| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
Instead, you will focus on online firms that specialize in options trading and have relatively low commission schedulesQUALITY OF EXECUTION While many investors focus solely on the dollar costs of commissions when choosing brokers, there are other less obvious costs to be wary of. Specifically, when investors place buy and sell orders, the quality of the execution and the subsequent price at which the stock trade takes place are equally important to consider. For instance, if you place a market order to sell 500 shares of a stock and the broker fails to act promptly, the order might get filled for, hypothetically, $50 rather than $50.25 a share. In other words, a delay in executing an order when a stock is falling can cost you 25 cents a share. Meaningless? Well, that amounts to $125 on your 500-share order. So if you are consistently losing eighths and quarters on share trades, who cares if the trades are commission-free? Arguably, the quality of a brokers execution is more important than the commissions on trades. In fact, under federal securities laws, all brokers have a duty to execute orders at the best possible price. It is called the duty of best execution. Consequently, the Securities and Exchange Commission (SEC) has stepped up surveillance of online brokers because of concern over the quality of their executions. Some of the concern stems from a practice known as payment for order flow. In order to understand how payment for order flow works, consider what happens from the time you submit your stock order until the time it is executed. Once the broker receives the order, they have a responsibility under the duty of fair dealing provision of the Securities Exchange Act to proceed promptly. At the same time, under the duty of best execution provision of the same Act, the broker is obligated to fulfill the order at the best possible price. With payment for order flow, this isnt always the case. Rather than shopping the order around to competing market makers or electronic communication networks (ECNs), the order is sent to a wholesale market maker who, in turn, pays the broker for sending orders in their direction. In short, brokers are increasingly using preferred market makers who pay them for the buy and sell orders. Such arrangements allow online brokers to offer cheap automated trades because they also make money off the order flow. At the same time, large market makers, such as Knight/Trimark, sometimes handle more than 30 percent of the orders in a particular stock. As the high volume of orders comes through, the market makers generate profits from the difference between the bids and offers. There is no incentive for them to beat the prevailing market price. Therefore, by directing trades to market makers who pay for order flow rather than shopping the order around to competing market makers, the broker is not assuring clients execution at the best possible price. During a speech to the Securities Industry Association in November 1999, SEC governor Arthur Levitt noted, I worry that best execution may be comprised by payment for order flow, internalization, and certain other practices that can present conflicts between the interests of brokers and their customers. Some brokers are responding to critics of payment for order flow by offering rebates to clients. A few brokerages, for example, do not prearrange to generate payments for order flow. Instead, when they receive an order, it is routed to the best execution point. If the best price happens to be with a market maker that does pay for orders, the brokerage passes the payment to its customers in the form of monthly rebates. The practice of paying for order flow is providing ammunition for firms that allow customers to bypass the traditional role of the broker. So-called direct-access firms are attacking Web-based brokers head-on by offering technology that takes orders directly to the marketplace, rather than through a broker. With direct-access firms, investors execute orders directly with market makers, exchanges, or ECNswherever the best price exists. Cybertrader, Edgetrade, and E*Trade Professional are the latest to offer the individual investor direct access to the stock market by eliminating the role of the broker. Direct-access firms are appealing in that they offer the individual investor a higher probability of better execution. These firms cater primarily to active traders, however. Often, their commissions are based on the number of trades executed monthly, with more frequent traders getting cheaper commissions and access to services like research and quotes. Bottom line: If you are an active trader, direct access can greatly increase the efficiency and effectiveness of your orders. INVESTOR SAFEGUARDS When investing in the stock market, your fiduciarythe financial agent you trust with your moneyis your broker. The SEC and the exchanges are diligent in their regulation of both brokers and their firms, but you still need to be aware of some of the possible indiscretions to protect against fiduciary fraud. First we will delineate these improper deeds and then provide the reader with six ways to self-protect ones account. Some of the most common improprieties include: Embezzlement. Usually a matter of a salesperson misappropriating your assets without the firms knowledge. Misuse of assets. Using customer equity or cash to cover operating expenses, or as collateral for the firm. Kickbacks. When order takers take bribes to direct trades to certain market makers, you end up paying for the bribe through higher customer prices. Misuse of discretionary authority. Trading without customer approval, or without the best interests of the client in mind. Churning. Increasing commissions by recommending excessive trading. Front running. Trading for the firm or selected clients with advance knowledge of forthcoming research recommendations. Conflict of interest. Arising from the brokerage firms role as market maker, underwriter, mutual fund manager, or investment adviser. There a number of things you can do to protect your account. Use the following six guidelines to safeguard your stock market profits: 1. Do your own research before you invest. Dont invest in companies that minimize or avoid disclosure of their financial condition. Always read the fine print in your information sources, and avoid hot tips. 2. Deal with major brokerage firms and reputable brokers. Know your brokerage firms financial condition and who owns the firm. Be sure you know exactly what your agreement specifies. 