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How to Trade Without a Broker

February 10, 2011

direct access tradingIn recent years, online trading has become increasingly popular.  Many investors are realizing that they can trade on their own without the help, and extra expense, of a traditional stockbroker.  Not only are traders becoming empowered by doing their own research and making their own decisions on how to manage their portfolio, but also they are cutting out the middleman, and saving money by trading without having to pay the broker.

When using an online brokerage firm, investors are still trading with a broker.  They’re just trading with a less expensive broker who provides less service, support, and advice.  When using an online broker, there is still a middleman involved.  However, there is a way to eliminate that middleman, too.  It’s called direct access trading.

What is Direct Access Trading?

Direct access trading allows investors to trade directly with market makers and specialists, rather than going through a broker.  Direct access trading uses software to link directly to the major stock exchanges and electronic communication networks, or ECNs.  (An ECN is a completely electronic stock exchange.)  Having this direct access to the exchanges not only saves the trader on commissions, but it also allows for faster executions and immediate trade confirmations.  For active traders, and those who need immediate information, this instantaneous action and reaction is a great value.

The other major advantage to direct access trading is it allows the trader to see more of the market.  With an online broker, you can see the bid and the ask price for a stock.  With direct access, you trade using Level II quotes, which allows you to see how many buyers and sellers there are at each price, as well as the size of the lot they are trading.  This gives the trader a much better picture of a stock trend, as well as how much support or resistance there is at any given price level.  This information, if used properly, will allow you to pinpoint the timing of your entry and exit for maximum profits.

With direct access trading, it is very important to choose the right trading platform.  There are many direct access platforms on the market today, but they are not all created equal.  They can vary quite a bit in price, features, and even speed.  In addition to choosing the right platform, you need to know how to use it properly.  Simply having the software on your computer will not make you a more successful trader.  You need to have the specific knowledge necessary to use it the same way professional traders do.

Trading without a broker in this fashion is not the best thing for everybody.  For a new trader, we would recommend staying away from the complexities of this type of trading until you have a better idea of how the markets work.  However, for intermediate and experienced traders, direct access trading will help you maximize your profits.

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