Direct Access Broker
Advantages & Disadvantages

Direct Access Broker Advantages and Disadvantages depends on your trading goals.  This all becomes evident as you continue your study of this page.

This is the newest type of broker, providing direct access trading via the web or via special software that is downloaded to your computer creating a Desktop...

Either way, Direct Access Trading (DAT) gives the trader the ability to trade securities directly with financial markets.

How many financial markets are available to you, and the depth of information provided, depends on what the broker offers, how much you are willing to pay, and your qualifications.


With DAT, you can

  • bypasses the retail broker.
  • obtain almost instantaneous executions with a software based trading desk.
  • have access to a Level 2 or Nasdaq Total View powered trading desks, and smart trading software that resides on the broker site and/or on your computer.  The options depend on your broker and on you.

Direct Access - Internet Version

While brokers do offer a web based version of direct access trading to the financial markets, this kind of connection is slower and unpredictable. Thus web based direct access trading is defeating the purpose of true direct access trading.  

 

If you are a day trader or if you are a frequent trader using time sensitive strategies, I would avoid web based direct access trading.  

 

If you are a penny stock trader, you need not be concerned with direct access trading (DAT) and certainly not the internet version of DAT.  

Why?

  • You are not trading in fractions of a percent profit range.  
  • Your trades are not so time sensitive that you can't spare 2 to 6 seconds for the time it takes your order to be executed by a good online discount broker.  
  • If your broker executes your trades within 6 seconds or less, then the internet version of DAT is no improvement, and is more complicated then what you require to trade the extraordinary way.


Direct Access Clients - Day Traders

The clients of direct access brokers are mainly day-traders.  These types of traders require full control of their trading on a stable high speed desktop, and at the fastest execution speeds possible - within milliseconds.  

Direct Access Trading means the retail trader can now become his/her own broker in practice - placing trades directly with any one or more ECN's, stock exchanges, OTC Dealer, with broker-dealers, or even Black Pools.  

Smart programmable algorithmic trading software is able to screen all these various financial markets for the best price of your target stock within the technical perimeters you programmed into the software - all within several seconds.

How many ECN's or Black Pools available to you depends on the broker and on your qualifications and trading goals.


What does "full control of their trading" mean?

With a Direct Access Broker, you can choose to trade directly with:


ECN's (Electronic Communication Networks)  

No identities of traders are revealed, so you are all equals trading on an ECN whether you are retail trader, broker, broker-dealer, specialist, firm, novice, pro, etc.  All trader ID's are anonymous.  All you can see are the trades taking place.


Black Pools

Black Pools are types of ECN's, and are similar to ECN's, with one major difference...  

Black Pools are closed systems (Private). Trading within Black Pools is totally anonymous in that all traders, and their trading, cannot be observed.  

The public markets are unaware of the trades that occur within Black Pools.


Auction Markets 

You can trade directly on auction markets (For instance: NYSE, NYSE MKT), with a DMM (Designated Market Maker or Specialist) - only one Specialist in charge of each stock).


Broker-Dealer networks  

You can trade directly using Level 2, or SuperMontage Total View, with any number of Market Makers (broker-dealers) in charge of your target stock of interest on the broker dealer markets.

The Nasdaq family of securities, OTCBB and Pink Sheets are broker-dealer markets.   


Discount Brokers overlap into Direct Access Trading

Increasingly more discount brokerages are also offering direct access trading as an option with different pricing structures and trading desks for each.

The Better Brokers offering genuine Direct Access Desktop Trading are listed below:

  • Interactive Brokers - IB (Trader Workstation - TWS)
  • TD Ameritrade (Thinkorswim)
  • E-Trade (Pro-Elite Platform)
  • Scottrade (ScottradeELITE) 
  • DASINC (DAS-PRO)
  • CHARLES SCHWAB (StreetSmart Edge)

Benefits of Direct Access Trading 

Direct Access Trading is clearly advantageous for Day-traders (retail or wholesale) and another type of day-trader called: algorithmic trading firms (mutual funds, broker-dealer firms, mega-trading firms).  


About Day Traders

Day traders make many trades per day and thousands of trades per year.  

Many day-traders major or specialize in one or two of the following types of day-trading activity: 

scalpers:  take advantage of nano-trends making fractions of a % in many cases on high volume, highly leveraged trades.  Algorithmic traders are a type of very sophisticated scalper in that they almost simultaneously buy and sell a certain stock within millionths of a second taking advantage price differences of that stock between the various financial markets, the difference being their profit.

momentum traders are trend traders - they screen for, target, and then attempt to capture profits off of a quick trend already in progress, with most such trades terminated within that day. 


Momentum traders fall into three major categories:

swing traders:

Screen for and target rocket stock trends already in progress mainly using technical data.

 

fundamental day traders (event/news based):  

These traders screen the news releases for tiny rocket trends, and trade one to many of these trends per day for tiny profits on high volume and high leverage (margin).

 

algorithmic traders: 

These traders use *highly sophisticated, *smart, *algorithmic trading software to execute trades within millionths of a second hundreds of times per day.

*highly sophisticated: complex programming

*smart: able to learn and improve performance over time based on the original perimeters set by the programmer/trader.  Also, able to scan all the appropriate exchanges, ECN's and Black Pools for the best price in a fraction of time) 

*algorithmic: highly advanced automated mathematical model programs that trade tiny trends hundreds to thousands of times per day.


Why is Direct Access Trading so advantageous to day traders and algorithmic traders?

Direct Access Trading is so advantageous because...

