A few observations on why use direct access vs. discount broker (web broker). I daytraded for a long time (3 years) using discount brokers (Schwab 500, and ETrade), before starting with direct access about 2 1/2 years ago. I agree that there is merit to considering both approaches carefully before leaping at one or the other. Speed of fills has already been mentioned as a direct access advantage. Another (big) reason for going to direct access: by placing your order directly to the proper ECN (IF you set the limit price properly and time the order exactly right) in many cases you can end up Buying near (or on) the Bid, and selling near (or on) the offer... in effect, "making" the spread, which can overwhelm and compensate for the higher commissions. This can happen "by accident" with discount brokers (using limit orders) and often on NYSE (listed) stocks; however using Level II and direct access, I enter and exit the majority of my trades this way. It more than makes up for the difference in cost and complexity.
On the other hand, using a simple discount broker setup as the method to place your orders keeps you focused on the result vs. the method/technology, and often you can get some very good fills with much less hassle/overhead. The biggest problem I've found in trying to daytrade this way, is dealing with "fast market" conditions. With a web-broker, when they are likely turn off 'auto-execution' at these times, and give you their finest "come in to our parlor" fills. For example, one morning early this year when "Brazil news" hit, YHOO gapped down big(on the open) many points (meeting some setup criteria I look for) and I immediately BOUGHT it on the ARCA ECN 1 point above the opening price (it proceeded to scream upwards 30 points in a few hours). On Schwab's website, I entered a market order at the same exact time, and was filled (was left hanging, and got the news 45 minutes later) 10+ points up (I later was able to negotiate that fill down 5 pts with them, they are a very honest outfit when it comes to things like that). But, that is typical of what can happen.
The biggest advantage of trading with a web-based discount brokerage is that it keeps things simple (KISS), so you can focus on the IMPORTANT things like technical analysis and selecting entry and exit points, risk control, and tracking your equity curve progression. As a rule of thumb, if your trading style leads you to trade more than 5-10 times per day, you're a good ECN candidate. Less than that, I'd recommend sticking with the web / discount brokers.
Moving on to a finer point, the biggest thing about trading with LII and ECN's is, it provides you with the tools to become exceedingly agile. With LII and direct access, it's much easier to jump in and out of a stock. With a web broker, you're more likely to ride something or get stuck in it. On a direct access interface, I might jump out of something twice with just a 'nick' before getting back in to ride it for a bigger move. So having direct access can allow you to watch things more closely and keep your losses very small - which are obviously some of the major keys to short-term trading success. Having direct access is no guarantee you'll use it that way, though - it has to be integrated into your trading style!
Good trading, -Steve |
