Last update: 23-Apr-2009

As a small trader, one of the keys for success is to choose wisely your broker. It can be the difference on making money for yourself with your trades, or end up you working to make money for the broker. Indeed, you may be right on all your stock picks, but fail to be profitable due to the broker’s high commission. This is particularly important if your investment capital is reduced.

Broker selection criteria

First we will discuss the factors to take into account to select your broker.

1	Internet Service. This is a must, as you intend to do your trades by yourself. Also, any other way of trading (such as phone orders, etc) will imply significant costs, normally starting on US$ 19 per trade. Practically all discount brokers offer this service, and it’s the key of their low costs.
2	Execution speed. This will determine the quality of trade that you got. A slow execution speed will normally imply obtaining always a price worst than expected. This is particularly important in volatile market conditions.
3	Commission costs. The most important factor to consider. If you are a small trader, with a capital around US$ 5000, then you must have a commission schedule that may reduce near to zero your trading costs. Have in mind that this will depend also on the type of trades that you intend to do (stocks or options?). Consider also the maintenance and/or incativity fees applicable (monthly or yearly), as well as the costs for fund or withdraw money for the account.
4	Orders flexibility. For the strategy that we propose, it is important that the broker offers a rich flexibility on the type of orders processed. The basic order types are market orders, limit orders and stop orders. All brokers will offer that, but have in mind that some will charge you an extra fee for limit or stop orders. Day orders and Good Till Cancel (GTC) orders are normally offered by everyone, but some brokers in addition provides the capability of activating orders after certain date/time. Some more advanced order types are trailing stop orders and conditional orders. These last type of orders can be very useful for implementing autopilot strategies.
5	Margin / Cash account. We recommend establishing a margin account, which will increase your flexibility by allowing you to short-sell stocks, as well as allowing leverage your capital. This normally increases the amount required to open an account.
6	Cash management facilities. The idea of trading is to make money in the market, and then withdraw money from your account. Be sure to find out the cost of withdrawing money from your account, as well as the applicable restrictions.

We have made the research and have selected a list of brokers more suitable for small investors. They are presented below in strict alphabetic order:

A.B. Watley Direct Firstrade Securities Interactive Brokers Investrade Discount Securities MB Trading Online Brokerage Services Scottrade Sogotrade Tradeking Zecco.com Find below a comparison between these brokers, based in their public information available. When some information is unknown, it will be marked with a question mark (?). All amounts are in US$. Disclaimer: This information is presented for informational purposes only. We have done all our efforts to verify the information, but we cannot guarantee it is fully accurate. Please confirm with the broker all the information presented here before opening an account.

Account Open / Maintenance

This comparison criteria is important for you as a small trader. Very likely you will start with a very small capital. This may reduce the list of options available for you. See below:

Broker Minimum for opening Monthly maintenance Inactivity fee A.B. Watley Direct 2,000 25 0 Firstrade Securities 0 0 0 Interactive Brokers 5,000 10 20 † Investrade Discount Securities 2,000 ‡ 20 20 MB Trading 2,000 0 0 Online Brokerage Services 2,000 69.95 # ? Scottrade 2,000 0 0 Sogotrade 500 0 0 Tradeking 0 0 0 Zecco.com 0 0 0
† For accounts below 2,000 ‡ 5,000 for foreigners # Software fee

Firstrade Securities, Tradeking and Zecco have no entry barrier (zero minimum), and Interactive Brokers has the upper level to open an account. All others are around US$ 2000. 6 out of 10 offer their service with zero maintenance costs. By law, the minimum amount for opening a margin account is US$ 2000. If you want to be able to short stocks, you will need it.

Trading cost

There are two possible basis for trade commissions: Flat and per share. As a small trader, you will normally trade few shares, and therefore a per share basis will be preferable. In options trading, the commission start with a base plus an additional cost per contract. In the table below this is shown as base price + contract price.

