LONG ANSWER
Overview
The objective of the Long Answer is to empower you with the necessary information so that you can make a sensible decision about which data feed, charting software and broker is best for you. We’ll do this by looking at all three elements and seeing how they relate to one another. Then we’ll assess the needs of those of you who trade via a direct market access broker (DMA) and those who don’t. To begin, let’s take a quick look at all three elements . . .
Data Feed
This refers primarily to the prices of an instrument and the volume of trades. The amount of data involved can be huge. In addition to the open, high, low and close data (OHLC), some traders also require Level 1, Level 2 and Time & Sales data. In the case of ‘tick’ data for the ES – the S&P 500 e-mini futures contract - this could easily exceed three million pieces of data per day. And that’s just one instrument in one market! Having access to reliable, accurate and glitch free data is essential for many traders – especially day traders. Once they have it, they need to display it and assess it in order to make their trading decisions. At a basic level, this can be done with a program like MS Excel. However, most traders prefer to view their data graphically in a chart, rather than as a set of numbers. Although this can be done to a limited extent in Excel, there are numerous bespoke software packages designed specifically for the purpose. Raw data isn’t inherently interesting, but it’s as important to your trading as petrol or diesel is to your car. And, just as you wouldn’t put fuel from a roadside filling station into an F1 car, you need to select the right data from the right supplier for the type of trading that you want to do.
Charting Software
On its own, charting software is useless without the data to create the charts. Using the driving analogy, it’s akin to having a 7-series BMW with an empty fuel tank. A beaten up old Ford Fiesta with a full tank will leave it standing – literally! Some software companies offer charts and data together, so you don’t need to source a separate data feed. Others supply their own data, but offer their customers the option of overriding this with data from a third party supplier. If the charting software that you use is supplied by your broker, then you may – or may not – be offered these options. This is expanded upon below.
Brokers
These are the people with whom you have your trading account(s). They will offer you one or more trading platforms which you will use to enter and exit your trades. Besides commissions and customer support, the trading platform is, arguably, the most important part of their service. Spread betting (SB) companies tend to have their own bespoke trading platforms, while direct market access (DMA) brokers may offer a selection – sometimes six or more – popular platforms from which to choose.
Ali-in-one
Like charting software, all trading platforms require a data feed. DMA brokers tend to let the customer dictate the source of the feed, whereas, with SB companies this is not an option, as they set their own prices. So, with a SB company, you get the trading platform, the data (their data) and, very often, charting software as well. And the great thing is it’s usually all free! Unfortunately, there’s a catch. The SB firms recoup the costs associated with providing all these goodies in various ways, the most notable being a wider bid/ask spread than exists in the underlying market. By contrast, DMA traders enjoy the tightest spreads available in any market. The catch for them is that they usually have to pay for their data feed, their charting software and possibly their trading platform. All these fees can mount up to many hundreds of dollars each month.
As with so much of trading, there are few hard and fast rules - just generalisations. As generalisations go, it would be fair to say that most new U.K. based traders start out with a broker that does not provide them with direct market access (DMA). Usually, this is a spread betting company. Conversely, it’s probably true to say that most traders who trade via DMA tend to be more experienced. It’s beyond the scope of this FAQ to examine the relative merits of trading with – or without – DMA. Equally, it’s not meant to imply that one route is better than the other. Far from it, each has its pros and cons.
Non-direct market access (DMA) brokers (e.g. most spread betting firms)
Broadly speaking, if you’re a new trader you’ll want to keep your costs to an absolute minimum and not pay for unnecessary luxuries you don’t need and are unlikely to use. Keeping everything as simple as possible is also advisable so that you are flexible and can do an about turn at any time. This is important as new traders tend to make sweeping changes while finding their feet. Securing a 20% discount by paying an annual subscription for charting software isn’t such a great deal if one wants to jump ship after just a month or two. For these reasons, it’s best not to worry too much about the data feed and focus more on charting software and brokers. Start with brokers, as there’s no point deciding on charting software first, only to find that it’s not supported by your broker. Of course, you can get this as a separate stand alone package, but this is likely to add to your expenses. So, start with brokers who offer an ‘all-in-one’ package. For many U.K. based traders, this is likely to be a spread betting company. When assessing these companies, the main points to consider are:
• What’s free & what’s not
Is everything free, or do you have to pay for any part of their service (beyond spreads)? If there is a fee, how does this compare to other companies?
• Be prepared to compromise
Are their spreads and commissions the best available? This is likely to be a trade-off with other aspects of their service. For example, they may provide a charting package that you particularly like, but their spreads are slightly wider than those of another broker that doesn’t have the charting software you want.
• Paper trading facility?
Do they provide a simulated trading facility, (often referred to as ‘demo trading’) - so that you can paper trade before using real money? Almost certainly, they’ll offer something, but the sim’ platform should mirror the live platform as closely as possible. Additionally, is it available indefinitely or is there a time restriction?