3. Keep a written record of all trades. Write your orders in advance. When you receive trading confirmations, be sure to compare them with your written records. 4. Put your broker to work. If trading confirmations are slow in coming, complain to your broker. Balance all monthly statements. Ask your broker to explain any discrepancies. If trouble persists, go to a supervisor. If it continues, change firms. 5. Change brokers who talk about sure winners. Resist all sales manipu lation emphasizing double-digit rates of return, stocks that will double, hot stocks, and guaranteed profits. 6. Never put greed before safety. Sometimes you have to protect your self against yourself, and that can be the most difficult job of all. Remember the stock market will be here tomorrowbut to use it, you need investment capital. Hopefully this information will help you avoid or deal effectively with any account issues that you might experience. Investors who know how to choose a good broker, how to analyze information, how to order skillfully, and how to protect themselves are investors who know how to make money. OPENING AN ACCOUNT The first step on the road to being a trader is opening an account with a broker. This can be done using an online broker, over the telephone, or visiting a brokerage in your area. Today, I find that most traders prefer the online route. In any event, whether you use a broker on- or off-line, you start by signing a new account agreement. This somewhat legal-looking document may have you wondering if you are setting up an account or applying for a job. Nevertheless, the new account agreement is important for two reasons: 1. The new account form enables the brokerage firm to find out about you and your financial resources, including your assets, liabilities, income, net worth, and the like. 2. It spells out the terms and conditions that the broker imposes on you. Therefore, while not particularly interesting, the new account agreement is your first look at the broker and, because it stipulates the terms of your relationship with that firm, is worth reading in detail. As soon as the account form is reviewed and approved by the brokerage firm, you can begin trading. Based on your experience level and financial profile, the broker may impose limits on your trading (e.g., limit the use of credit, limit specific option strategies, or prohibit the purchase of certain speculative investments). In most cases, however, that will not pose a problem. While the actual process of setting up a brokerage account is relatively easy, in the long run finding the right broker who meets your specific investment goals can be quite difficult. After all, there are a large number of online brokers out there these days. Determining which one is right for you can be a long and arduous process. One of the most important considerations when evaluating various brokers is: What type of brokerage firm is it? In turn, in order to understand the differences between brokers, it is important to understand how they make money. Specifically, most of a brokerage firms revenues come from the trading activity of its clients. In other words, each time an investor buys or sells an investment security, the broker makes money through commissions. Today, due to the sheer number of firms in existence, commissions (and/or sometimes fees) vary wildly. Furthermore, with the recent growth in online trading and subsequent competition, commissions have reached historical lows. Some firms even let certain wealthy clients trade for free. Others, however, provide specific investment advice and, therefore, require that investors pay higher fees and commissions for doing business with them. As a generalization, commissions will be higher for brokers who offer specific advice to the investor. So-called full-service firms have financial consultants or financial advisers who not only buy and sell shares on your behalf, but also gather information about your financial resources and make specific recommendations. Other firms, sometimes called discount brokers, do not offer any sort of financial advice. They simply execute buy and sell orders on your behalf at the lowest cost possible. For instance, to buy 100 shares of a stock trading for $55, a full-service broker will charge between $75 and $200, while a discount broker charges only $10 to $20. At the same time, a full-service broker will place the order in context of your personal financial situation and, if you request, offer advice as to whether it is a suitable investment for you. A discount broker will simply complete the transaction according to your instructions. Charles Schwab and E*Trade are examples of discount brokers. If you are reading this book, chances are you will be a self-directed investor and it will not make much sense to use a high-priced broker. Instead, you will focus on online firms that specialize in options trading and have relatively low commission schedules. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |