It is not a surprise that active traders are highly coveted clients desired by every online broker. These seasoned traders require far less hand-holding than a new investor, and generate much more revenue for the broker each year. The question is, though: How many trades (buy or sells) must be made to be considered an “active trader”?
After speaking with numerous brokerage executives, traders and industry experts over the last year, there really is no defined answer. This is because every broker has a different number based on their offering and costs of doing business. In fact, “active trader” has become so loosely used in marketing and branding that niche brokers such as Lightspeed have begun using a new term, “hyperactive trader” to distinguish between the two.
Published by Blain Reinkensmeyer on Monday, September 29th, 2014 .
Here at StockBrokers.com, we have no problem setting industry standards, and thus will define both from our perspective. An “active trader” is best defined as someone who places at least 10 trades or more per month, or 120-plus trades per year. Alternatively, a “hyperactive trader” is someone who places at least 10 times that much, 100-plus trades per month or 1200-plus trades per year.
Understanding where you fall as a trader is critical to selecting a broker. As an active trader, you are likely comfortable paying $4, $5, $6 or even $7 per trade. You desire low-cost trades, but having a feature-rich platform or research is likely important too, thus, you are willing to pay more. However, speak to a hyperactive trader, and you’ll find that the platform design, research and trade tools don’t matter; cost and execution talks while everything else walks.
Because of this, our top 10 ranking in this category weighs both trader types, with the most significant factors being price, speed and execution as these are aspects both have in common.
Our No. 1 pick, Lightspeed, wins this category because the broker has only one item on their mind, and that is active trading. You won’t find the broker’s platform at a beauty pageant anytime soon, and you can forget research. What you will find though are programmable hotkeys for every possible order under the sun, low margin rates, direct market feeds and a secret to controlling cost so powerful that only a select few brokers offer it, and few traders actually understand it.
This secret is that Lightspeed passes 100% of all market rebates for adding liquidity back to its clients. The combination of limit orders and direct market routing can dramatically lower net trade costs. Confused yet? I’ll explain. Many market exchanges will pay your broker for routing your order to them. These rebates are usually no more than a tenth of a penny or two per share, but they add up. Using a broker like Lightspeed, routing a 1,000 share buy limit order to the NASDAQ will currently net you $0.0021 per share. Lightspeed charges $.0045 per share, so the original $4.50 trade now becomes only $2.40, thanks to a $2.10 rebate from the NASDAQ, nearly a 50% savings.
While Lightspeed gives this rebate to the client like the example above, most online brokers do not. The practice, known as receiving payment for order flow, is very common in the brokerage industry. In fact, only two brokers included in our review this year do not receive payment for order flow, and instead offer market rebate kickbacks: Lightspeed and Interactive Brokers. Only one broker, TradeStation, does not accept payment for order flow, nor does it pass on rebates.
Ironically enough, according to Wikipedia, payment for order flow was a practice pioneered by Ponzi scheme king Bernie Madoff. But let’s get something straight: Your average online broker is no crook. The SEC requires by law that new clients be notified upon opening their accounts. Furthermore, these rebates help pay for the slew of tools, research reports, mobile apps and customer service clients enjoy.
Order routing aside, our other top finishers in this category shine for different reasons. Interactive Brokers offers the lowest margin rates in the industry. TradeStation provides competitive rates with quality executions and an insanely powerful desktop platform rivaled only by TD Ameritrade’s thinkorswim. OptionsHouse has an easy to use platform, low pricing and ample experience from its parent PEAK6 that’ll make any options trader get excited. We recommend reading our full online broker reviews for a complete breakdown of each broker.
All in all, finding the right broker as an active trader first requires defining “active.” Next, ask yourself, “How really important is low cost?” Assume that the lower your trade costs are, the lower the overall quality of everything else you will have (platforms, tools, research, etc.) In the isolated world of a hyperactive trader, there is certainly no free lunch.
All pricing data was obtained from a published web site as of 11/01/2014 and is believed to be accurate, but is not guaranteed. The StockBrokers.com staff is constantly working with its online broker representatives to obtain the latest pricing data. If you believe any data listed above is inaccurate, please contact us using the link at the top of this page. For stock trade rates, advertised pricing is for a standard order size of 500 shares of stock priced at $30 per share. For options orders, an options regulatory fee per contract may apply.
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