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