Bull Investors.com - Direct Access Broker

Direct Access Broker

When you use a direct access broker to place your order, your order gets sent DIRECTLY to the market. This leads to much faster executions than you achieve with an online or full-service broker. When you send an order using an online broker (like E*Trade, Ameritrade, Charles Schwab, TD Waterhouse, etc.) you are working through a web interface (your broker's website on the Internet) which is much slower than a software interface (like RealTick) that is installed on your computer. After you log in to your online broker's website, every time you want to buy or sell a stock you have to manually enter the ticker symbol, number of shares, type of order, limit price if its a limit order, and then press the send button. With a direct access trading system like RealTick, you simply click on a price that you want on level II of a stock that your are watching and it automatically appears as the price you want to buy or sell. Furthermore, you can also have a default trade size of say 1000 shares so that you rarely have to type the number of shares that you want every time (unless is different than 1000). After that, you simply press the buy or sell button to send the order. This process saves you a lot of time entering the order. (To day trade currencies you don't need a direct access broker. You just need a special online trading system that works just as well.

When you click the "send" button to send the order via an online broker, you are taken to a separate page on the broker's website (which must finish loading first for you to see it ) that gives you the details of the order that you are about to send, and asks you again if you really want to send your order. If you do, you click would click the "send" button again and your order will be send to your broker. With a direct access broker trading platform, when you send the order you are not taken to a separate page, but remain where you are so that you could continue tracking the market and your stocks. If you don't want to be asked whether or not you really want to send your order after you click the buy or sell button, you can set this up via the software (even though I recommend that beginning traders at least enable a small pop-up window giving them the details of the orders that they are about to send - this reduces the number of mistakes that beginning traders make).

When you finally send the order to your online broker, you are actually emailing the order to the broker who then executes the order by sending it usually to a market maker (who gives the brokerage firm a rebate - payment for order flow), who then executes the order himself (you cannot tell the broker "where" to send the order if you are using an online or a full-service broker). This multi-step process takes time and can cost the investor or trader a lot of money (much more than the commission that the investor pays the broker). By losing time, the investor loses control of his trading which is a big disadvantage. The trader also has to go to a different section of the online broker's website to see if and at what price the order was executed. He must then proceed to hit "Refresh" (or "Reload") on his web browser until the order information is displayed. This data can take several minutes to post if the broker's website is very busy that day (I know of many cases where the order was executed but the data was not posted on the broker's website, forcing the trader to call the broker via the phone).

With a direct access trading software like RealTick, once the order is sent it goes directly to the market. If there are shares available at the specified price, the order is executed in a fraction of a second and the confirmation is displayed instantly in a pop-up window, without any interaction required from the trader. Everything is done automatically, allowing the trader to spend his time watching the market, which is how he finds trading opportunities and makes money. The trader also chooses the ECN or market maker that he wants to send the order to. Since he has access to level II (and sees all the available prices for each ECN and market maker), he can send the order where he thinks he is most likely to get the best price. This results in frequent price improvement relative to online executions. For example, if an investor obtains a 0.10 improvement in price in a trade of 1000 shares, that the investor is saving $100 in the transaction. This can be very significant for active traders who make 50 or more trades in one month. The benefit of having multiple places to send the order goes beyond mere price improvement. In an emergency situation (when everyone wants to buy or sell a stock at the same time), a trader with direct-access can get out of or into a stock a lot easier than the typical online trader can. This is because, since the online trader cannot choose where his order is sent, it will probably get sent to the traditional route that most online brokers are using at the time (like to the market makers), leaving the trader waiting behind a long line of orders that arrived before him and with a high probability of getting a horrible price. On the other hand, a trader with a direct access trading system can use a nontraditional route to sell a stock and avoid a an unnecessary loss (while everyone else panics). Likewise, he can buy a stock a lot easier than the online trader if everyone is trying to buy the stock at the same time (before the run up in price is over). In conclusion, using a top-of-the-line direct access trading system like RealTick can give you a lot more control in your trading, and the cost savings that a trader would realize from using it will more than pay for the actual cost of the software.

Commissions and Fees of a direct access broker

That brings me to the next point which is the commission and fee structure of brokers that offer a direct access trading system like RealTick. Most people are used to an online broker, who charges commissions anywhere from $5 to $30 a trade. There are even some online brokers who don't even charge commissions. Wow! No commissions! How could they do that, you ask? The reason is that they only allow you to place market orders and make money off your trade. However you want to look at it, you always get what you pay for. Furthermore, from the earlier explanation it is obvious that the hidden cost of trading online is much greater than the actual commission amount that the online broker charges. The actual commission paid is meaningless if the quality of execution is poor. A trader's greatest concern when selecting a broker should be the "quality of execution," not the actual commission paid.

Most direct access brokers charge commissions based on a scale. The more transactions (trades) a trader makes, the lower the commission per transaction. Commissions can typically range from $15 to $25 per transaction depending on the broker. The trader must also pay the fees charged by the individual ECNs. This fees are added to the commissions. Consequently, the normal commission plus the ECN fees would normally be somewhere in between $15 to $35 a transaction (again, depending on the broker). The local broker I work with in Miami is in the lower end of this range. These commissions are about the same as those of the typical online brokers, with the added benefit that when you use a reliable direct access broker, the quality of your executions is much, much greater.

The last fee associated with doing business with a quality direct access broker is the software fee. The maker of RealTick (Townsend Analytics) charges the broker about $250 to $300 a month. The broker passes this cost to the trader if the trader does not make a certain number of trades in the month. The actual number varies from broker to broker but can be generalized as ranging from 50 to 300 trades a month. For example, the broker I work with waives the $300 a month fee if the trader makes at least 50 total trades in one month. A trader that is starting out will easily make 2 or 4 trades in one day. For example, if the trader buys and sells a stock in the morning and then buys and sells a stock in the afternoon, he already has 4 trades executed for that day. Assuming that there are 20 trading days per month (sometimes there are 21 or 22), 4 trades a day represent 80 trades per month. So, most of the times, the broker will pay the software fee himself. Even though there are direct-access software packages out there that cost less than $300 a month, I believe that RealTick is by far the best and is well worth the $300.

In conclusion, using a direct access broker to trade stocks is by far the best decision an investor or trader can ever make. Direct access trading has commissions that are approximately the same as those seen in the world of online brokers, but offers superior quality of execution in the form of price improvement, much faster executions, and greater control in order routing.