Daytrading with 'Discount' Broker versus Direct Access Electronic Brokers
For the sake of this post, I'll define discount brokers as firms that sell their order flow to market makers. This would include firms such as Fidelity, E-trade, Ameritrade, etc. Direct Access firms, by contrast, provides direct access to SOES, SelectNet, and one or more ECNs to their traders and do not route any orders through a third party.
Advantages of Direct Access Firms
1) Typically provide Level II data to allow the trader to 'see' the depth and size of the market in the stock.
2) Enable extremely fast placement and routing of orders. SOES orders can be filled in less than 3 seconds, and ISLD orders can be filled in less than 0.5 seconds.
Disadvantages of Direct Access Firms
1) All orders are placed in the 'real world' and are subject to the whims of the marketplace. Fast order placement is useless if not accompanied by subsequent order executions. It can be very difficult to get your orders filled. See post referencing 'Liquidity'.
Advantages of Discount Brokerage Firms
1) Many traders report better executions through discount brokers than they could have achieved on their own. You market order or limit order is routed to a market maker. During normal times, the market makers computer is set for "auto-execution" meaning that your order will immediately be filled.
2) Often you may be able to get an execution buying (selling) at the inside ask (bid) for 1000 or 2000 shares, even when the size of the inside ask (bid) is only 100 shares. In other words, increased liquidity may be possible.
3) Sometimes, discount brokers will give you price improvement at prices in between the inside bid or ask.
4) Discount brokers often offer cheaper commissions than daytrading firms.
Disadvantages of Discount Brokerage Firms
1) During volatile times, a stock can be taken off of "auto-execution". When this happens, all orders in this stock are filled manually, subjecting the investor to much slower fills and the potential for surprisingly adverse fills when the stock is moving in the wrong direction. On the day after Thanksgiving 1998, many discount broker customers placed orders to sell shares of a popular stock at prices of 90 - 95 as the stock was dropping rapidly. 15 minutes later their fills came back at prices as low as 50!
2) Order cancellations may not come back in a timely manner for stocks that are not on "auto-execution". |
