Tuesday, June 10, 2014

Review of online stock trading comparison::What Time Does the Bond Market Close?







Review of online stock trading comparison::What Time Does the Bond Market Close?








               Many               newcomers               to               stock               trading               cannot               tell               the               difference               between               a               proprietary               trading               firm               and               an               online               (retail)               broker.

When               deciding               to               open               an               account,               traders               make               their               comparison               of               brokers               based               on               the               relative               cost               and               the               products               offered,               but               more               often               than               not               they               fail               to               realize               that               the               products               are               not               exactly               the               same.

This               article               seeks               to               shed               light               on               the               mechanics               of               a               prop               trading               account               and               educate               traders               about               the               differences               between               the               two               options               so               that               one               can               compare               them               more               effectively.
               The               analysis               has               been               provided               in               six               key               areas:               software,               rebates,               fees,               buying               power,               education               and               short               locates               (availability               of               hard               to               borrow               securities).

These               are               the               areas               in               which               the               two               are               most               distinctively               different               and               are               rightfully               the               most               common               factors               considered               in               this               decision.

You               as               a               trader               will               place               a               different               emphasis               on               particular               categories               as               you               consider               whether               retail               or               prop               is               best               for               you.
               
               Software
               Retail
               Retail               brokers               typically               offer               the               ability               to               execute               trades               on               their               website.

Most               also               offer               their               own               trading               platform               at               a               monthly               cost               to               the               trader.

This               fee               may               be               waived               if               you               meet               their               minimum               requirements               for               account               assets.
               Prop
               A               good               prop               firm               will               offer               traders               a               choice               between               a               few               different               direct               access               routing               programs.

A               trader's               platform               provides               the               ability               to               execute               and               monitor               transactions               quickly               and               effectively.

A               proprietary               platform               will               have               direct               connectivity               to               the               exchange               matching               engine.

Hot               keys               are               also               a               must               have               for               intraday               traders               and               are               a               feature               offered               in               proprietary               software,               but               not               often               that               of               retail               firms.

Most               proprietary               trading               platforms               provide               access               to               more               in               depth               real-time               market               data               such               as               NASDAQ's               Totalview,               ARCA               Book,               NYSE               OpenBook,               BATS               and               Direct               Edge               Books,               although               some               of               this               data               may               come               at               an               additional               cost.

Greater               market               depth               and               breadth               can               assist               the               trader               in               making               better               trading               decisions               on               very               active               and               heavily               traded               securities               in               real-time.
               Rebates
               Rebates               refer               to               the               compensation               that               ECNs               provide               to               traders               who               add               liquidity               to               the               market.

Most               ECNs               give               rebates               to               traders               who               add               liquidity               and               charge               a               slightly               higher               fee               to               traders               who               remove               liquidity               from               their               market               center.

This               is               a               basic               ECN               business               model,               although               there               are               a               few               ECNs               that               are               structured               differently.
               Retail
               In               the               vast               majority               of               cases,               retail               firms               do               not               pass               on               rebates               to               their               traders.

The               online               broker               will               most               often               route               the               flow               to               a               low               cost               exclusive               destination               which               does               not               cost               extra               and               is               not               often               directly               to               an               exchange.

If               a               retail               trader               chooses               to               route               to               a               particular               ECN,               the               additional               fee               on               top               of               their               flat               commission               rate               may               be               passed               through               to               the               trader.
               Prop
               Traders               who               trade               at               a               proprietary               trading               firm               get               the               advantage               of               benefiting               from               the               widely               adopted               "taker-maker"               model               that               most               exchanges               offer.

Traders               who               add               liquidity               will               receive               rebates               for               doing               so               in               accordance               with               that               exchange's               rates               (which               can               be               as               high               as               $3/1000               shares).

This               can               be               a               substantial               source               of               revenue               for               the               prop               trader               and               will               also               influence               his/her               decision               of               which               route               to               use.
               Fees
               Retail
               The               fee               structure               for               retail               firms               will               vary               from               shop               to               shop               and               the               industry               is               highly               competitive.

One               firm               may               offer               no               account               transfer               fees               while               another               may               advertise               no               inactivity               fees.

Still               another               may               not               charge               for               wires,               but               they               may               make               this               up               in               their               commission               structure.

In               general,               retail               firms               have               a               flat,               per               trade               commission               rate               that               is               charged.

There               is               also               usually               a               software               fee               for               the               platform               unless               you               meet               certain               minimum               asset               requirements               or               if               you               are               a               very               active               trader.

Some               other               incidental               fees               that               you               may               incur               are               those               that               have               been               mentioned               above.
               Prop
               Proprietary               trading               firms               are               able               to               offer               more               competitive               commission               and               transaction               fees               than               the               online               broker.

Proprietary               firms               typically               use               a               per               share               structure               with               breakpoints               for               decreasing               your               commission               as               your               volume               increases.

This               is               often               a               direct               benefit               to               intraday               traders               who               have               a               high               number               of               trades               per               day.
               All               prop               firms               charge               a               software               or               desk               fee               which               goes               to               pay               for               the               data               and               order               entry               software               that               the               firm               uses.

Some               offer               this               software               "at               cost"               to               their               traders               and               some               charge               a               premium               on               top               of               their               cost.

The               variety               of               routes               offered               directly               affects               the               desk               fee               as               well,               so               ask               your               prospective               shop               about               the               routes               available               when               talking               about               desk               fees.

For               some               traders,               more               routes               is               more               value               added.
               Day               Trading               Buying               Power
               Retail
               In               retail               accounts,               your               buying               power               is               THE               LESSER               OF               the               equity               in               your               account               divided               by               .30               (the               30%               minimum               global               margin               requirement               for               equities)               OR               your               SMA               multiplied               by               2               (which               satisfies               the               Regulation               T               requirements               for               equity               purchases).

For               day               traders,               you               must               have               at               least               $25,000               in               equity               in               order               to               do               more               than               three               round               trips               (day               trades)               in               a               rolling               five               business               day               period               (FINRA               Rule               2520).

Outside               of               this               model,               certain               accounts               may               be               eligible               for               portfolio               margin.
               Prop
               With               a               prop               firm,               your               buying               power               is               determined               by               the               firm               you're               with               and               the               risk               capital               deposited.

Some               traders               may               be               fully               backed               by               a               firm               (true               prop)               in               which               case               they               can               expect               the               firm               to               take               a               portion               of               profits               to               compensate               for               the               risk               taken.

Many               traders               find               trading               prop               more               advantageous               as               they               can               trade               a               lot               more               capital               that               they               would               have               access               to               in               a               retail               account.
               Day               traders               with               less               than               $25,000               are               prime               clients               of               prop               firms               as               they               are               able               to               trade               freely               without               worrying               about               the               minimum               equity               requirements               enforced               by               FINRA               Rule               2520.

This               is               because               most               prop               firms               are               set               up               so               that               traders               trade               sub               accounts               of               the               firm,               but               the               firm               "hits               the               street"               as               one               large               account.
               Education
               Retail
               Many               retail               firms               have               educational               information               on               their               website.

The               breadth,               depth               and               level               of               educational               materials               vary               from               firm               to               firm.

The               material               is               usually               in               the               form               of               suggested               reading,               archived               lessons               and,               occasionally,               trading               seminars.
               Prop
               Offerings               for               training               in               the               prop               field               are               highly               sought               after.

Many               traders               who               are               beginning               their               trading               careers               look               to               prop               firms               with               advertised               training               programs.

Be               cautious               of               firms               that               charge               for               educational               classes               and               then               provide               firm               capital               for               you               to               trade.

Some               of               these               firms               are               modeled               to               generate               revenue               from               training               which               can               cause               a               conflict               of               interest               as               their               incentive               to               see               traders               last               in               the               long               run               is               greatly               reduced.

When               a               trader               joins               a               prop               firm               and               deposits               risk               capital,               all               compliant               firms               are               required               to               hold               your               deposit               for               12               months.

Afterwards,               the               trader               may               receive               his/her               deposit               back.

In               short,               be               aware               that               if               a               firm               charges               for               training               they               may               be               trying               to               avoid               the               lock               up               period               so               they               can               treat               it               as               revenue               immediately.
               Shorting/Locates
               All               traders,               prop               and               retail,               are               subject               to               Regulation               SHO               which               governs               short               selling               in               US               markets.

Traders               must               have               located               shares               that               they               wish               to               borrow               before               selling               short.

Some               stocks               may               be               on               the               threshold               list               or               "hard               to               borrow"               list               and               may               not               be               available.

This               list               is               updated               every               24               hours.
               Retail
               If               a               retail               trader               would               like               to               short               a               stock               on               the               threshold               list,               there               may               be               little               that               can               be               done               to               locate               additional               stock               intraday               and               an               opportunity               may               be               missed.
               Prop
               Traders               with               a               prop               firm               may               submit               locate               requests               before               and               during               market               hours               in               order               to               locate               additional               shares               of               stock               on               the               threshold               list.
               As               it               happens,               most               traders               begin               trading               in               retail               accounts               due               to               their               accessibility               and               pervasiveness               in               the               investing               community.

Too               many               traders               are               unaware               of               the               options               available               to               them               when               it               comes               to               cost               structure,               service               and               performance.

It               is               my               hope               that               this               article               will               dispel               some               of               the               mystery               and               stigma               from               prop.

Looking               at               these               six               areas,               you               can               better               determine               if               your               style               of               trading               is               more               suited               for               a               prop               account,               or               if               you               would               be               better               off               opening               an               account               with               a               retail               broker.
               When               choosing               a               firm               in               either               category,               research               is               paramount.

Make               sure               your               broker               or               trading               desk               has               a               sound               reputation               and               make               sure               to               ask               the               right               questions.

Talk               to               traders               or               read               reviews               on               forums               and               trading               websites.

The               better               informed               you               are               from               the               onset,               the               better               your               experience               will               be               and               the               more               comfortable               you               will               be               doing               business               with               them.
               Happy               trading.






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