Page 74 - THE MARKET WHISPERER

72 PART 2 - Day Trading And How To Get Star ted

the quantity of shares needed and the speed of execution, but the direct
access system leaves that choice in the trader’s domain, which is how it
should be. For the most part, the trader will prefer executions of up to
several thousand shares, considered a large amount, routing the orders
via the broker’s automated routing system. The system will automatically
find the cheapest and most rapid route much faster than the trader can.
For a professional trader, a delay of one or two seconds can in some cases
mark the difference between profit and loss. In other instances where
the quantities are large or the commission is more significant than the
execution speed (a method we’ll learn about later), the trader may want to
route the order direct to the market makers.

It is very clear that a trading system supporting direct access is far
better and more effective. If so, why is it that most brokers don’t allow
direct access? More on that later.

With Which Brokers Should You Never Work?

The online broker, unlike the direct access broker, is interested in delaying
the execution of transactions. If a transaction is delayed, it could lodge even
greater profit in the broker’s pocket beyond the regular commission: for
example, imagine a situation in which a client sells 1000 Microsoft stocks
and simultaneously another client with the same broker wants to buy 1000
Microsoft stocks. The broker will prefer to execute the order between the
two clients without needing to relay it to the stock exchange computer.
Closing the transaction internally saves the broker costs, and sometimes
even makes the broker additional profit from the spread (difference)
between the bid (purchase) and ask (sale) prices. A spread of one cent over
1000 stocks means $10 more profit beyond the regular commission that
the broker collects from both of the clients making the transaction. To
create opportunities where the broker can execute orders in-house, the
broker may be tempted to delay execution for several seconds. This is
insignificant for the long-term investor, but intolerable for the day trader.
In addition, when online brokers relay your order to the market, they will
choose the destination cheapest for themselves. Usually these are market
makers who will share their profits with brokers. The cheapest destination
is not necessarily bad for you and can sometimes be a faster route, but
your preferences as a trader are different from those of the broker. You
want speed and liquidity; brokers want profit.