Five Things to Consider When Comparing Brokerage Firms

Cobra Trading, Inc.
Jan 26, 2018

Whether you’re a new trader looking to get started, or a seasoned investor searching for a new home, the task of finding a brokerage firm is rarely an enjoyable one. Sure, there are some common priorities which spring to mind immediately (i.e. investment options, reputation and regulatory memberships, insurance on deposits, etc.) but there are other factors involved which can be equally important. In this post we’ll explore some of these other variables which may sway your decision one way or the other when undertaking your next brokerage search.

Let’s start with the elephant in the room, commissions. What is it going to cost to execute a trade? Perhaps surprising to some, commissions and the cost to execute the trade are not equal in most cases. Commissions are the portion of the total cost to execute a trade paid to the brokerage firm for providing the ability to effect the transaction. There are various commission structures used by different firms with two of the most common being per trade (E*Trade, Charles Schwab, TD Ameritrade/Scottrade) and per share (Cobra Trading, Tradestation, Interactive Brokers). While both models have advantages and disadvantages it is readily apparent if you’re trading smaller share quantities per trade, such as 1,000 shares or less, it can be advantageous to go with a per share plan. Using Cobra Trading’s highest per share cost as an example, the commission for a 1,000 share execution would register at $4.00 compared to $5+ at a per trade firm. However, as I stated above and will discuss below, the commission portion of the cost doesn’t tell the entire story.

Where a trader routes orders, and the associated pricing, is probably the most overlooked cost associated with trading by both new and experienced traders alike. Adding or removing liquidity is a topic which can be convoluted, confusing and intimidating but the basic concept is this; if you add liquidity to a route venue’s book (buying with limit below the bid or selling with limit above the offer) you may be eligible for a rebate whereas if you remove liquidity from a venue’s book (buying at or above the bid or selling at or below the offer) you are likely going be charged for removing liquidity. Many large brokers will remove this layer of cost uncertainty by limiting where a trader can route orders. They do this by having a trader route the order directly to their trade desk and they handle it from there either by internalizing the order, routing to a venue which pays them for order flow or working the order using a cost neutral strategy. In almost all instances this will end up costing the end customer either in poor execution price or lost liquidity rebates. Alternatively, Cobra Trading provides a host of various routing options and fees along with the pass through of liquidity rebates to help give you choice and reduce the overall cost of trading.

Much like liquidity rebates, the availability of short locates for traders who wish to profit when a stock price falls differs vastly among different brokers. In order for a trader to effect a short sale their broker needs to secure the shares to short and brokers go about this in different ways. Some will provide shorts only for their own inventory while others may cap the stock price by which they allow shorts at $5 or $10 or above. However, there are many different stock inventories and short locate services to which a broker may look to secure the locate for short shares and Cobra Trading puts forth the effort to contact as many as we can in order to find shares of any company you wish to short. This extra effort leads directly into another overlooked aspect when comparing brokers, customer service.

How often do we receive truly exceptional customer service? Taking it a step further, how often do we receive truly excellent customer service from our financial institutions? When working with a large broker there will understandably be phone directories, hold times, security questions, case numbers and any number of other items utilized by big brokers to place metrics on how well their customer service is working. We can all understand this as necessary in today’s business environment. However, understanding and accepting are two vastly different approaches to choosing a broker. Plain and simple, these frustrating aspects of working with a large broker can potentially, and sometimes do, cost you money. Cobra Trading strives to have a broker who can assist you answer every phone call on the first two rings, every live chat within seconds and every email within a single business day.

Lastly, let’s touch on the slightly boring, but sometimes highly relevant, topic of margin interest. Many brokers will allow you to trade using margin and under these margin agreements they will charge you interest anytime you use the margin load to hold positions overnight. This margin interest rate usually fluctuates with the rates set by the Federal Reserve but even still it can vary significantly from broker to broker. If a trader routinely holds positions overnight using a margin loan it is definitely worth looking into how your rate compares with other brokers. Even lowering it 1% could potentially save substantial money over the long term.

In closing, it isn’t fun or glamorous but if you’re trading with a broker or looking to get started these are important items which might not otherwise have been high on your list of priorities. Knowing the commission structure, routing fees and margin interest fees could provide peace of mind and save on trading costs over the life of an account. Also, having a dedicated customer service team to answer questions and go the extra mile to find shares for you to short could also be a key piece to finding the right home for a trading account. If these topics haven’t been considered lately it might be time to take another look. Prosperous trading to all.

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