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WHY DAY TRADERS NEED AWESOME BROKERS

By Andrew Aziz  |  
Andrew's Newsletter  |  
Sep 22, 2022

As an individual trader or investor, you cannot trade directly on a Stock Exchange. For that, you will need a “broker” or “brokerage account.” A broker is simply an intermediary that gives people access to a Stock Exchange. 

For day trading, you need a good direct-access broker. In fact, you don’t need just a good broker; you need an awesome broker. Your broker is your vehicle to trade. If you have a bad broker, you lose money, even if you are trading properly and accurately, because your broker eventually has to fill your order on time and at a good price. 


For the sake of keeping this blog short, I will not attempt even a brief review of the major ones. An online search of the topic can provide much more in-depth information about available brokers. However, I will share here what brokers many of our community members and I are using and why. But before that, let me explain the pattern day trade (PDT) rule.

Pattern Day Trade Rule

The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) enforce laws that limit the number of trades a trader can make if they are undercapitalized. The rules adopt the term “pattern day trader,” which includes any person who day trades (buys and then sells or sells short and then buys the same security on the same day) four or more times in five business days. Under the rules, a pattern day trader must maintain a minimum equity of $25,000 on any day that they day trade. 

This rule is strictly enforced by brokerages inside the United States due to their regulation by FINRA. However, offshore brokers, who have their main office and activities outside of the United States, are not subject to this rule and they do not enforce the PDT rule with their customers. This creates an opportunity for new traders who fall below $25,000 in their account to be able to day trade if they open an account with offshore brokers. Capital Markets Elite Group Limited (CMEG), based in Trinidad and Tobago, is an obvious example of an offshore broker. Such brokers offer no PDT restrictions to undercapitalized traders, and in return, they offer a slightly higher commission fee structure. Interactive Brokers Canada is located in Canada and therefore not literally “offshore,” but the PDT rule still doesn’t apply to them.  

Using these brokers does require some consideration. The U.S. SEC and FINRA strictly monitor and enforce regulations on U.S. brokers to ensure that customers and traders are protected from brokerage firms. Offshore brokers, on the other hand, are not regulated by U.S. authorities. Offshore brokers are regulated by authorities of the country they are operating in, but often these regulations and regulators might not be as strict and diligent as they are in the United States, and there is an inherently higher risk when working with them.

Conventional Brokers vs. Direct-Access Brokers

Conventional online brokers usually direct customer trade orders to market makers and other liquidity providers through pre-negotiated order flow arrangements. This multi-step process often takes time – from a few seconds to several minutes. These brokers often do not offer a super-fast execution as their services tend to place a greater emphasis on research and fundamental analysis functions over speed execution. These brokers, at times called “full-service brokers,” provide research and advice, retirement planning, tax tips, and much more. Of course, this all comes at a price, as commissions at full-service brokerage firms are much higher than those at direct-access brokers. Full-service brokers are usually well suited for investors and retail swing traders, but due to the lack of speed execution, they are not a good choice for day traders.

Day traders need a fast and flawless order execution as their entry and exits are often only literally one or two seconds apart. I often get in and out of trades in a matter of a few seconds and people wonder how I can do it so fast. Direct-access brokers are the answer to this question. These firms concentrate on speed and order execution – unlike a full-service broker that focuses on research and advice to investors. 

Please note that many brokerage firms have begun to offer both direct-access and full-service services (such as advice and research), so it is best to check their websites and inquire about their services. 

For example, in Canada, BMO Bank of Montreal InvestorLine, RBC Direct Investing, and CIBC Investor’s Edge are examples of full-service brokers that are generally not suited for day trading. On the other hand, Interactive Brokers Canada Inc. and Questrade offer both direct-access trading and full-service brokerage services.

In the U.S., some of the best-known direct-access brokers are CenterPoint Securities, Lightspeed Trading, E*TRADE, and Interactive Brokers.

Interactive Brokers

I am currently using Interactive Brokers (IB). Why? They are an inexpensive and established broker that offers discounted fees. In 2020, Barron’s rated IB as the best online broker. Based on quite a few different criteria, IB maintains the largest electronic trading platform in the United States and is the largest broker on the Foreign Exchange Market (Forex). In addition, I appreciate their global presence, as more than half of their customers are from outside of the United States. 

As you investigate which broker might be best for you, please take a moment to read some commentary about various brokers on our website.

Capital Markets Elite Group Limited
Capital Markets Elite Group Limited, not to be confused with the famous CME Group Inc., an American financial market company operating an Options and Futures Exchange, is an offshore broker that offers an excellent 6:1 margin for traders, higher than most brokers do. Since they are based outside of the U.S., the PDT rule does not apply to their clients. This results in CMEG being an alternative for those with less than $25,000 available for day trading. If you live in the U.S. and have under $25,000 available for day trading, you may be eligible to use CMEG as your broker. CMEG, however, does not offer services to Canadian residents or to persons using a Canadian bank account.

Robinhood and Commission-Free Brokers 
Commission-free brokers such as Robinhood and TradeZero (which does not permit residents of the United States and Canada to hold accounts) are suitable for swing trading and investing, but not for day trading.

Resources

Would you like to ask Andrew Aziz some questions or share your own experiences? He would enjoy hearing from you at  [email protected]