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Here we offer some of our comments when selecting brokers. As we normally concentrated all our trades using options the comments below applies primarily to finding brokerage houses for options although they may also be applicable when considering brokers for futures trading.
NATIONAL BEST BID AND OFFER I'd like to let you in on a trading secret that most traders simply don't want to face, sometimes the spread between the bid and the ask of an option or futures contracts is a much more costly than the commissions that you will pay to make the trade. This is why having a broker that is experienced and advanced is absolutely crucial to your profitability. One of the primary features we look for in a brokerage house is their ability and inclination to get us the National Best Bid and Offer (NBBO). In other words, the absolute best fills on your trades which is critical for spread trading because you are doing two transactions for each trade. The national best bid if you are trying to sell and the best offer if you are trying to buy, means that your trade needs to be exposed to all 6 options exchanges to get the best price available at any moment.! Ideally, your broker will be able to buy a leg at one exchanges and then sell a leg at another exchange with the best fill for you. You must ask if your broker can execute options trades on all of the exchanges, and can they route their complex options spreads leg-by-leg to different exchanges to obtain the best possible execution price for the complete trade? If you are doing option spreads, there can be normally 5 or 10 cents difference on a $2.50 spread and a 10 to 15 cents discrepancy on a $5 spread between exchanges. The 6 Options Exchanges. 1) Chicago Board of Options Exchanges (CBOE).
OPTION CLEARING CORPORATION (OCC) The OOC is the regulator of all these activities. OCC acts as the hub with all the various exchanges linked to it. In fact, all the options exchanges jointly own the OCC. Today, OCC and the six option exchanges developed a system to give brokerage houses electronic access to all exchanges simultaneously to receive the national best bid and offer.This is good because when there are more exchanges there will be more liguidity and less slippages. This means that your brokerage house now has the ability to get you the best national best bid and offer provider they want to or provided they can! The end result is narrower bid and ask spreads and better fills on your trades. See, some options trading brokers have commission rates that look appealing on their face, and many new option traders think that one online broker is the same as the next as long as they can execute options orders quickly. To most, commission cost is the only variable in options trading but access to OCC to get the national best bid should also on of your main criteria to reduce trading cost. PAYMENT FOR ORDER FLOW Behind the scenes, some brokers sell their order flow to a certain market maker on a certain exchange and will not get you the national best bid and offer. This is extremely common practice and is acceptable to try and bring in more money in an era of decreasing commissions and increasing competition. You should ask your broker if they allow payment for order flow and does the broker receive payment for order flow from various exchanges or market makers (a huge conflict of interest in our opinion)?
CHARACTER OF A GOOD BROKER Therefore when you evaluate an online Brokers always remember that commission are not the only important criteria. Below are 10 very important factors other than commissions that you should think about when selecting an online options and futures broker: 1) No payment for Order flow
6) Spread Order Executions and other complex options spreads 7) Live Streaming Charts and Quotes 8) Hardware/Software Protection and Tier 1 System Reliability The broker should inform you how they subject their hardware and software to rigorous testing and whether they have an in house IT staffs dedicated to daily operations. Most importantly, there should be multiple connections through several Tier I Internet backbones to minimise likehood of connectivity lapses. 9) Financial Stability 10) Excellent Customer Service. When you review a prospective broker talk to them through Live Help, ask questions, bother them, do all this to find out if their customer service team is experienced, patient and capable of giving knowledgeable professional support. Live help transcript should also be emailed to you for your reference.
CONCLUSION Some web based options trading brokers have commission rates that are very cheap. Optionsxpress charges a minimumof US14.00 per contract while InterativeBrokers (IB) charges US$1.00 per SMART trade. SMART trade has very limited human assistance from the (IB) side. Many new traders think that one online broker is the same as the next as long as they can execute options orders quickly. To most, commission cost is the only variable in options trading. This type of thinking leads traders to brokers that are quite simply incapable of properly executing options trades. You should look for online brokers that just don't stresses on commission rates, all the other factors mentioned above must be considere also. When you add up all of the above mentioned factors, commission prices tend to diminish in importance. In the current cut throat internet based environment, these commissions can be extremely competitive, but the execution price savings and the other factors mentioned above that traders receive by utilizing their brokerage trading platform is what makes the difference between you being able to concentrate on your trading or worry about other things as well.
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