Saturday, September 13, 2008

The Changing Face of Brokerage Firms

As I walked through the exhibition hall at the Trading Expo in Las Vegas, I was struck by the intensity of the competition among the various forex brokerage firms. All tout narrow spreads, high leverage, and a wide array of pairs and options for trading. Charting features once associated with stand-alone programs are now standard in the brokerage platforms.

The latest battleground appears to be features that enable traders to backtest their strategies prior to trading them. My last post mentioned how Scottrade is offering the Trade Ideas Odds-Maker program as a free feature, letting them test out screening criteria over the past three weeks of trading. TD Ameritrade is offering the Cool Trade program as a free offering for customers; this provides a platform for testing trading strategies, trading them in simulation mode to get a feel for them in real time, and share strategies within a trading community. Trade Station has offered its system-development and testing platform free of charge for their active traders; active Fidelity brokerage customers have access to the Wealth Lab Pro testing platform. What makes the TD Ameritrade and Scottrade offerings unique is that they involve no programming whatsoever.

Over time, I expect this competition to only intensify. Identifying and exploiting historical trading patterns, once mostly an activity limited to professional traders, will increasingly become part of the retail mainstream. Note, for example, how Cool Trade enables retail traders to fully automate their trading strategies. I would not be surprised to see the next round of competition to include online trading journals and metrics to facilitate performance enhancement and self-coaching, along the lines of the StockTickr program. Such tools, like the screening and system-testing/automation platforms, will require significant efforts at trader education and coaching; it's not reasonable to ask brokers to guide traders in their learning curves.

Too much of retail trading has been a revolving door, with brokerage firms continually trawling for new accounts, as traders get in over their heads and lose their money. A far more promising model is to provide traders with the tools and training that keep them in the door as successful and satisfied market participants. I suspect that the firms staying on the leading edge of this evolution will be the long-term winners in this competitive arena.