Kicking the wires

The way we trade shares today has evolved significantly since the first appearance of public companies. From the early days with ink-stained ledgers, to direct purchases, open outcry, chalkies, brokers and electronic bourses, trading has come a long way. Today’s electronic trading platform market is deep and it is varied. But despite the smorgasbord on offer, when choosing a platform personal taste remains the key ingredient.

For more than 20 years the development of Australia’s capital and financial markets has held pace with world leaders and electronic platforms have been at the vanguard of this advance. Like much else of Australia’s financial community, the trading platform industry has developed to be amongst the best in the world.

At first glance, that statement may seem a misnomer. After all, Australia’s trading platform market is essentially one imported from offshore – ComSec being a notable exception. And most people would have good cause to say, with regards to trading platforms, Australia has excelled where it often has before – in imitation rather than innovation. But in this case, that wouldn’t be quite accurate.

Firstly, Australian financial and capital markets are extremely efficient. True enough, there are always professionals banging on about one gripe or the other, but to be fair, the domestic market is top shelf. Equally it is true not all trading platforms on the market today strike the same standards. There are specialist platforms targeting specific markets and there are those that focus purely on price and myriad other distinctions in-between. Abandoning the notion that only a client advisor and personal relationships can provide the service you’re after (and horror broker stories are not uncommon), a stroll through what the electronic trading platforms have to offer is well worth the trip.

To start, there are really two types of electronic trading platforms; institutional and retail with many crossing over between the two.  The general distinction that holds is that institutional platforms target the institutional/ broker/professional market, and the retail platforms serve the DIY and SMSF investors.

A good example of this distinction is Iress and ComSec. Iress is an execution platform that is installed across almost every advisor desk in Australia, yet most at home would not have heard of it. ComSec, on the other hand, caters almost exclusively to the non-broker and professional DIY market and is one of the most widely recognised brands in financial services.

Given the number of trading platforms available, and the percentage of which serve both markets, it becomes difficult to completely separate the categories for ranking purposes. Hence taking a needs-based approach seems to be a reasonable course of action to pursue.

The available choice of electronic trading platforms is, as stated, vast. Most banks offer their own platforms but a number are merely “white labelled” versions of others and are almost identical to each other. A white label simply allows a bank (or other corporate) to put their brand on another’s product. The bank essentially pays a clip back to the platform provider as “rent” to use or on-sell their product (platform) to investors. Also, some of those listed below are owned by banks – see E*Trade and ANZ, or ComSec and CBA. But, putting these various issues to one side, as a representative list, the following will suffice:

• ComSec

• Iress

• E*Trade

• Bell Direct (Third Party Platform)

• CMC Markets

• Macquarie Edge

• IG Markets

• D2MX

• Morrison Securities

• Timber Hill (Interactive Brokers)

• Saxo (most commonly a white label product)

The above list is far from exhaustive, but rather selected with a view to reflecting the diversity of choice within the market. Clearly the most commonly promoted and widely used platforms are the major retail offers – eg ComSec, E*Trade, Bell Direct and Macquarie’s latest entry into the market. And while active traders tend to gravitate towards these low-cost options, others with more tailored needs often float towards specialist providers such as an IG or CMC Markets. The Macquarie offer is a more holistic offer aiming to carve out a footprint between these two categories.

In the case of IG and CMC, these platforms specialise in CFDs, or Contracts for Difference, rather than just outright stock trades and both offer more sophisticated trading options and multiple markets. Other specialist providers may focus on Futures, Commodities or Foreign Exchange. Some platforms catering to the greater demands of professional traders offer a huge array of multi-market and international market access. Saxo, Interactive and Macquarie all provide comprehensive premium platform services across multiple markets. But while some platforms are deliberately different from others, across all platforms simplicity, cost, support and functionality are the primary considerations. Some platforms earn a solid tick in all boxes, others, not so much.

PRICE

Concerning a price-only analysis, the comparative calculations are easy enough to do yourself. However that does not necessarily mean that a cheap, easy-to-use platform with good functionality, outranks a slightly more expensive and complicated platform. The more expensive platform may offer access to limitless trading opportunities that return greater value than the relative cost incurred. Reconciling an answer here would obviously depend upon the user. And therein lies the rub. Given the size of the issuer and user market, a purely price-based analysis across the trading platform industry is of little value. At the very inexpensive end of the market, little separates the offers, and more real benefits can be gained simply through good functionality or ease-of-use.

Evidence suggests most decisions on choice of electronic trading platforms aren’t just about price or, indeed, aren’t well researched at all. Brand marketing is powerful in the industry and client referrals for the platform operators are high. But given the available range it would seem foolish not kick the tyres of at least a few trading platforms before selecting one or more. It is easy enough to do.

It should be noted, that a good number of DIY and SMSF investors regularly use more than one platform. Traders operating in different markets and in different financial instruments often adopt a “horses for courses” approach.

As stated, comparing the selections based on price alone seems easy enough – if a little limited.  Brokerage fees are charged either on a flat fee per-trade basis or as a percentage of traded volume (and sometimes a combination of the two). But these two pricing models are what generally distinguish client advisor services and electronic platforms. An advisor may, for example, charge 1% brokerage while a trading platform may charge $50 per trade. Under this example, trading a $10,000 parcel of shares would either cost $100 (charged by a client advisor) or the $50 flat fee charged by the platform. Advisors, of course, claim their services offer far more than just execution with their “expertise” more than making up for the cost difference. (Some BrisConnection unit holders may tend to agree.)

