Full service and direct access brokers
When we say brokers, we think about the people between the buyer and the seller. We also think about the person who executes the trade. They generally do all those things, but did you know that there are several types of brokers? For example, we have direct access and full-service brokers.
Full-service brokers are more on investment research and advice. On the other hand, direct access brokers are more focused on executing the order quickly. The latter is what we will talk about today. Direct access brokers use complex computer software. And they learned this for a reason. It helps clients trade directly with other people through ECNs or electronic communication networks. Thus, these brokers are named as such. Technology is always dynamic. It has changed our lives, but it does not end there since it is continuously evolving. Who knows what we’ll have tomorrow with advancements? Trading is not an exception to this. It became more accessible, and markets were more efficient. Hence, many people demand that their trades should be executed faster. Today, most people are most likely trading with their phones instead of desktops, even though it is possible. We cannot deny that using our phones will always be more convenient and comfortable.
How do they work?
We mentioned that direct access brokers see to it that the execution will be fast. We also said that technology made people call for quicker execution. If we put it this way, we mean that direct access brokers have become more recognized today. However, it is not only because of the swift execution. It is also because of the other services that they offer. For example, they can also give streaming quotes, level II Nasdaq quotes, interactive charts, real-time features, and the like.
Direct access brokers removed their third party. This lessened their costs and raised their efficiency at the same time. And because of this, they can charge cheaper commissions compared to the regular brokers.
Typical online brokers will take customers to a centralized trading desk for them to make a trade. From there, these desks route to the company’s market makers and other liquidity providers using an order flow arrangement that was already negotiated beforehand. These platforms are known to be more on research and fundamental analysis instead of execution services. If you are a self-thought or a retail trader, this might be a good idea for you.
Today, online brokers do not charge anything to people who trade on stocks, ETFs, options, and the like. They may be free, but they sell order flow to HFT and market makers, and we call these arrangements PFOF or payment for order flow.
Which broker is for me?
It depends on the type of investor. For example, would an institutional investor hire a full-service broker? If this investor already has a team of researchers, there is no need to hire another one. Hence, wouldn’t it be wise to engage with direct access brokers who focus more on execution instead of full-service brokers?
On the other hand, what if you prefer to buy and hold long-term investments? It means that you need to study your investment well, and there is no rush for execution. In this case, why would you pay for an expensive premium if you do not need an immediate execution?
So, if you wonder which broker is the best for you, you should ask yourself first which type of investor are you.