an Internet browser. Schwab participates in different electronic communications networks and liquidity pools, which may improve execution.
For more information, go to www.schwab.com/public/schwab/active_trader.
ChoiceTrade
ChoiceTrade offers software-based equity stock and option trading services to individuals and small trading firms. Customers can opt for a basic platform or pay a monthly fee for additional charting, analytic, and money-management services. Traders can opt for direct access trading, which may offer faster execution for some strategies. Some of ChoiceTrade’s platforms include mobile trading capabilities, which may be useful as a backup system.
For more information, go to www.choicetrade.com.
Cobra Trading
Started as a stock brokerage firm, Cobra now offers trading in futures, options, and foreign exchange. It has a lot of features for short sellers, such as an “easy to borrow” list that helps identify stocks that can be shorted with little market disruption. The firm offers different software platforms to suit different trading styles, as well as a web-based platform.
For more information, go to www.cobratrading.com.
E*TRADE
E*TRADE offers trading in stocks, options, and futures as well as services for active traders through its web-based trading platform. It also offers a software-based platform, Power E*TRADE Pro, with direct-access trading and customization abilities, and it has robust options trading and charting tools, too. The company also has market scanners, to help you spot when a target pattern shows up, and efficient backtesting systems. If you really want to trade from your phone, E*TRADE has platforms for that. (As I mention in Chapter 14, I think mobile trading is a bad idea.)
For more information, go to www.etrade.com.
Fidelity Active Trader Pro
Fidelity started life as a mutual fund company and continues to dominate that business. It now also offers a wide range of financial services, including online trading. Fidelity Active Trader Pro is a software-based system with lots of bells and whistles, including systems for analyzing and testing options strategies. (A web-based version is available but has less functionality.) To use Active Trader Pro, you need to place 36 trades over a rolling 12-month period; placing 120 trades over a year gets you free Level II quote access. Both levels should be a slice of cake for most day traders.
For more information, go to http://personal.fidelity.com/accounts/activetrader.
Firstrade
Designed for stock traders, Firstrade offers screeners, alerts, and commentary through its web-based trading platform and iPad app. The education features include some good advice about taxes, and community features help traders with ideas. In addition, Firstrade offers its platforms in both traditional and simplified Chinese, if you’d rather not work in English. (No surprise, Firstrade has a lot of Chinese-speaking customers.)
For more information, go to www.firstrade.com.
Interactive Brokers
Interactive Brokers offers software-based direct-access trading, with special expertise in international markets. It has options, futures, and foreign-exchange trading services, as well as trading in stocks. Traders can use a range of order types and order-management features to work complicated strategies. Interactive Brokers has a small stake in TradeStation, mentioned later in this list, and some observers think it’s just a matter of time before the firms merge.
For more information, go to www.interactivebrokers.com.
Just2Trade
Just2Trade targets equity day traders with low commissions. The company’s goal is to provide fast execution through its web-based platform, which is useful to day traders who are looking to move quickly. Its services include real-time Level I and Level II quotes at no extra fee. It doesn’t offer the analysis tools that some of the other brokerage firms do, but its system is nice and simple.
For more information, go to www.just2trade.com.
Lightspeed Trading
Lightspeed Trading specializes in low commission trades and has robust information services for day traders. It has several services for short sellers, who are often ignored. Lightspeed also offers programming and testing services for traders who want to develop their own automated trading systems that include high-frequency trading capabilities. In addition, Lightspeed promotes its webinars and tutorials to help people just learning trading or looking for order ideas.
For more information, go to www.lightspeed.com.
ScottradeELITE
Scottrade is an online brokerage that offers additional services for customers with more than $25,000 in their accounts. Under the name ScottradeELITE, it gives these customers web-based access to Nasdaq Level II and detailed Nasdaq TotalView quotes as long as they do 15 trades a month; otherwise, this access costs $15. The firm can handle stock, bond, option, ETF, and international trading.
For more information, go to www.scottradeelite.com.
SogoTrade
SogoTrade started life as a stock brokerage firm, but the company has added a lot of features for options traders. Its commissions are low: $3 for stock trades, $5 for options. The website has basic educational services, screeners, and other tools to help people get started. The platform runs in both English and Chinese, and it has Cantonese-speaking technical support, too.
For more information, go to www.sogotrade.com.
thinkorswim
Although thinkorswim began as a trading platform for options strategies, it has since been acquired by TD Ameritrade, a more-traditional discount brokerage firm, and is now TD Ameritrade’s service for active traders. thinkorswim offers a full range of products, including currency and mutual funds, on web, software, and mobile platforms. In addition to an auto-execute feature for subscribers of different trading newsletters, it has a paper-trading feature that lets you practice your trades before you commit real dollars. It also has educational programs, chat rooms, and a version of backtesting it calls thinkOnDemand that lets you do paper trading against recorded market data from a past time period to see how your strategy would work. And it has services to help traders keep track of their gains and losses, the better to simplify tax time.
For more information, go to www.thinkorswim.com.
TradeStation
TradeStation offers a huge range of services for people who day trade stocks, options, futures, and foreign exchange. A software-based system, TradeStation includes a rich set of features, especially for developing and testing trading strategies. Traders who have strong systems will like the automatic trading features that signal — and can even act — when appropriate trading opportunities occur. TradeStation’s services are especially popular with traders who like to develop their own systems and work on their own programs.