Notwithstanding, an active trader may want to consider this price difference in terms of the percentage profit they are giving away to their advisor. For example ten $10,000 trades through an advisor may cost $1000 brokerage.  Through a DIY platform, those 10 trades, at $50 per trade, would cost $500.  Does the advisor provide value for that $500? Possibly. But what about over 100 trades, or 1000? The numbers do mount up.

THE POWER OF RESEARCH

Aside from price, other considerations when selecting a trading platform include the features, ease of use, reliability, security, market access, and any additional add-ons that may be desirable including linked services.

Many of the published studies on the subject point to broker and industry research as something clients are most keen to receive as part of their service. Obviously good linked banking facilities (CMTs), possible margin lending and other bells and whistles are also attractive, but research generally is king. And it’s easy to understand why.

Given DIY and SMSF are a central part of the target market for electronic trading platforms, these investors are the type most in need of research and support. “Trading in the dark” – with no research or advice assistance – is an almost certain fail.

Virtually all trading platforms provide some level of research support. Aegis and Huntley Research are among the most widely distributed by the platforms.  At the pointy end, broker-produced research like Goldman’s, Macquarie and UBS etc are highly sought and regularly provide insights to listings outside the major indices, but access here is limited. And the small cap sector is where research is most likely to provide an edge and DIY investors are most likely to add value to their portfolios. Niche research in this space is gold.  The cheaper trading platforms on the market tend to lack when it comes to providing quality, niche research outside the top indices and specialist-backed broker platforms provide a more attractive spread.

Hence the bank and broker-backed platforms generally outscore in the research department.  Groups like Huntleys and Aegis are pure research shops and mostly keep their focus on the major indices generating as much research as possible to on-sell to other brokers. Possibly every trading house in Australia would receive one or both of these reports hence access to this research is also vital. But, only largely through niche research can real outperformance be gained. In other words, the best platform providers in terms of providing research support are those that can access and offer a mix of both specialist and blue-chip research. A good charting package is an additional support.

FUNCTIONALITY, TOOLS AND SERVICES

Assessing the reliability and ease-of-use of trading platforms is a purely personal experience. Suffice to say some offer good, free demonstration accounts. Opening a few different demonstration accounts and trading a live, simulated market is the best way to test such subjective comparisons. Specialist operators tend to offer the most useful road test models and they market on the strength of both the platform and the services. Generally, most of these specialist platforms also operate on a “margin” basis, meaning a percentage of your funds are held as margin on your trading activities. How these margin accounts are administered and run by the platform is an important test of compliance to be considered.

As a general comment, having traded through a number of electronic trading platforms, all become relatively easy with time (some quicker than others), but all provide a good trading base. Matching personal activity to the functionality on offer matters most.

From time-to-time platforms do, of course, “go down”. The scenario can be simultaneously frustrating and frightening. For those without a ready alternative it’s a fairly dark place to be. The trick here is to understand what the platform actually offers: is it direct access to the underlying market, or is the platform a “construct” that sits on top of the market activity and operates through market markers. Direct access is often preferable and less likely to fall down – less moving parts.  This distinction of direct market access (or DMA) is particularly useful when distinguishing between specialist, and multi-market providers.

Research aside, the major points of distinction within the trading platform industry are the features, the linked services, the tools (charting and the like), and market access – or information. Security concerns should generally not be an issue, except in the case of trading derivative markets where investors should ensure all client accounts are segregated.

Considering all these categories as a whole, it becomes quite difficult to cut up. In most cases, the various platforms are becoming more and more homogenous. Pricing differences at the sharp end are negligible, similar charting packages are available, ASX information should be a given across the board and all provide or directly link to margin lending and cash management services. Yes, certain margin lenders charge different rates on different stocks but cash management trusts are generally all cut of the same cloth.

Specialist platform providers, including CMC and IG Markets are significantly different. These two platforms are CFD specialists – or Contracts for Difference.  There are other specialist CFD platforms and then there are those trading platforms that specialise in FX, Commodity or Futures trading. In all cases, these platforms cannot be directly compared to a ComSec, E*Trade or other so-called “discount broker” because of the different consumer markets they focus on.  But, like the major retail offers, price competition between the specialist platforms is fierce with little to distinguish between. Again, personal feel is paramount.

With a clear eye on what’s important, a purely quantitative analysis of the electronic trading platform market probably doesn’t add much value. If cost is the only consideration, then any one of a number of platforms holds equal merit.  Ease-of-use, functionality and research support are the defining features. And where specialist services are required, specialist providers should be front-and-centre.

At the end of the day it’s impossible to offer verifiable recommendations on trading platforms. If it’s price alone – pick from a few. But an honest assessment includes assessing a collection of intangibles where only taste matters. Research support is one real and measurable distinction across all offers and access to niche research is especially valuable.

Hence DIY investors are well advised to trial a number of options, before settling on one (or two) trading platforms. Those that require more specialist services are best served by specialist providers. And as personal needs evolve, so too might the optimal choice of platform, because at the end of the day, most people have their own taste in tea.