How to Choose Your Simple Day Trading Broker

stock-broker-screen

On the road to day trading consistency there are many decisions to be made.  One of the most important, but often least considered/researched is what brokerage firm to use.  Very often new day traders try to leverage existing brokerage relationships (and paperwork) by simply using their E*Trade, Schwab, etc. account to wade into the day trading arena.

Big mistake.

Day trading is a specialized pursuit.  Of course, it requires dedication from you the trader, but also from any vendor you might engage.  A broker who uses it purely as an opportunity to run more volume through their own commission pipe without committing the proper resources is simply limiting your potential to succeed.  It would be like an agent associating with a real estate firm that hasn’t yet embraced technology and then trying to compete with agents of firms that have not only embraced technology, but who also leverage it effectively to better serve 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 basing your 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 could prove to be the difference between success and failure.

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.

The 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 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 primarily concerned with the Emini here.

 

  • Broker 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.
  • Broker length of time in business You are effectively a startup.  You need to leverage the resources and experience of a long running entity as your broker partner.  Just as you shouldn’t trade a security 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… certainly for your first account anyway.
  • Customer service/support Another of the pivotal considerations.  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 from experience.  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.
  • Degree of specialization The desire to be all things to all traders afflicts a great many brokers.  However, it’s a killer for you as a direct access trader.  The be all 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 both the security you trade along with the day trading styles of trading.  For example, you can trade virtually any tradeable security on the globe through Interactive Brokers.  Can you imagine what kind of technological load that is?  Now compare that to a Chicago based electronic futures broker that focuses on just that market.  Who’s systems are going to be under more strain?  I rest my case.
  • 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.
  • Reputation in the day trading community Traders talk.  You should listen.  You should also google the brokers 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 just look for brokers with the fewest and most minor complaints to the extent that they have any.  Most important, make sure they’re not operating in bankruptcy, or under indictment or some such nonsense.  Bottom line… just make sure any broker you choose has a long standing reputation of being above board.
  • Margin rates $500/contract margins is about right these days.  Much less and you should be worried about the viability of the firm… They might be “trying too hard” to lure customers.  If they require much more (required by them… not your own heightened requirement) and you should be worried about the viability of your day trading career.  Relatively low intraday margin leads to accelerated increases in buying power which in turn accelerates the speed at which you can compound your account.
  • 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 (largest volume) 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.

These are, of course, not your only considerations.  I did not set out to create an exhaustive list.  That said, it is a great core list by which to evaluate each of the brokers you’re contemplating.

For Your Consideration

Here are 2 brokers for you to evaluate.  There were 3, but I recently closed accounts with the 3rd (trying too hard… lowering minimum initial accounts and margins too much), so don’ feel comfortable suggesting them even for you to investigate.  With one of these I have extensive experience.  The other has a good reputation as far as I know.  And no I won’t tell you which is which…

Investigate for yourself.

Advantage Futures

Infinity Futures

Interactive Brokers – this more for stocks, ETFs and swing trading/TrInvesting™.

I would say good luck, but you don’t need it.  Use the list and a bit of common sense and you’ll be fine.

KIS,

The Trader