  • extremely fast speed of trade executions (within millionths of a second) in and out - essential to trade fractions of percent moves on minute trends in progress.
  • of the streaming real-time quotes, charts and stock information.
  • of the complex technical indicators displayed on charts in real time.
  • the trader has full control of your trading on the markets.
  • a trader can minimize costs if volume trading due to volume discounts.
  • a trader can minimize costs if trading under 1000 shares per order.
  • a trader can minimize broker costs, by taking advantage of ECN rewards for adding liquidity for that stock - creating a buy or sell limit order that is hopefully filled when the right price is hit.
  • Smart Order Routing software automatically scours multiple financial markets (Nasdaq, NYSE, NYSE MKT, numerous ECN's, and even regional exchanges) - wherever your stock trades - to locate the best price for your target stock within seconds.
  • Intelligent Programmable Algorithmic Software that you can input your strategy to locate stocks.  
  • a trader can view the depth and history of trading for that stock on a number of price levels.
  • a traders Smart Algorithmic software can be programmed to learn to become more efficient over time to achieve the desired result and then automatically place trades for you. 

The downside is that such software does not always work as hoped due to market manipulation by broker-dealers. 

This creates false signals.


The typical fee structure for an active day trader

Day-trading desk/platform is free to as much as $200 per month depending on broker, volume of trading, account balance, sophistication of trading desk, market depth information.  

I would not day trade without a highly sophisticated smart routing, programmable, algorithmic trading platform.  

The cost is more, but the risk of failure - which is great - depends on it. The greater success of your trades should pay for the greater monthly cost of such a platform.  

The Direct Access Brokers I listed earlier on this page have some of the best trading desks and services for the money.


ECN Fees

Such fees are hard to determine, but will be less than if you trade using a direct access broker that charges a flat fee average of about .004 or .005 cents per share - which is common.  1000 shares X .004 = $4 per trade.  

$4 per trade may seem low for the average trader, but for a day-trader making thousands of trades per year, the cost is prohibitive.

Many ECN's charge far less than .004. Some ECN's don't charge at all.  

Additionally, many ECN's will reward, give you credit, if your trade is a limit order that is filled at a later time.  Such orders add liquidity to the stock, which is beneficial to the ECN.  

Such generous discounts and credits are eliminated if you go with a flat fee direct access broker.  


Direct Access Broker - Flat Broker Commission

Some direct access brokers also charge a flat commission to place trades on a direct access trading desk.  The best flat commission direct access broker is TD Ameritrade using their Thinkorswim trading desk - a $9.99 flat commission per trade. 

This flat commission is advantageous for the penny stock trader or even a day-trader who trades over 10,000 shares per order.


Direct Access Brokers are disadvantages to the following types of traders:

  • Inactive traders
  • Penny Stock Traders (including Extraordinary Investors)
  • Long-term investors
  • Novice traders

Why are Direct Access Broker disadvantageous to these types of traders?

  • Direct Access Broker fees: They charge inactivity fees and trading platform fees.  These costs can easily add up to hundreds or thousands of dollars per year for inactive traders and long-term traders.  Keep in mind that the direct access broker caters to day-traders and frequent traders.
  • Novice traders will find it difficult to learn how to trade direct access.
  • Prohibitive Trade Costs for Extraordinary Investors and other penny stock traders trading a larger numbers of shares for pennies per share.

 

Penny Stock traders typically purchase over 50,000 shares at a time at a small price per share.  50,000 shares X .004 cents ECN Fee = $200 per trade round trip.  Compare that huge cost with paying only a $5 flat fee for a round trip trade, with no inactivity fees, no maintenance fees, no trading desk fees when using a discount broker.

Even if the broker charges an ECN fee of .002 cents with rewards and discounts, that is still $100 round trip for 50,000 shares.  


TD Ameritrade's Thinkorswim and Penny Stock Trading

If you are a penny stock trader and desire the benefits of direct access without having to worry about all the ECN fees, etc, then TD Ameritrade's Thinkorswim Desktop is the best.  

  • One flat fee of $9.99 for trading all stocks, even penny stocks. 
  • No maintenance or inactivity fees or volume limits or requirements.  No platform fees. No extra fees for trading penny stocks.  
  • Free streaming real-time quotes.  
  • Free Level 2 quotes.  
  • Thinkorswim is the very best stable platform in the industry.  

Thinkorswim has a big learning curve - difficult to figure out.  Why? Because Thinkorswim has so many features packed into a small area, and many of features are hidden.

To ease the learning experience, TD Ameritrade does offer adequate instructions and videos.  Still, learning this takes time.

TD Ameritrade is an excellent brokerage firm with few complaints. The major complaint being that TD Ameritrade restricts trading on what it feels to be unusually risky penny stocks. They do this to protect their clients.  

You can still place orders on those restricted penny stocks, but must be done by phone.   

This is the only Direct Access Trading Desk I recommend for even Penny Stock Traders, because you get the benefits of direct access trading such as: quick execution and fills on orders, Free streaming real-time quotes, Free Level 2 quotes, plus Free streaming real-time trading tools and charts of your stocks all for just one fee of $9.99 per round trip trade.  No inactivity fees, No extra penny stock fees, No limit on order size.  

The negative side is that, as an extraordinary investor, you do only require a basic trading desk.  Thinkorswim is a top of the line, but offers far more than what you require that can make trading more complicated than it need be.  

As well, as a cautious trader with winning strategies, I do not like being restricted on the types of penny stocks I trade.


NOTE to active day traders / ThinkorSwim

Day traders can ask TD Ameritrade for an active trader discount on the $9.99 per trade.  However, very active professional day-traders trading thousands of times per year with stock orders of 1500 shares or less may find that they will pay far less in fees by trading directly with ECN's.  

ECN's do offer trade volume discounts on top of rewards by adding liquidity which together practically eliminates trading fees for each trade.  

So your trading requirements influence the type of direct access broker you will require to maximize profits for you.

You have now completed this subtopic called:

Direct Access Broker


When you are ready please continue to the next lesson:

Online Broker