Step-By-Step
Advice on How to Correctly
Select a Stock Market or Commodity Broker
Choosing the right Stock Market or
commodity broker is a critical aspect of trading. While
it is easy to obtain recommendations for a broker, the
actual selection process itself is often overlooked.
What is a great Stock Market or commodity broker to
someone else, might not be a great broker for you. For
this very reason, I have avoided giving out my own Stock
Market or commodity broker recommendation (plus, I don't
want to detract from the selection procedure itself).
The following is a checklist of the
process that I go through when looking for a new Stock
Market or commodity broker (any additions are welcome!).
Many of these steps will be universally applicable,
others will relate only to my personal needs. So, pick
and choose the ones that apply to your situations
1. First and foremost, clearly
define what your needs are. Are you a novice or experienced
trader? Are you a day trader or position trader? Do
you trade in both Chicago and New York? The answers
to these questions will determine the 'category' of
firms you will want to look at.
2. Based upon your needs, obtain
a list of 4-6 different brokerage firms. You can get
such a list from recommendations or advertisements (or
even by glossing through Futures Magazine annual 'SourceBook
'for firms that may be suitable).
For the purposes of illustration, as
a day trader (only) in the Chicago markets who is interested
only in fast execution and fill quality, my initial
needs are: Broker must be located in Chicago. That's
where the business is, so that's where I want my firm;
firm is a clearing member itself on both the CBOT and
CME. I prefer not to have to go through a 'middleman'
Introducing Broker (IB) and pay a middleman's commissions.
However, not many clearing firms deal directly with
smaller individual retail accounts, so you have to do
your homework to find the ones that do; I prefer NOT
to use one of the large well-known/heavily advertised
discount firms (personal bias/opinion - based on prior
experience).
Once you've got your list of 4-6 possibilities
together, call the NFA at 1-800-621-3570. Ask them to
mail you a written copy of all disciplinary actions
taken against a firm (do this for all 4-6 firms). If
your considering an IB then be sure to obtain the disciplinary
information for both the IB and the clearing firm that
it uses.
Note - Some firms with a poor disciplinary
history may have changed their name and registered with
the NFA under a new name to try to 'hide' their history.
So ask the NFA how long each firm has been registered
under their name. If not long, then ask the firm for
their previous name, and get the NFA to check under
that name!
Going a step further - you could even
ask the potential brokerage firm for the name of the
floor broker/s that it uses in the pit/s that you trade,
and have the NFA check up on them too!
4. Once you get your NFA reports,
you may choose to automatically rule out a few firms
with poor disciplinary records. There are two things
that I look for in these reports. Firstly, any major
'problem' like a huge fine/fraud/big lawsuit etc. Secondly,
I look for an excessive number of reparation complaints
against that firm, relative to other firms. I'm not
overly concerned about occasional minor rule infringement.
5. With your surviving 'possibilities'
- contact them! Be sure to let them know that you are
speaking to a few different firms, and that you won't
be making a decision until after you have spoken to
everyone. Not only is this a good idea, it's also a
useful negotiating tactic. Make the firms compete for
your business!
6. Ask each one, any probing
questions that you can think of e.g.:
If dealing with an individual person
(e.g. full-service broker), how experienced is he/she?
Will he/she help you with order placement if you need
help etc? If dealing with a discount order desk, where
is it located? (preferably on the exchange floor) How
many phone calls before your order reaches the pit?
How fast is their turnaround time in the markets you
trade? (especially important in New York markets).
You don't want a broker that is slow
to report your fills. Does the clearing firm use salaried
pit brokers, or independent pit brokers (in the markets
you trade)? Preferably you want independent pit brokers,
because they will likely have a greater vested interest
in giving out good fills, as opposed to a salaried employee,
who is merely doing a 'job'.
It is also easier for a firm to switch
from one independent pit broker to another, than to
get rid of a salaried employee. Is the clearing firm
financially sound? Is it a member of all the exchanges
that you trade on? (If not, find out the other clearing
firms, and check their disciplinary records).
7. Negotiate the best commission
rate you can, based on your account size/trading activity
and experience. Make sure that you negotiate all fees
(except the $0.16 NFA fee) into the commission rate
that is quoted to you, otherwise they'll show up as
'extras' on your statements! Tell them about a better
competitive offer (if you have one)! Don't commit to
anyone until you've sized up all the offers.
8. Then, based on all criteria
(not just commission rate) pick a firm that you feel
will best suit your needs and personality. Don't necessarily
go with the lowest commission rate. Go with the best
'all-round' offer. If commission rate is in the middle
of all your offers (and other intangibles look to be
the best) then you've probably made a good choice. You
don't want to be penny-wise and pound foolish!
Finally, my personal belief (contrary
to the opinions of some), is that even if you are a
novice you are better off going with a quality discount
firm (as opposed to full-service) in order to reduce
your trading overhead.
If a (full-service) broker's 'advice'
was so wonderful then he wouldn't be a broker, he'd
be a trader. If you are a novice who needs help in learning
how to place orders, and wants a thorough understanding
of the order process itself, then order Joe Ross' course
"How to Place Trading Orders." You'll likely
learn more about order placement from this course than
you will from your full-service broker, and save yourself
lots of money in the process. by Simon Campbell |
