What to Look For in a Broker

The first thing I hear about this topic is low commissions. While important, broker commissions is number five on my list. Instead, you need to find out the following:

Number One: Can you communicate with the broker? Can you phone someone when something goes wrong? A popular brokerage several years ago got hacked, causing many traders to lose large sums of money. With no contact information, they were left out to dry. I want to be able to call someone right away when I have trading issues.

In addition to this, do the brokers speak fluent English? I once had a brokerage account that, when I called, I could not even understand the receptionist. It was very awkward, indeed.

In the same vein, can the brokers handle problems quickly and efficiently? These are questions you need to ask before you sign on to a broker.

Number Two: Do the brokers send your orders directly to the market? If your broker admits to “diverting your order to the trade desk for review,” run for the hills. There is nothing to review. What that really means is that the brokers may be looking to front-run your order, a practice that is similar to insider trading.

As brokers are able to see the market slightly ahead of you, they can manipulate the price by placing personal or corporate orders ahead of you, driving prices up, and then executing your order, leaving you holding the bag for the disadvantaged price. Make sure you are dealing with an honorable firm. The brokers we use send orders directly to the market. This is non-negotiable.

Number Three: What is the execution speed? It is extremely frustrating when your orders fail to execute on a timely basis. When I hit the “send” button, I expect them to fill instantly. The price changes continuously, and when I see a price I like, I want it then.

Number Four: Do the brokers actually fulfill your needs? Some brokers do not allow for same-day-expirations trades. This may not be very attractive if that is something you may want.

Number Five: What are the commissions? Brokers make most of their money on lending funds out on margin; commissions may be secondary. That said, I do not want a company with zero commissions, as I am certain that the brokerage firm is making money on my trades in some covert way.

I always look for a broker with fair remuneration — fair for the both of us. Commissions can vary depending on several factors. Generally speaking, the more you trade, the better rates the brokers will provide. You may also be able to negotiate your rates.

Number Six: I prefer a broker in the same country that I am trading in. The presence of a domestic broker means a great deal to me, especially if there is some issue that needs to be resolved. This segways into another point for foreign clients. Make sure your broker does not exchange your funds on a daily basis. Instead, he or she should hold them in U.S. dollars until you say otherwise. For example, a Canadian client years ago had a situation where this person’s Canadian broker exchanged this person’s funds into U.S. dollars at the beginning of the day and then converted them back again into Canadian funds at the end of the day. With each conversion, the client lost in the process.

If the client exchanged $10,000 Canadian into U.S dollars, the client may have received $7,500 U.S. But, given the same exchange rate, that conversion back to Canadian dollars may have only been converted to $9,900 Canadian dollars. If left unchecked, that leakage will soon erode your funds.

Number Seven: Not all brokers offer quality trading platforms. Make sure they are easy to navigate and offer what you need in terms of charting and data.

Most traders only look at commissions and jump at cheaper prices. Maybe they are cheaply priced, but something may be lacking. Accept the fact that, if you want a quality broker with a superior trading platform and prompt, courteous support, you will have to pay for it. Our brokers have been vetted, and we are happy with their performance.

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