• Have a check list of features
Does the platform have all the features you require? For example, if you plan to swing trade (i.e. hold positions for more than one day), does the broker offer a guaranteed stop facility? This matters to some traders in order to protect them from ‘black swan’ events. E.g., if World War 3 breaks out in the middle of the night, any open positions that move against you are guaranteed to be closed at a pre-defined level. In a fast moving market, stops that aren’t guaranteed might not be filled, putting your account at risk. So, not only would you wake up to find you’re at war, but you could be stone broke as well!
• Opening balances & margins
Is there a minimum deposit required and, more importantly, is there a minimum amount that you can trade? With spread betting companies, you’ll trade ‘per point’ movements of a (share) price as opposed to the underlying instrument itself. Some firms permit you to trade as little as £0.10p per point. This is a useful facility, especially if you’re funding your account with a very small opening balance, i.e. £500 or less.
• Safety & security
Is the firm regulated by the Financial Services Authority (FSA) – or some other authority such as the Securities & Exchange Commission (SEC) in the U.S.? Are your funds held in a separate account that’s segregated from the company accounts so that, in a worst case scenario in which your broker goes bust, you can be reasonably sure of getting your money back? Is their security up to scratch so that no one can hack into your account? Obviously, if you’re just funding an account with £100 – then these issues probably aren’t deal breakers!
• Customer support
What is their support like? Can you get hold of them easily and quickly? Do you have an individual account executive that you like, respect and can talk to?
• Golden hello offers
If you’re considering a spread betting broker, the market is so competitive that many firms offer prospective clients a ‘golden hello’ in order to secure their business. This includes things like a credit of £100 to the opening balance, or to write off any losses in the first month or to match whatever the account is funded with – up to a specified maximum. These deals change all the time, so it will pay you to shop around and see who is offering the best one. Equally, guard against being seduced by a good deal at the expense of a feature you want such as a guaranteed stop loss facility.
DMA brokers
If you want to trade via DMA, your costs are likely to increase as you may have to pay for your data feed, your charting software (if you need it) and, in some instances, for your trading platform. In the case of the X_Trader platform from Trading Technologies (a popular platform used by professionals) - this could be as much as USD $600 per month. Even so, many of the points made above also apply to DMA accounts. In addition, these points are worth considering:
• Diversity
Do they offer all the markets and instruments you require? Futures brokers are often just that, so if you want to trade equities you’ll either have to switch accounts altogether or open a separate account with an equities broker. Some brokers offer a variety of markets and instruments but you might need to open separate accounts (with the same broker) in order to trade them. Occasionally, you might be able to trade all markets from one universal account, but this facility is not common and the commissions may vary from one market to the next.
• Don’t get caught out!
Make sure that you compare like with like – especially when it comes to round trip commissions. Some brokers advertise what looks like a really low commission, but it’s just one side of the trade and not a ‘round trip’. Similarly, others will offer a low RT commissions, but this doesn’t include exchange and clearing fees which add considerably to the overall cost.
• Free stuff tends to be limited
Some brokers offer their own data feed for free which sounds great, but it may not be enough for your requirements. For example, stock index futures traders often like to look at market breadth indicators like the NYSE $Tick, VIX and cash indices. Futures brokers will provide futures data only, so you’ll have to go elsewhere to get a data feed for these indicators and indices.
• Not all data is equal; some data is more equal than other data!
Data feeds can and do vary and the feed supplied by your prospective broker may not be suitable for your needs. For example, if you use cumulative volume analysis in your trading, you not only need a charting package that supports it (not all do), but also pure, unbundled, tick-by-tick bid/ask data. Even some very well known and popular brokers do not provide this.
• Never accept the broker’s opening offer
If you’re opening an account with a DMA broker, don’t accept their first offer. If you like everything about the firm other than their round trip commissions, go back to them and haggle – politely! Remember, the larger your opening deposit and the more you trade, the better the R/T commissions are likely to be.
• Burn as few bridges as possible
Most data feed providers, charting software companies and brokers allow you to test drive them before signing up. It will really pay you to do that and don’t feel awkward about walking away from them and politely saying ‘no thanks’ after the trial period. It’s not a bad idea to leave the door open and say that you’re very impressed but, on this occasion, you’re going to go to XYZ. However, tell them that if it doesn’t work out, or you decide to open another account in the future, they’ll be first on your list to contact.
One final thing . . .
Regardless of whether you’re the greenest of newbies or a battle hardened pro, do check out the Reviews section of T2W as it contains a comprehensive list of data suppliers, charting software companies and dozens of brokers. After reading what fellow members think, please say if you found their review helpful (or not) and, when you decide on the broker etc. that’s right for you, please add your own review!
and they noticed that ET keeps deleting them and only posting the good comments. They did not even get any feedback from ET Administration for their actions! :-0
