When you use a direct access broker to place your order, your order gets sent DIRECTLY to the market. This typically leads to faster executions than you can achieve with an online or full-service stock broker.
When you send an order using an online broker (like E*Trade, TD Ameritrade, Charles Schwab, etc.) you are usually working through a web interface (your broker’s website on the Internet) which is much slower than a software interface (like RealTick for stocks or MetaTrader 4 for currencies) that is installed on your computer.
After you log in to your online broker’s website, every time you want to buy or sell a stock you have to manually enter the ticker symbol, number of shares, type of order, limit price if its a limit order, and then press the send button.
With a direct access trading system like RealTick, you simply click on a price that you want on level II of a stock that your are watching and it automatically appears as the price you want to buy or sell. Furthermore, you can also have a default trade size of say 1000 shares so that you rarely have to type the number of shares that you want every time (unless is different than 1000).
After that, you simply press the buy or sell button to send the order. This process saves you a lot of time you would normally spend on manual order entry (To trade currencies, you need access to a special trading platform as well. Click on this link, to learn more about the advantages of trading currencies over stocks).
When you click the “send” button to send the order via an online broker, you are usually taken to a separate page on the broker’s website (which must finish loading first for you to be able to see it) that gives you the details of the order that you are about to send, and asks you to confirm if you REALLY want to send your order. If you do, you would click the “send” button again and your order would be sent to your broker.
With a direct access platform, when you send the order, you are not taken to a separate page, but remain in the same place to continue tracking the market and watching your stocks.
If you don’t want to be asked whether or not you really want to send your order after you click the buy or sell button, you can set this up via the software (even though I recommend that beginning traders at least enable a small confirmation window that gives them the details of the orders that they are about to send – this reduces the number of order entry mistakes that novice traders typically make).
When you finally send the order to your online broker, you are often times “emailing” the order to the broker who then executes the order by usually sending it to a third party known as a “market maker.” This market maker gives the brokerage firm a rebate also known as payment for order flow, and then executes the order himself (usually, you cannot tell the broker “where” to send your order if you are using an online or a full-service stock brokerage firm).
This multi-step order execution process takes time and can cost the investor or trader a lot of money (much more than the commission that the investor pays the broker).
By losing time, the investor loses control of his trading, which is a big disadvantage. The trader normally has to go to a different section of the online broker’s website to see if and at what price the order was executed. Then, he might have to proceed to hit “Refresh” (or “Reload”) on his web browser until the order information is displayed. This data can take several minutes to post if the broker’s website is very busy on a particular day (I know of many cases where the order was executed, but the data was not posted on the broker’s website for quite some time, forcing the trader to call the broker via the phone to confirm the details).
With a direct access trading platform like RealTick (or a platform like MetaTrader 4 for currency trading), once the order is submitted, it goes directly to the market. If there are shares available at the specified price, the order is executed in a fraction of a second and the confirmation is displayed instantly in a pop-up window, without any interaction required from the trader. Everything is done automatically, allowing the trader to spend his time watching the market and trying to make money.
With direct access, a trader also chooses the ECN or market maker that he wants to send the order to (not necessary with currencies when using some systems). Since he has access to level II (and sees all the available prices for each ECN and market maker actively trading the stock), he can send the order where he thinks he is most likely to get the best fill. This could result in frequent price improvements relative to online executions.
For example, if an investor obtains a 0.10 improvement in price on a trade of 1000 shares, that investor is saving $100 in the transaction. This can be very significant for active traders or scalpers who make 50 or more trades in one month.
The benefit of having multiple places to send the order for stocks goes beyond mere price improvement. In an emergency situation (when everyone wants to buy or sell a stock at the same time), a trader with direct access might be able to get out of or into a stock a lot easier than the typical online trader could.
This is because, since the online trader cannot choose where his order is sent, it will probably gets sent to the traditional route that most online brokers are using at the time (like to the market makers), leaving the trader stuck behind a long line of orders that arrived before him and with a high probability of getting a horrible price.
On the other hand, a trader with a direct access system might be able to use a nontraditional route to sell a stock and avoid slippage (worse price fill due to delays while everyone else panics). Likewise, he might be able to buy a stock a lot easier than the online trader if everyone is trying to buy the stock at the same time (before the run up in price is over).
In conclusion, using a top-of-the-line direct access platform like RealTick can give you a lot more control in your trading, and the cost savings that a trader will realize from using it may more than pay for the actual cost of the software.
Commissions and Fees of a Direct Access Broker
That brings me to the next point, which is the commission and fee structure of brokers that offer a direct access trading platforms like RealTick.
Most people are used to an online broker, one who charges commissions anywhere from $5 to $30 a trade. In the past, there have even been some online brokers who have chosen not to even charge commissions. Wow! No commissions! How can they do that, you ask?
The reason is typically that they only allow you to place market orders and make money off your trade. However you want to look at it, you usually get what you pay for. Furthermore, from the earlier explanation, it is obvious that the hidden cost of trading stocks online is typically much greater than the actual commission amount that the broker charges. The actual commission paid is meaningless if the quality of execution is poor.
That’s why a trader’s greatest concern when selecting a broker should first be the “quality of execution;” then the actual commission paid.
Most direct access brokers charge commissions based on a scale. The more transactions (trades) a stock trader makes, the lower the commission per transaction. Commissions can typically range from $15 to $25 per transaction depending on the broker. The trader must also pay the fees charged by the individual ECNs. These fees are added to the regular commissions. Consequently, the normal commission plus the ECN fees will normally be somewhere in between $15 to $35 a transaction (again, depending on the broker and the amount of shares traded).
These commissions are about the same as those of the typical online brokers, with the added benefit that when you use a reliable direct access broker, the overall quality of your executions should be much, much greater.
The last fee associated with doing business with a quality direct access firm is the software fee. The maker of RealTick (Townsend Analytics) charges the broker about $200 to $300 a month (but can be as high as $500 or more). The broker passes this cost to the trader if the trader does not make a certain number of trades in the month.
The actual number varies from broker to broker but can be generalized as ranging from 50 to 300 trades a month. The average day trader that is starting out might make 2 to 4 trades in one day. For example, if the trader buys and sells a stock in the morning and then buys and sells a stock in the afternoon, he already has 4 trades executed for that day. Assuming that there are 20 trading days per month (sometimes there are 21 or 22), 4 trades a day represent 80 trades per month. So, most of the times, the brokerage firm will pay the software fee itself.
Even though there are direct-access platforms out there that cost less than $300 a month, I believe that RealTick is very good and well worth the $300. (Many direct-access platforms to trade currencies can be accessed for free. This is one of the advantages that the forex or foreign exchange market has over stocks.)
In conclusion, using a direct access broker to trade stocks is by far the best decision a stock investor or trader can ever make. Even though commission for direct access trading are approximately the same as those seen in the world of online brokers, direct access offers superior quality of execution in the form of price improvement, speedier executions, and greater control in order routing.