- 1998: Volume 7, No. 1 Should You Be An Electronic Trader?

The futures and options markets, long associated with innovation and cutting-edge technology, are finally opening the door to electronic access. Taking a cue from firms like E-TRADE in the equities market and E-FOREX in the foreign exchange market, a number of firms have been introducing products which allow traders to interface with the futures and options markets electronically.

Is It Right for You?

Although it's easy to get excited by major advances in technology, the first decision a trader must make is whether he should be trading electronically at all. The trader must question what level of service they require to trade successfully. To the more experienced, sophisticated trader electronic access represents an opportunity to trade, quickly, accurately and cheaply. The beginning trader, on the other hand, may find that electronic trading is the fastest way to the deep end before he has learned how to swim.

Your current location on the learning curve will determine whether you are ready for electronic access. If you rely upon advice and strategies received from your broker, you will probably want to delay your first foray into electronic trading until your trading skills catch up with trading technology.

If, on the other hand, your trades are mostly self-directed or your primary interest in the markets is to hedge a cash position, then electronic access may represent an opportunity to make your trading operation more efficient and less costly.

What is Electronic Access?

In a conventional brokerage operation the trader calls his broker, places his order and waits while the broker looks up his account, reviews open positions and money balances before transmitting the order to the floor. The trader waits for confirmation that an order has been filled. All of this information is relayed through the broker, usually via telephone. When a market is accessed electronically all of these processes are handled directly through the trader's computer with no direct human contact. This can be done in several ways.

Products like ZAP (see article below, "ZAP Offers Traders an Electronic Link to Order Fills") serve as an interface between your computer and your broker. Other firms, such as XPRESSTRADE, LLC are using the internet to deliver their services in the belief that doing so saves traders from having to purchase additional software and avoids constant upgrade woes. In either case, the trader gets his orders to the floor via his computer.

What Are the Benefits of Electronic Access?

As with discount brokerage in general, cost is a major benefit to electronic access. The totally electronic business model employed by these firms allows them to operate more efficiently due to the automation of many internal operations. They do not require the same administrative staff, commissioned sales force or brick and mortar expenses that a traditional brokerage firmdoes. As a result, the broker is able to offer cheaper commission rates.

Increased control is another benefit traders will experience when trading electronically. In many cases orders can be placed 24-hours a day. This is particularly true on internet-based systems. After all, the web never closes. Traders should be aware, however, that placing an order at 3:30 a.m. does not mean that the order will be filled immediately. The order still has to be traded on the appropriate exchange and the exchange's hours are somewhat less flexible than the internet's. Most computer interfaces are designed to acknowledge an order within two to three seconds. Once an order has been filled and reported to the firm, the electronic bropker instantaneously updates the trader's P&L, money balances, current positions, log of working orders, margin requirements and transaction history. All of this information can be called up by the trader with a few keystrokes. 

All the Bells and Whistles

Electronic access is not limited to market transactions. In addition to their own account information, traders have access to market data in the form of real-time quotes and a variety of analytical tools. XPRESSTRADE will allow traders to configure a personalized quote screen with detailed summaries of current conditions in up to 15 futures and options contracts. XPRESSTRADE is preparing to launch a Java-based charting program which will allow traders to access intraday, daily, weekly, and monthly bar, line, curve and candlestick charts and to select among a variety of technical study and additional indicator overlays.

Traders also have access to a margin calculator, which computes exchange-minimum margin requirements on "what if" positions, contract specifications and calendars of significant trading dates.

Premium research consisting of The Vardon Report, written by regular Trader contributor Bob Ecob, is available on a pay-per-view basis. Traders also have access to The Hightower Report via regular mail and Tucker Emmett's Daily Commentary.

Questions You Should Ask

It is important for traders to realize that when you establish your electronic trading relationship you should look for the same qualities that you do in a conventional broker. Make sure that your electronic broker clears on those exchanges which trade the contracts you are interested in. Your access to the markets will be limited by the markets your broker can deliver. Is the firm registered with the NFA? What is the financial stability of the clearing firm? Look at the firm's assets, adjusted net capital and stockholder equity. Do the numbers make you feel comfortable?

Beyond the issue of financial responsibility, you should examine the uniquely electronic issue of operational stability. We have all experienced computer crashes on a personal level. What happens if your electronic trading firm experiences a major system crash? Do they have redundancy built into the system that will provide a backup in the event that the primary system crashes?

If the firm is internet-based you must be concerned about security. XPRESSTRADE has taken pains to assure that their system represents a secure vehicle for receiving and disseminating sensitive information. All online transactions and communications between XPRESSTRADE and its customers over the internet are encrypted and protected by Netscape Secure Commerce Server. They also make use of a user ID and password system to ensure that all transmissions to and from clients are confidential, private and secure.

In the final analysis, it is imperative that traders ask themselves first, "should I really be trading electronically." If you can honestly answer, "yes," then you will have no trouble locating a firm which is ready to meet your needs.

Graham W. Burns is the editor of the CRB Trader. For information on ZAP, visit their website at www.zapfutures.com or call 1-800-441-1616. to find out more about XPRESSTRADE, visit their website at www.xpresstrade.com or call 1-800-947-6228.