07 June 2020

How To Choose Your Simple Day Trading Brokerage Firm - Don't Ignore These 8 Things


"Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid."
Albert Einstein
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On the road to trading consistency, you must make many decisions. One of the most important, but often least considered/researched is what brokerage firm to employ. Very often new traders try to leverage existing brokerage relationships (and paperwork) by using an existing E*Trade, IB, Schwab, etc. to wade into the day trading arena.

Big mistake.

Day trading is a specialized market activity. It requires dedication from you the trader, but also from any vendor you might engage. A broker who approaches day trading as an opportunity to run more volume through their commission pipe without committing the proper resources is simply limiting your potential to succeed. It would be like a real estate firm that hasn’t yet embraced technology trying to compete with a firm that has not only embraced it but also leverages it on behalf of the firm's agents and, ultimately, clients.

For example, to be fair, if you’re looking to only trade once a day using the hourly (or higher) timeframe, you likely don’t think latency (data and execution lag) is something you need to worry about. 

Trust me, it is. 

While you might be basing your S&P Emini [ES] trade decision on a high timeframe (the hourly), you’re using the “right now” timeframe for entry/exit triggers and the actual execution. At $12.50/tick, a lag of a couple of seconds could cost you… big. Over lots of days (executions) that cost might prove to be the difference between success and failure... between profitability and lack thereof.

Further, even if your trading style allows for a modicum of time lag in your data, does your traditional broker answer the phone when you call in, or do you go into an endless digital queue?

These things and others matter my bright-eyed, newbie friend. Don’t handicap your chances of success by making the brokerage decision lightly.

Selection Criteria

So now that you understand and appreciate the importance of choosing your broker well, let me suggest some criteria to consider as you wade through the vast number of brokerages happy to take your initial deposit. FYI, I day trade the S&P Emini [ES] so this list of criteria reflects as much. Most of the points apply to brokers of stocks, fx, options, etc. as well, but be aware that I am singularly concerned with the Emini here.

1) Capital Base 

 I think this is arguably the most important criteria. In the trading business (just as in all business), the all-important metric is ROI. But the acronym stands just as well for Return OF Investment as it does Return ON Investment. A thinly capitalized brokerage firm can literally be taken under in times of tremendous volatility. In fact, a broker with technically legal, but practically insufficient reserves can be destroyed by a single rogue trader or employee even faster than a big bank. Make sure you understand and monitor the financial position of your broker of choice.

2) Time In Business 

Your trading business is, effectively, a startup. You need to leverage the resources and experience of a long-running entity as your brokerage partner. Just as you shouldn’t trade a stock with only a short chart history and/or one that “trades by appointment” (meaning it trades very little volume), so too should you avoid signing up with a relative newcomer to the world of brokerage… certainly for your first account anyway.

3) Customer Service/Support 

Another pivotal consideration. As I mentioned above, as a day trader, you need a broker who answers the phone. Period. No voicemail… no digital queue... Things happen… Your electricity goes out... Your computer(s) die... Your internet blinks... Your internet crashes… I’m not telling you what I think. I’m telling you what I know because each of those things (and more) has happened to me. Your 1 saving grace in any of those instances is a charged mobile phone with your broker’s direct number… and a broker who picks up the phone.

4) Specialization 

The desire to be all things to all traders afflicts a great many brokers. It’s a killer for direct access traders. The be everything brokers are supplying data and execution for an enormous number of securities. Just from a load perspective, it’s better to deal with a broker who specializes in your security. Less competition for the data pipe. And more development for your security. For example, you can trade virtually any tradeable security on the globe through Interactive Brokers. Can you imagine what kind of data load that is? Now compare that to a Chicago based broker that focuses on the domestic futures market. Who’s systems are going to be under more strain? I rest my case.

5) Software Platform/Technology 

Trying to trade using a system designed for swing trading stocks to day trade index futures is like trying to stay on the Nascar track against pros driving your 1992 get out and push… doesn’t work. While it’s certainly possible to overdo it on this front (don’t bring a bazooka to kill an ant), there are minimum levels of technological advancement and maintenance required to be in this game. Use the platforms provided by other brokers to benchmark any broker you’re considering. Remember, the number of bells and whistles is not important… but it has to have the basics. Don’t worry… you will come to understand what constitutes basics as you examine brokers… and if you don’t you can always ask me.

6) Reputation 

The firm's reputation in the day trading community Traders talk. You should listen. You should also google each firm you're considering. Check SEC.gov, FINRA, and the Better Business Bureau. You don’t need them to be “perfect” (Internet Trolls would never allow that anyway). You should be looking for brokers with the fewest and most minor infractions to the extent that they have any. Just make sure any broker you choose has a long-standing reputation of being above board.

7) Margin Rates 

$500/contract margins are about right these days. Much less and you should be worried about the viability of the firm… Much more (required by them… not your own heightened requirement) and you should be worried about the viability of your day trading career.

8) Commission Rates 

I have commission rates dead last to make a point. Most people would list commission rates as first because it is a true and visible cost of doing this business. However, your job is to trade in such a way that accounts for the need to pay for transactions. The initial rate nowadays for most shops is $5.00/Round Turn (trading in and out of a single emini contract). At 12.50/tick, if your trading strategy/skill is any good at all, you won’t have to worry about commission costs. In fact, your goal should be to become one of your brokers' biggest accounts. This will get you better service from the broker and interestingly enough, make it much easier for you to bargain for lower commission rates...eventually.

That’s it. Pretty simple actually.

Keep these things in mind as you evaluate potential brokers and you should have a good start on your way to trading success.