For more information, go to www.tradestation.com.
Brokers for options and futures
To effectively day trade options and futures, you need an account with a broker that has direct access to the exchanges’ electronic communications networks. Several of the full-service firms listed in the preceding section offer that service, as do the brokers listed here, which specialize in these particular markets.
eOption
If you have a good idea of what you’re doing, eOption offers very low commissions on options trading. It doesn’t have a lot of bells and whistles, either, but for some traders, that’s okay. The platform’s best feature is that the confirmation screen features the total cost of a trade, including any exchange fees.
For more information, go to www.eoption.com.
Infinity Futures
Infinity Futures offers software-based trading in the options, futures, and foreign exchange markets; it also has trading education services and access to live brokers who can answer questions. Customers can choose from several platforms, depending on trading needs. The firm particularly supports traders working in the stock index futures offered by the CME Group.
For more information, go to www.infinityfutures.com.
MB Trading
MB Trading handles stocks and foreign exchange as well as derivatives, but the company is best known for its services for forex traders. The company seems to add features constantly. The firm has both software and web platforms, training programs, community features, and customer alert settings to help you find trades that suit your system. In addition, MB Trading offers a lot of support for developers who want to build software around its platform.
For more information, go to www.mbtrading.com.
tastyworks
Once upon a time, a group of traders decided to develop a news and information series for traders called tastytrade, www.tastytrade.com. It has some great content, so people went to check it out. And the proprietors decided that they were on to something, so they developed an online brokerage platform with a different URL, www.tastyworks.com. The firm prides itself on being easy to use for all traders, from beginners to those with years of experience. Although you can trade stocks from its platform, its area of expertise is options and futures, and one of its nifty features is that you can follow the live trading of different experts affiliated with the company to help you see what traders actually do when they approach the markets.
For more information, go to www.tastyworks.com.
TradeMONSTER
TradeMONSTER is designed for options and futures traders, although this broker handles stock and mutual fund trades as well. The company offers a suite of tools to help traders do research, develop and test strategies, and refine them over time. Some of its features are wonderfully practical, like the ability to rearrange the data windows across multiple screens to suit your preferences.
For more information, go to www.trademonster.com.
Brokers for foreign exchange
The foreign exchange, or forex, market is the largest trading market in the world and offers lots of opportunities for day traders to make (or lose) money. Most forex trades take place between banks, corporations, and hedge funds directly, without the use of a broker. If you want to trade foreign currency directly, you need to use a trading firm that is tied in to these networks. Many of the brokers listed in the preceding sections offer forex. The following sections list those that do little else.
ATC Brokers
ATC Brokers is clearly a broker; it doesn’t deal for its own account. It also offers very low cost trading for forex traders who know what they want to do. It works through MetaTrader (see Chapter 12).
For more information, go to www.atcbrokers.com.
FOREX.com
Part of Gain Capital Group, which deals mostly with institutional investors and money managers, FOREX.com is designed for individual day traders. There you can download software that lets you analyze markets and place trades. The company offers a lot of educational programs and practice accounts for traders interested in foreign exchange; it also has a mobile application for those who want to trade by phone.
For more information, go to www.forex.com.
OANDA
Pronounced “O and A,” this broker specialized in foreign exchange and mostly works with corporate customers. Despite this, it has no minimum trade size, which makes it popular individual day traders, too. It doesn’t offer a lot of services, but one that stands out is its analysis of price spreads. It can work with many trading platforms including MetaTrader (see Chapter 12 for information on platforms).
For more information, go to www.oanda.com.
Being Aware of Brokerage Scams
In Chapter 12, I cover research services, including information on how to investigate and identify any potential scams. I want to revisit it here. I have reason to believe that every broker listed in this chapter is legitimate.
A lot of research and advisory services are out there, and many traders find them to be useful. The best advisors work through a brokerage account. What this means is that you don’t keep your money with the advisor, but you subscribe to the advisor’s service and execute the trades yourself. Or, you find an advisor who works with a particular broker. The advisor places the trade, to be executed in your account so that you can monitor what is happening.
Some popular platforms, like MetaTrader, are software overlays for your brokerage accounts. Instead of using the broker’s signaling and charting services, you use the platform’s — but the brokerage firm that has custody of your money executes your trades.
The use of a broker separate from the advisor is common in the money management world. You should expect it. Sure, day trading is risky, but it’s better to lose money based on your decisions rather than to have it stolen from you.
There’s a common scam that crops up every few years, and the basis of it is simple: Most day traders lose money, especially when they’re starting out. The scam artist offers a day trading advisory service, especially for new traders. You deposit your money and then trade through the service platform. The operator takes your money. You think you’re really trading, but really, you’re only paper trading. And maybe the advice isn’t all that good, so you think you lose everything and no one is the wiser.
The way these scams get caught is that those few traders who actually do make money want their cash back so that they can move up to a platform or broker with more sophisticated services, and they find out the hard way that the money is gone.
The bottom line: Look for your money to be kept with a brand-name brokerage firm. Check out stock and options brokers at http://brokercheck.finra.org and futures firms at www.nfa.futures.org/basicnet/.