The first decision to make is, do you want a full-service brokerage firm, a discount
brokerage firm, or a direct-access brokerage firm? One is not better
then the other, and what is important is that the firm and the broker fit
within the individual investor's trading style.
There are several important questions to ask a brokerage firm before
opening an account with them. Because all of the exchanges are competing
with one another, it is important for the individual investor to get the
best price. Ask the brokerage firm how it routes its order flow, and ask to
see whether it routes based on payment for order flow. Payment for order
flow is simply market makers paying brokerage firms to send their stock
or options orders to them. This technique is a cost-saving method for the
brokerage firm, which usually passes the savings on to the client (unfortunately,
however, it does not guarantee the best price for the customer).
The trader should have the choice ofwhere and how he or she wants the
order executed. Also ask what the average execution time is for stock and
options orders.
Questions to Ask Brokerage Firms
Option Questions.
1. Do they have access to all five options exchanges?
2. Do they enable you to view the options markets on all five exchanges?
3. Do they enable you to choose on which exchange you want to execute
your option order?
Stock Questions.
1. Do they offer SelectNet?
2. Do they offer access to multiple ECNs, and to which ones?
3. Do they offer access to SOES?
4. Do they offer access to DOT or SuperDOT?
Then, ask them to expound on other advantages that they might offer
to the individual investor.
At this writing, we found only three direct-access brokerage firms that
gave the investor the access to view the option markets on all five exchanges
and that gave them the choice of where to route his or her options order.
These brokerage firms are as follows:
- Preferred Capital Markets
- Mr. Stock
- Interactive Brokers
As individual investors become educated as to the benefits of options,
more brokerage firms will give more access to the multiple option exchanges.
When the individual investor decides what type of trader he or she
would like to be, the investor must then decide whether he or she wants
to trade directly within the marketplace or whether he or she would like
to have the comfort oftrading with a knowledgeable broker. The DAT has
no choice in the matter and usually does not have a broker, because this
style oftrading requires the DAT to trade directly with the market (hence
the name direct-access trader). As for other styles of trading, whether it
is investing, technical, or position trading, the trader has a choice and can
use a broker. There is no right answer to this question; rather, it is only
relevant to the comfort zone of the individual investor.
If the individual investor decides to use a broker, he or she should
investigate the broker. The broker plays a crucial role and is responsible
for executing your trades. Before, online trading investors had no choice
but to use a broker; therefore, brokers were only required to know how to
execute the trades. Now, brokers are competing with online brokerage
firms and need to offer something more than just brokering tickets. Many
brokerage firms have realized the value of education on the use of the
many products that are available to the individual investor and are educating
their brokers to help individual investors. Here are some questions
that we suggest you ask a broker to help decide whether he or she will be
able to handle technical or position trader questions. Remember, he or she
will be part of your team, and you want to make sure that he or she
understands what your goals are and your level of knowledge.
We first suggest telling the broker what style oftrader you are (whether
you are an investor, technical, or position trader). Then, ask the broker
some questions:
1. Does he or she understand the four market outlooks?
2. Is he or she knowledgeable about synthetics and their use?
3. Does he or she know about intrinsic versus extrinsic values?
4. Can he or she route order flow to the exchange ofyour choice?
5. Does he or she understand most or all of the Greeks?
6. Does he or she understand the strategies that you wish to employ?
7. How long has he or she been a broker?
8. Can he or she offer alternative strategies based on your market outlook?
9. Does he or she understand risk management?
10. What style of trader would he or she be?
Always be polite to the broker, because he or she will be a valuable
part ofyour team. It is important for you to make sure that this person is
someone with whom you are comfortable working.
Read More: The Brokers and Brokerage Firms
