Commissions and Fees of a direct access broker

That brings me to the next point which is the commission and fee structure of brokers that offer a direct access trading system like RealTick. Most people are used to an online broker, who charges commissions anywhere from $5 to $30 a trade. There are even some online brokers who don't even charge commissions. Wow! No commissions! How could they do that, you ask? The reason is that they only allow you to place market orders and make money off your trade. However you want to look at it, you always get what you pay for. Furthermore, from the earlier explanation it is obvious that the hidden cost of trading stocks online is much greater than the actual commission amount that the online broker charges. The actual commission paid is meaningless if the quality of execution is poor. A trader's greatest concern when selecting a broker should be the "quality of execution," not the actual commission paid.

Most direct access brokers charge commissions based on a scale. The more transactions (trades) a stock trader makes, the lower the commission per transaction. Commissions can typically range from $15 to $25 per transaction depending on the broker. The trader must also pay the fees charged by the individual ECNs. This fees are added to the commissions. Consequently, the normal commission plus the ECN fees would normally be somewhere in between $15 to $35 a transaction (again, depending on the broker and the amount of shares traded). These commissions are about the same as those of the typical online brokers, with the added benefit that when you use a reliable direct access broker, the quality of your executions is much, much greater.

The last fee associated with doing business with a quality direct access broker is the software fee. The maker of RealTick (Townsend Analytics) charges the broker about $250 to $300 a month. The broker passes this cost to the day trader if the trader does not make a certain number of trades in the month. The actual number varies from broker to broker but can be generalized as ranging from 50 to 300 trades a month. A day trader that is starting out will easily make 2 or 4 trades in one day. For example, if the trader buys and sells a stock in the morning and then buys and sells a stock in the afternoon, he already has 4 trades executed for that day. Assuming that there are 20 trading days per month (sometimes there are 21 or 22), 4 trades a day represent 80 trades per month. So, most of the times, the broker will pay the software fee himself. Even though there are direct-access software packages out there that cost less than $300 a month, I believe that RealTick is by far the best and is well worth the $300.

In conclusion, using a direct access broker to trade stocks is by far the best decision a stock investor or trader can ever make. Direct access trading has commissions that are approximately the same as those seen in the world of online brokers, but offers superior quality of execution in the form of price improvement, much faster executions, and greater control in order routing.