The process of choosing a broker can be more challenging than you think. There are a lot of choices out there, and many have outstanding adverts boasting their greatness. But it's best to do a little research and ask some fundamental questions, as this blog by our guest writer Jim Cagnina, Executive Senior Vice President of Infinity Futures, explains.
Trading Futures and Options on Futures involves substantial risk of loss and is not suitable for all investors.
Here is Jim’s comprehensive checklist of the 10 fundamentals of choosing a broker...
1. Test their technology
The first question is whether the broker's trading technology includes all the features you need. For example, does their trading platform provide advanced order entry services such as server-side orders (like one-cancels-the-other order or OCOs), multi-target brackets, trail stops, etc?
Is there an option for a web-based trading platform that enables traders to chart and trade from devices like cell phones and tablets? Is it compatible and in sync with the PC-based trading ladder (the DOM - depth of market - or order book)? Can you log into the web- or cloud-based platform at the same time as you use your trading ladder?
When choosing a broker, many brokers will try to sell you features that you don’t need, so focus on these three elements of their online trading technology:
- How reliable is the platform and does it use minimal resources on your trading computer or device?
- Is the data feed quick and reliable? These days data transmission and trade execution are measured in milliseconds. This is particularly important in times of high volatility in market stress.
- Who is providing the technology and its corresponding components? Does the brokerage firm own, operate and maintain the trading platform and provide the data feed, or do they outsource to third-parties? Typically, firms that own and operate their trading infrastructure are understandably more vested in its success and can maintain and troubleshoot issues more quickly and efficiently. In-house systems adjust to changes imposed by the exchanges more quickly as well as respond to systematic changes to the internet, Internet Service Providers, and operating systems.
2. Demo their data feed
When choosing a broker, you need to consider your data feed for a moment. A firm that outsources it from a third party is probably getting that data from an entity that also provides data to other companies. This means its technical support and delivery capacity will be diluted and priority won’t always be given to your brokerage. Even worse, there could be a whole lot of finger-pointing when something goes wrong!
You need to know whether the broker's data feed is quick, stable and reliable. Depending on the markets you're trading, the amount of data delivered in real-time from the exchanges through your brokerage directly to your trading station is considerable. Make sure it’s delivered by professionals that have a deep level of experience and a proven track record. One question to ask is whether a prospective brokerage firm is directly licensed from the exchange as an internet service vendor (ISV).
To be sure, it's a good idea to try a real-time practice account (a.k.a. a demo account). Most of the better brokerage firms allow you to test drive their trading and analysis software with real-time data.
3. Check their customer service
Work out what level of customer service the brokerage offers. Choosing a broker that offers extensive support is key. Ask yourself the following questions:
- Will you have a direct number to a dedicated customer service representative that you can call?
- Can you call the trading desk directly with technical issues or when unusual circumstances mean you want to place the trade over the phone?
- Or will you have to deal with an annoying phone system which requires that you press a bunch of numbers to get to the right department?
If you’re trading markets that are 24 hours, find out whether there is a fully staffed night desk.
4. Are they legitimate?
Even though you're trading electronically it’s good to know where your broker is physically located. A key part of the process of choosing a broker is being thorough in your research and spotting any red flags.
Are they operating in a trusted jurisdiction? Equally important is that they’re regulated by a legitimate regulator, such as a federal government or professional department. You might never visit your online brokerage firm in person but is their address published? Could you visit if you want to? This helps prove that they are a legitimate business.
How long has the brokerage firm been in business and how long have the principals and account representatives been there? In my experience, longevity is generally a good thing.
Spot the red flags when choosing a broker
An aggressive approach to marketing could be a red flag. Does the firm you are considering promise great returns? Are their salespeople particularly aggressive in trying to get you to open an account or to trade? Consider moving more slowly. Take your time and kick the tires before you begin trading. Remember, there's always another day in the market and you’re not missing anything by doing so.
5. If they are a specialty broker, are they really specialists?
Consider your broker's experience in the particular market that you’re interested in. Some fairly large brokerage firms offer access to many different types of markets, including individual stocks, stock options, futures, CFDs (Contract For Difference), ETFs (Exchange-Traded Funds), FOREX and bitcoin.
This may sound attractive at first. However, consider that they have to take orders and route them to many different places in order to satisfy many different types of traders. If you're trading a specialty market, like the futures markets, I suggest you consider choosing a broker that's dedicated to (and has many years’ experience in) that space.
6. Evaluate transaction costs
Transactions costs are very important to the trader's bottom line. Investigate the cost of trading with the brokerage and check that costs include commissions, platform fees, data fees, routing fees, and other miscellaneous fees. Evaluate whether it makes sense to buy a lifetime license for trading software from your brokerage firm or is there an equally good or better trading platform that you could get for free?
7. Capital investment and trading margins
Cost-effective use of your capital is important when choosing a broker. You should ask your prospective broker what their margins are. Will they charge you interest to trade with low margins? Remember, there is a difference between day trade margins and position trading margins, so make sure you ask about those two different capital requirements. During extreme situations, margins could change, however, investigate the consistency of the brokerage firm under consideration. Most brokers will list margins on their website.
If not, ask the firm what their margins are in these categories, how often they change them and what hours they are in effect. You don’t want them to be pulling the rug from under your feet on a regular basis.
8. Bid/ask spread and order routing
The bid/ask spread is part of your transaction costs and can be difficult to overcome if it becomes too large. Ask your brokerage firm if they widen the bid/ask spread at any time during the trading session. Firms that pass the best bid/ask spread directly to your trading platform are typically the best.
With respect to order routing, ask your broker whether or not they route your order to a preferred exchange or ETN (exchange-traded note). In my opinion, best practice means trading with one transparent regulated exchange that executes trades on a first-come first-served basis.
Then ask if your broker trades against you and/or they are paid for order flow. This can result in a conflict of interest or a markup of execution services.
9. Do they provide a good education?
Good brokerage firms offer several levels of trader education. They will publish videos and live webinars for customers as well as potential customers on a regular basis. This education should include how to use technical tools, including the charting and trading platform, effectively. In addition, they should also provide information about the markets themselves. Active education efforts mean that the firm has a dedicated mission to assist their customers. I strongly suggest choosing a broker that has a progressive approach to educating its customers.
10. Ask for references
Do not hesitate to ask a prospective brokerage firm for references from their customers. You can then talk to like-minded traders about that broker's particular strengths and weaknesses. This is another key component of choosing a broker.
Summary: Choosing a broker is all about asking the right questions
I hope this checklist for traders looking for a broker has given you plenty to think about. I’ve outlined the importance of doing extensive research when choosing a broker and why it’s vital that you ask the right questions of the firms under consideration. Happy hunting!
This blog was written by Jim Cagnina, Executive Senior Vice President of Infinity Futures, on behalf of Tradeguider. For more handy tips and insights on trading fundamentals, browse our latest blogs and Free Resource Center.
Remember, trading Futures and Options on Futures involves substantial risk of loss and is not suitable for all investors.
If you’re interested in the FOREX market, we have a dedicated blog post on How to Choose a FOREX broker.
Tradeguider is the home of Wyckoff Volume Spread Analysis (VSA), the only way of analysing market activity that shows you how to track what the people who really move the markets are doing. Traders of all levels of experiences, trading any market and any time frame, can use our software to follow the smart money and improve consistency and profits. We offer extensive courses and resources as you’ll see from our Free Resource Center, as well as offering mentorship on a wide range of aspects of the trading process. We enjoy helping new traders get off to a good start, so we can help you with choosing a broker.