When opening an option brokerage account, don't just go with the cheapest broker. You will find it worthwhile to spend some time evaluating their quality of service first. Read on for tips on how to find the best online options brokerage for your trading needs.
Full-Service Broker vs. Discount Broker
There are two main types of options brokerage firms in the market - the full service brokerage and the self-directed discount brokerage.
Full service or traditional brokerages provide a wide range of services at extra charges. Their services include advice to their clients on where to place their investment money.
Self-directed discount brokers generally leave investment decisions to the customer. Some also offer research, education or separately priced advice. Compare the actual service and conflicts, rather than assuming every discount or full-service firm follows the same model.
There are also brokerage companies that offer both services to their customers, letting them to choose the level of service they require.
Choose the level of support you need. Confidence in trading options does not establish financial expertise, and both advice fees and transaction-based compensation can create incentives worth understanding.
Quality of Service
When determining which is the best options brokerage, commission charges should not be the only consideration. When it comes to online brokers, site availability, speed of execution and ease of use are just as important, if not more so, than price.
Availability & Speed of Execution
Site availability and responsiveness are perhaps the most crucial aspects to look out for when selecting an online brokerage. No matter how low the commission charges, if the trade does not get through because the brokerage site is overwhelmed by ultra high load and becomes unavailable, the amount of transaction fees you save is not going to be worth it.
Responsiveness of the site affects the timeliness of the real-time price quotes you get. Remember, we are living in the information age. News travel fast, round the globe, 24 hours a day. Markets react to breaking news events faster than ever before. You don't want to be lagging, even if its just seconds behind, especially when the trading action is fast and furious.
Your own connection, device and account security also matter. Know the broker’s alternative order-entry and support arrangements before an outage.
Quality of Execution
The National Best Bid and Offer summarizes the best displayed quotations across relevant markets. Best execution is broader than a blanket guarantee of a displayed price: under FINRA Rule 5310, firms must use reasonable diligence to seek favorable execution under prevailing conditions. Compare routing disclosures, fills, price improvement, speed and execution likelihood; a quote is not a promise that any order size will fill at that price.
Ease of Use
With option trades already complicated enough on their own, it sure doesn't help when you still have to puzzle over how to use the order placement form. An easy to understand user interface helps minimize errors, which can be extremely costly when thousands of dollars are changing hands every trade. Look for option trading brokerages that offer single-screen order entry forms for Covered Call, Condors, butterflies and other multi-legged option strategies.
Commissions and Fees
Fee schedules differ. Some use a ticket charge plus a per-contract charge; others use minimums, caps or waived components. Read the actual schedule, including exchange and regulatory fees, rather than assuming every broker charges both components.
Per Trade Fee (or Ticket Charge) - There is usually a minimum fee per transaction, regardless of how many (or rather, how few) contracts are involved in each trade.
Per Contract Fee - This fee is charged for every option contract involved in each trade.
If X is a ticket charge, Y a per-contract rate and N the number of charged contracts, two illustrative schedules are:
Total commission = X + (Y × N)
If X instead represents a minimum charge, the schedule may be:
Total commission = max(X, Y × N)
Market or Limit Order
Check whether order type or route changes fees. A limit order controls the acceptable price but may not fill; a market order prioritizes execution without guaranteeing a price. For a spread, understand whether the limit applies to its net debit or credit.
Internet or Broker-assisted Trade
Broker-assisted transactions may carry an additional charge. Assistance can be relevant for outages, complex positions or operational problems; confirm available support and pricing in advance.
Volume Discount
There are options brokerage houses which charge a lower rate if your trading frequency exceeds a certain threshold. So, if you are an active trader making dozens of trades a month, it makes sense to look out for a brokerage firm that offers such a discount scheme.
Hidden Fees
Check charges beyond the headline trading commission. The following are examples of possible account fees, not charges imposed by every broker:
- Account Inactivity Fee - Some brokerages charges a fee if you did not make any trade after a certain period of time.
- Annual Maintenance Fee - This is a fee levied every year as long as you have an account with the brokerage firm, whether or not you have made any trade.
- Minimum Balance Fee - This is a fee that is levied periodically (say monthly or quarterly) when your account balance is below a certain threshold.
Commissions and execution costs can materially affect returns, especially on small or multi-leg trades. The worked commission example shows how two hypothetical fee schedules change net profit; it does not promise a fixed percentage improvement from switching brokers.
Permissions and account obligations
Confirm which strategies the account is approved to trade, margin and cash requirements, exercise cutoffs, assignment procedures and liquidation policy. Paper trading can help you learn an interface, but simulated fills and profits do not prove live execution quality. Verify the firm and relevant permissions independently.