Broker Type of Commision Cost per Share Flat fee stock Commission Options Trade Commission A.B. Watley Direct Flat - 9.95 9.95 + 1.50 Firstrade Securities Flat - 6.95 6.95 + 0.75 Interactive Brokers Per share 0.005 † - 0 + 0.75 † Investrade Discount Securities Flat - 7.95 (MKT) 11.95 (LMT) 0 + 1.50 ‡ MB Trading Per Share / Flat 0.01 4.95 0 + 0.95 Online Brokerage Services Flat - 7.95 14.95 + 1.95 Scottrade Flat - 7.00 7.00 + 1.25 Sogotrade Flat - 3.00 n/a Tradeking Flat - 4.95 4.95 + 0.65 Zecco.com Flat - 4.50 4.50 + 0.50

† Minimum $1.00 ‡ Minimum $14.95

The following examples illustrates the commission costs for typical small trader transactions. We have considered that the amount to stake will be grossly a third of his capital, around US$ 1500 (actually, this is more than we may advise initially, but it illustrates the point). The transactions are (a) buy 50 shares priced in $30 (limit order), and (b) buy 5 calls, which means you will be controlling 500 shares with these 5 contracts.

Broker Buy 50 shares at $30 limit Buy 5 calls A.B. Watley Direct 9.95 17.45 Firstrade Securities 6.95 10.70 Interactive Brokers 1.00 3.75 Investrade Discount Securities 11.95 14.50 MB Trading 4.95 4.75 Online Brokerage Services 7.95 24.70 Scottrade 7.00 13.25 Sogotrade 3.00 n/a Tradeking 4.95 8.20 Zecco.com 4.50 7.00

In the example, Interactive Brokers offers the lowest commission for a US$ 1,500 investment in shares (US$1!), followed closely by Sogotrade. For options, Interactive Brokers has also the lowest cost in options trading. However, please note that Interactive Brokershas a flat monthly cost per maintenance of US$10. Depending on the monthly quantity of trades you intend to do, it will worth to pay that fee. If you make four or more trades a month, your costs will remain lower with Interactive Brokers pricing schema. Zecco.com is an interesting case. When we did this review two years ago, they were just starting and offered no commissions. Now their pricing structure has become more standard, and currently they offer 10 free trades for month, but only if you have a capital of US$25,000 or make 25+ trades in a month. So now they are not so appealing for a small trader, but are still very competitive: For stocks , they have the second best flate rate; and for options, they are in the third position. Tradeking is slightly above Zecco’s costs, but offers more flexibility on the type of orders you can request, as we will see soon. Our recommendation is for Interactive Brokers. They have an excellent execution speed, reasonable good service level, and very powerful possibilities for trading automation using APIs. However, they may not be for everyone: the user interface can be hard to understand for the starter.

Miscellaneous information

There some other secondary criteria that may be important in your case.

Broker Domestic outgoing wire International outgoing wire Accept foreign customers? A.B. Watley Direct 25 60 Yes Firstrade Securities 30 35 Yes † Interactive Brokers 10 10 Yes Investrade Discount Securities 20 50 Yes MB Trading 15 50 Yes † Online Brokerage Services ? ? Yes Scottrade 20 40 No Sogotrade 25 50 No Tradeking 20 50 No Zecco.com 15 50 Yes
† Limited list

In the table we show some other costs to have in mind. As a successful trader, you should be pulling money out of the market. Ideally, you should be withdrawing money once a month. If this is the case, then Interactive Brokers has the best deal on this, because they charge you zero for the first withdraw of the month. In all other cases, this has also a cost, and if you live overseas, the cost in some cases the cost is higher. Almost all brokers accept foreign customers. Another important aspect is the order flexibility. Here, the information publicly available is limited. Most of traders accept trailing stops, which is the smartest way to “let the winners run” as the old market adage advises. Also, some brokers offers the ability to automate the trading, which can be very advisable for small traders with almost no time to trade live.

Broker Special Orders Automation A.B. Watley Direct Trailer Stops No Firstrade Securities ? No Interactive Brokers Trailer Stops Conditional Orders API Investrade Discount Securities ? Autotrade MB Trading Trailer Stops API Online Brokerage Services Trailer Stops No Scottrade Trailer Stops Conditional Orders No Sogotrade No n/a Tradeking Trailer Stops Conditional Orders Planned Purchases Zecco.com Simulated Trailer Stops No

Interactive Brokers, Scottrade and Tradeking offers Trailer Stops and Conditional Orders, which can help to enter or exit of positions in the most advisable moment without needing to monitor the market. Personally, we use Interactive Brokers for our trading. Do your own homework and make your decision. Remember that this is a key decision: By keeping low your trading cost you will have a good advantage, as your trading mistakes during the learning process will be less painful. Good trading! Note: If you are a customer of the abovementioned brokers and you detect something incorrect, or if you can provide information that is missing (marked as “?”), please post a comment below.