What is a Deep Discount Broker?
A deep discount broker is an agent who mediates trades on exchanges between securities buyers and sellers at even lower commission rates than those offered by a regular discount broker. As one might expect, deep discount brokers also provide fewer services to clients than standard brokers; such brokers typically provide little more than the fulfillment of stock and option trades, charging a flat fee for each.
- Deep discount brokers also provide fewer services to clients than standard brokers; such brokers typically provide little more than the fulfillment of stock and option trades, charging a flat fee for each.
- With the advent of online trading, deep discount brokers have grown in popularity. Deep discount brokers may even offer other services besides equity trading, such as the ability to write checks on the account, execute trades over the phone, or the availability of research information about stocks, bonds, and mutual funds.
Understanding a Deep Discount Broker
Full-service brokers are licensed financial broker-dealer firms that provide a large variety of services to its clients — including research and advice, retirement planning, tax tips, and much more. All brokers will execute trades for their clients, but a full-service broker will also research various investments and give advice.
The ideal client for a full-service broker is a person with a large investment portfolio but lacks the time or desire to manage his or her own investments. In return for these services, full-service brokers typically charge high fees when a client buys or sells stocks. For example, a client may pay $150 or even $200 per trade with a full-service broker, while the same trade would cost between $5 and $10 online with a deep discount broker. Full-service brokers also charge annual service charges or maintenance fees on their clients' accounts.
Deep Discount Brokerages 101
With the advent of online trading, deep discount brokers have grown in popularity. Deep discount brokers may even offer other services besides equity trading, such as the ability to write checks on the account, execute trades over the phone, or the availability of research information about stocks, bonds, and mutual funds. These days when it comes to trade execution, discount brokerages often use the same third-party services as brand ones. For example, TD Ameritrade uses third party execution services such as Knight, Citadel, and Citigroup — the same third-party services are used by TradeKing, (purchased by Ally Invest), but for about half the price.
Most brokers offer flat-fee stock trading. However, some brokers, especially active trading-focused brokers, offer per-share trading. Both have their pros and cons; it depends on an investor's average trade order size. For example, placing 2,000 share orders, on average, would make a per-share broker expensive, compared to a flat-fee broker. The vast majority of investors, over 99%, trade with a flat-fee broker. Brokerages may also require a minimum balance of anywhere from $500 to $2,000. However, the brokerages may waive the minimum requirement for investors who are opening an IRA.
Over the last few years, commission free trading has been all of the rage. The reason a deep discount broker can afford to do this is because they sell the order flow to HFT firms and hedge funds. The latest firms to offer commission free trading on stocks, ETFs, and options are: Fidelity, Etrade, & Schwab.
Example of a Deep Discount Broker Trade
For example, Charles is looking to open a brokerage account and is deciding between a full service broker and a deep discount broker. He has learned that the full-service broker offers tax advice and planning, as well as consultations. The deep discount broker only offers execution of orders at the low price of $1 per trade vs. $35 per trade at the full-service broker. Because he is only interested in execution and no other services, he decides to do his business with the deep discount broker.