When deciding to open a trading account, the average trader not only has to select a broker, but also the type of account they wish to operate.
One of the key criteria you should look for when opening a trading account is whether the broker has a conflict of interest. By their very nature, a Spread betting account will have a high conflict of interest, a Futures account will have zero conflict of interest and an ECN account may lie somewhere inbetween. Let me explain further…
One of the key criteria you should look for when opening a trading account is whether the broker has a conflict of interest.
When you place a trade with a spreadbet broker, the broker takes the other side of the trade. The trade does not get sent to the real market, so in fact you are trading against the broker. Of course, the broker will hedge its client’s trades in the real market to eliminate the risk, but for all intents and purposes you are playing a game against your broker. When your stoploss is hit, the broker (not the market) gets to keep your money. Similarily, if your trade wins the broker has to pay you out of their own funds. You can now see why an unscrupulous broker may do anything in their power not to pay out, such as “dealing desk intervention”… but more about this later.
With a futures account, your trades will go to the real market. Your broker merely facilitates your order going to the market and cannot influence the outcome of the trade in any way. Your trades will be executed at the current price at the futures exchange where that product trades. The other advantage of the Futures market is that all trading occurs at the same venue for any particular financial instrument. For example, the EURUSD contract (know as 6E) will be traded at the Chicago Mercantile Exchange. This provides transparency as the volume traded or waiting on the order book can be seen by all.
An ECN broker promises to send your trades to the real market (rather than trading against you) where they will be matched against a liquidity provider. This is somewhat better than placing a trade with a spreadbet broker, as the ECN broker will be looking to make profit from the commission rather than your losses. In practice, it always pays to check the execution policy of ECN brokers to make sure that what they state is true.
The obvious advantage of spreadbetting for traders based in the UK (in the majority of cases) is there will be no tax to pay on profits. The downside is that losses cannot be offset against your tax bill. However, if you are planning to trade professionally for a living, I would recommend getting advice from a good tax accountant because spreadbetting profits as a main source of income are a grey area in taxation law.
Dealing and platform costs
I have found the more transparently a broker operates, the higher their barriers to entry. For instance, a spreadbet account can be open online and funded by a credit card in a matter of minutes. There will usually be a web-based trading and charting platform so you can get started right away. The idea is to make it as easy as possible for the punter to lose money!
A Futures account will require agreements and ID to be submitted and funds to be wired by bank transfer.You will then need to purchase or lease a trading platform from upwards of $60 a month. Some data feeds come free, but others will need to be payed for too. As you can see, transparency and no conflict of interest have higher running costs.
An ECN account will require forms and ID to be submitted, but the trading platform is usually provided free. So this is a very good compromise.
The cost of trading an ECN or Futures account will be deducted in trading commissions. In other words you will pay a fixed amount of commission per “round trip”, typically $5 to open and close a trade, but the prices will mirror the live market. Conversely, spreadbet companies do not charge a commission, but their fees are built into the spread, so the difference between the bid and ask price will be wider than the actual market.
Forget speed of execution and scalping for spread betting. If they see you scalping, you are likely to get the dreaded “dealing desk intervention”.
This is why the Futures or ECN brokers are more suitable for scalping – the price you open a trade at is the price you get, and it is possible to get out at the same price with no loss apart from commission. It would be impossible to scalp on spreadbet as just opening a trade would instantly put you negative by a few pips. Spreadbetting is more suitable for swing trading where 1 or 2 pips here and there will not make much difference to your strategy.
Speed of Execution
You will want to take into account speed of execution when choosing a broker. This matters more for scalping or intraday trading than swing or position trading. The fastest route to the exchange will most likely be a futures broker, but this also depends on the speed of your internet connection and the technology employed at the broker’s end.
Forget speed of execution and scalping for Spreadbetting. If they see you scalping, you are likely to get the dreaded “dealing desk intervention” whereby a message pops up asking if you’re sure you want to execute the trade or a re-quote where the price becomes invalid and you have to resubmit the trade.
You will also want a platform that is reliable and has minimal downtime. Even with a futures broker, it is possible that the platform could go down for a period of time. This once happened to me with an order hanging in the market. It always pays to have your broker’s phone number on speed dial!
Lot sizes & Leverage
One of the advantages of spreadbetting and ECNs is the ability to trade small size. A trader can open an account with as little as $200 and start trading micro lots, which equate to approximately 1.25 cents a tick. Futures can only be traded in full lots which means for the EMini S&P for instance, the minimum trade size is $12.50 a tick. There is an exception – the futures markets have started to offer “mini lot” contracts but these are not worth trading as volume is very small.
Another advantage of spreadbetting or ECNs over futures is much higher margin, sometimes giving you the trading power of 500 times more than your initial deposit. This can be a double-edged sword and it’s possible you will blow your account very quickly.
The most popular free trading platform among the retail community is Metatrader, also known as MT4. It’s fast, easy to use, doesn’t use much in the way of computer resources and is offered by most spreadbet and forex brokers. There are hundreds of free indicators and “expert advisors” that have been written for Metatrader. The platform has its own scripting language; MQL that allows you to code your own indicators or tools if you should so wish. There is also a huge community of Metatrader programmers out there who will write custom code for you very cheaply. There is also a Strategy Tester that allows you to backtest your own strategies.
The most popular free trading platform among the retail community is Metatrader, also known as MT4.
If you wish to trade futures, then there are several paid options available. My Futures trading and charting platform of choice is Ninjatrader. It can be bought outright or leased monthly. Depending on which broker you use, you may receive free market data for some exchanges, e.g. the CME and have to pay for data from other exchanges, for instance EUREX. You will also have to ensure that you recieve historical aswell as current live data, and this is not always provided by the same broker.
Again, there are many indicators and scripts for Ninjatrader, plus functions to backtest strategies. With Futures, you will also want to see the Depth of Market or (DOM) which is catered for by NinjaTrader.
The Futures platform favoured by the pros is XTrader which is more expensive than Ninjatrader. One of the reason the pros like it, is because it provides the most intuitive DOM which is easier to use, but patented to XTrader.
Another Futures package which is fast catching on is Market Delta. The software is unique in that it provides a “volume footprint” that allows the trader to see where the aggressive buyers and sellers entered the market. It also provides the usual DOM and Market Profile – another tool that is very popular with futures traders.
Dealing desk intervention, requotes, spread widening, price spikes
I know I have berated spreadbet brokers a lot in this article, but I’m going to berate them some more! It’s all very well making a tax-free profit, but tax on negative profits is zero anyway.
You must be aware that trading with a spreadbet company or even a non-ECN broker puts you on a not very level playing field. Besides the conflict of interest issue we talked about earlier, there are numerous tricks that can be played. These include:
- spread widening to such an extent that any stoploss within a 100 pip range is taken out.
- delaying the platform, so execution is slow
- only filling orders when price ticks against you
- constantly re-quoting until price is at your disadvantage.
- spiking price to take out stops and then removing the spike from historical charts.
- Showing a message “telephone quotes only” when there is a fast move in the market.
- freezing the platform during news events.
I also encourage you to google the web for “Virtual dealer plugin”. This was a much talked about software module supplied to brokers to “handicap” the Metatrader software. I still like Metatrader as a platform, but it is worth being aware that it can be manipulated.
I do hope this article has given you an insight into the many choices of brokers, platforms and trading accounts that are available. If you’ve enjoyed this article, please use the social media buttons below to share it. Thanks!