The number of retail investors, and thus the number of online brokerage accounts, has grown tremendously over the past decade. That’s good news for those of us who trade regularly, because it means that there’s a lot of competition between brokerage firms. That competition helps drive down costs and also fosters innovation.
The most obvious time to research the offerings from different brokers is when you’re opening a new account. However, it’s also useful to periodically compare what your current broker provides to what’s available from others. One good source for this type of information is the annual Online Broker Review published by Barron’s each March.
If your commission rates seem higher than average, you might be able to negotiate a better rate. But if your broker doesn’t provide a specific service that’s important to you – for example, being able to trade option spreads in your IRA account – then you might have to bite the bullet and move your account to a firm that can provide you with a better overall package of services.
Here are some important items to consider when selecting a broker:
- Financial Instruments
If you plan to trade a variety of different financial instruments such as stocks, options, futures, and/or currencies, then you need to decide whether or not it’s important to you to be able to perform all your trades from within a single trading platform, or if you prefer to have different platforms that are optimized to each of the instruments. Stocks and options can almost always be traded from the same account, while futures and currencies (ForEx) often require separate accounts even if the trades can be placed via a common platform.
- Account Types
Every online broker will allow you to open standard single-owner or joint accounts, and most also allow you to open IRA accounts, although they may limit your trading privileges in the latter. However, if you need a less common account type like a beneficiary IRA, a 401k rollover, a custodial account, or an account owned by an LLC for an investment club, then determine early on whether the broker is able to accommodate your needs. Be prepared to file some additional paperwork for these account types.
- Commissions and Fees
Most brokers offer volume discounts; the more you trade, the lower the commission rates you qualify for. However, it’s rare for your broker to just offer you a lower rate, so make sure you ask on a regular basis. You might get an answer like “The lowest rate we offer on option trades is $0.75 per contract unless you’re trading more than 500 contracts per month”. That kind of detail is very useful, but often isn’t available on the web site or in other published documents.
- News & Research Data
Even if your approach to trading is primarily technical in nature, it can be helpful to have easy access to current news articles, company fundamentals, and other data beyond price and volume. The recent 20+% decline in the price of The McGraw Hill Companies, Inc (MHP) might have looked like a great opportunity unless you realized that the US government was filing a suit against McGraw Hill’s rating agency, Standard & Poor’s. Check whether your broker can supply the data that you typically use, and if so, whether there are any costs associated with gaining access to that data.
- Platform Tools
Every trading platform offers its own unique set of functionality. Whether you’re a new trader or a long-time veteran, make sure that your trading platform streamlines the tasks that you perform most often. If you trade a lot of option spreads, it’s much easier to right-click a specific contract and select “Sell Iron Condor” than it is to buy and sell the four legs individually. Once you’ve selected a broker and gotten accustomed to the platform, don’t forget to investigate features that you haven’t used before. Release notes can be especially helpful in pointing you to useful new functionality, but are also a good gauge of how much effort the development team is putting into adding new features versus fixing bugs from previous releases.
- Customer Service
We all need help from an expert once in awhile, whether it’s asking a question about ADR fees, how to place a specific type of trade, or figuring out what that funny little icon at the right end of the toolbar does. Brokerage firms typically offer a variety of support channels including phone, email, online knowledge bases, FAQ’s, customer forums, and online chat. Since it can be difficult to assess wait times, attitudes, and effectiveness of the responses until you’ve actually used the support channels a few times, it’s often best to find some online reviews where others have shared their experiences. Do keep in mind that unhappy customers are far more likely to complain than happy customers are to give praise, so if you’re looking at uncensored customer feedback, there will almost always be more negative feedback than positive.
- Shares Available to Borrow
You can only short stocks if your broker has shares available to borrow. At any given time, one broker may have shares available for a particular stock, while another broker does not. Over time, however, patterns emerge regarding which brokers most consistently have shares available for borrowing. If short strategies are particularly important to your trading plan, you may want to consider having accounts with multiple brokers simply to increase the odds that you will be able to open short positions for most or all of your short trade signals.
- Options Policy
If you’re interested in trading options, make sure that you look carefully at the broker’s policies before opening an account. Many brokers require you to pass through “levels”, with each new level providing successively greater privileges regarding the types of options and spreads you are allowed to trade. In some cases it can take many months before you’re allowed to trade something as simple as a naked put or a vertical call spread. Also, if you’re trading from an IRA or other cash account, make sure that the broker allows you to trade the types of spreads that you want to from the type of account you plan to open. There are no federal securities regulations preventing you from buying a calendar spread in an IRA account, but there are a lot of brokers that won’t allow it.
- Mobile Support
There has been huge growth in the area of mobile trading over the past 12-18 months. Brokers are building out their platform capabilities on iPad and Android tablets, and often have separate applications optimized for smart phones as well. If you often find yourself trading on the go, check out these supplemental tools.
- Integration with Tax Software
One of the most burdensome aspects of trading frequently is dealing with the tax consequences. If you prepare your own taxes using a package such as TurboTax, then you can save an enormous amount of time if your platform is able to export all of your trading activity as a CSV or TXF file that can be imported into the tax package.