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Direct-access trading systems use front-end trading software and high-speed computer links to stock exchanges such as NASDAQ, NYSE and the various electronic communication networks. Direct-access trading system transactions are executed in a fraction of a second and their confirmations are instantly displayed on the trader's computer screen.
Commissions and fees
Most direct-access firms charge commissions based on trading volume, usually in terms of calendar months. Increased trading activity typically reduces commission for each trade. Commissions are generally on a per share basis and typically around 0.005 USD per share. Reduced commissions are considered a must for scalpers that trade significant volume on a daily basis.
Unlike traditional online brokerages, direct-access brokerages usually pass through the exchange fees involved in trading to customers. Examples are specialist fees, Electronic Communications Networks fees, exchange modify and cancel fees, clearing fees, regulatory fees etc. Some firms set pre-established fee schedules rather than passing on exchange fees directly on a per case basis.
Platform or software fee
Some firms do not charge their clients a platform fee. Instead, they provide a lower-end, less-featured electronic trading platform to minimize their costs. More complex systems are offered as an upgrade option, but come with monthly fees. Costs can be recovered elsewhere, including hidden fees, or giving a client significantly less interest for cash balances.
Some firms have platform or software fees which cover firms' costs of developing, using and maintaining their proprietary trading software or platforms. The charge can be somewhere between $50 to $300 per calendar month. However, most firms will waive the fee if you trade up to a specific volume per calendar month.
There are usually two types of minimums to open a direct-access account:
- Balance minimums
- This could be several thousands in USD. Different types of accounts may have different requirements. More deposits are required if one engages in pattern day trading according to United States regulations.
- Activity minimums
- Some firms charge inactivity fees if a minimum monthly trading volume has not been met. Many firms will deduct transaction fees and commission paid each month from that month's inactivity fee. Hence an activity fee often serves as a minimum monthly commission which is paid to the brokerage. However, not all direct-access trading brokerages charge an inactivity fee.
Direct-access brokerages vs. online retail brokerages
- Speedy execution: It allows very fast execution, measured in terms of milliseconds.
- Cost reduction: Transaction costs are lower for trade executed with a direct-access brokerage. Transaction costs are generally per share (ex. $0.004 per share) whereas retail brokerage firms charge on a per transaction basis (ex. $5 per trade).
- Slippage: Slippage is controlled at a minimal. Also it has a higher chance to execute at a better price when the market suddenly moves rapidly.
- Control over order routing: With most direct-access firms, a trader may choose to send his orders to any specific market maker, specialist, or electronic communication network.
- Liquidity rebates: Traditional online brokerages usually have a simple and flat commission fee per trade because they sell order flows. Direct-access brokerages do not sell order flows and get rebates They earn money from serving their customers. An active trader can gain what traditional online brokerages gain.
- Volume requirement: Some firms charge inactivity fees if a minimum monthly trading volume has not been met. For example, Interactive Brokers charges a 10 USD per month inactivity fee on low net value accounts generating less than 10 USD a month in commissions. Many firms will deduct transaction fees and commission paid each month from that month's inactivity fee. Hence an activity fee often serves as a minimum monthly commission which is paid to the brokerage. However, not all direct-access brokerages have minimum monthly trading volume requirements.
- Knowledge: New and inexperienced traders may find it difficult to become familiar with direct-access trading. Knowledge is required when dealing with something like making trade decisions & order routing.