Discount Futures Brokers and Their Brave New World

Discount futures brokers only arrived in the late 1990s and since then they have had a mixed press. Not surprising, really, since there are good and bad. The trouble is, the changes in recent years, though beneficial to traders and investors in many ways, have encouraged cut-priced (or discounted) services with not just a reduced level of service but also a lower level of professionalism.

Whilst the futures market has existed for many years, it’s only in comparatively recent times that a major shift has taken place. It means that the traditional investor, investing for the medium to long term, has been largely replaced by the “trader”, who is looking for quick profits over a period of a few months at most, and often only days.

And what they trade is in most cases not the traditional shares or company stock, but options to buy the stock, or the future price of the stock (“futures”), which means no real attachment to the company concerned, no interest in its affairs other than how they affect the share price, no concern for the workforce, no attending the annual meeting to discuss and vote on the future direction of the company, and no stock certificate signed by the company secretary certifying the holder to be the owner of so many shares in the company.

This detachment is compounded by the fact that it may just as easily be a company based on the other side of the world as a local, or national, company.

It was undoubtedly the internet that enabled ordinary people to trade in this way, and at a discount, i.e. for cheaper brokerage fees than had been the case previously. With advances in computer capabilities and speed came equally impressive advances in software applications.

Stock brokers invested heavily as they saw the profit potential, and most of them began offering discounted services and promoting themselves as, among other things, discount futures brokers.

The trading platforms that enable you to make your trades instantly without speaking with another human being, the charts and their indicators, giving price histories going back to way back when on thousands of stocks, these are all the result of that massive investment. And they now enable brokers to attract far more business than before by using the increased automation produced by their advanced software programs to offer cut price services.

And while futures are now all the rage, the traditional role of the futures broker has all but disappeared. Brokers have re-invented themselves. The typical transaction now no longer involves the broker advising his client on how he sees the future of a particular market or how the client ought to consider spreading his risk. Even more in decline are pro-active services where the broker actively suggests investments and trades, or even takes over the client’s portfolio to trade as if it were his own. Only the more wealthy even consider paying for these kind of services.

Now what used to be called “execution only” services are king. The broker simply provides access to the information the trader needs in order to make trading decisions, often by technical analysis. More astute traders rely instead on independently obtained data. Real brokerage services have been taken over by “dealers” who make calls to customers to offer help and, more to the point, make sure they are making enough trades and incurring a decent level of brokerage fees.

Yes, the fees. Not much to worry about there, as it’s all discounted, right? Well, not so fast. There are brokers who are straight from the start about their fees, and there are others who are more evasive. If you’re opening an account for the first time, or switching your account to another brokerage, then you need to check the fee structure before you sign up. Watch out for hidden fees.

With each broker you consider, ask what their all inclusive “round-turn” rates are. Ask what your transaction costs will be, including any “hidden” fees. If you’re a regular trader then you’re in a position to negotiate fees rather than tamely accept the quoted minimum fees.

By protecting yourself from excessive fees, even from the new breed of discount futures brokers, you can at least more easily profit from the brave new financial trading environment.

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