Trading Costs and Commissions

When trading more often some strategies like scalping and arbitrage might require more sophisticated, and expensive, trading systems and software. Many day traders use multiple monitors or even multiple computers to execute their orders. Then robotic sytems mean developing or purchasing software or EAs. For these traders a fast Internet connection, such as broadband, is a must.

Then comes the intial investment. Most gurus advise to start in the neighborhood of $25K to $100K. You can, theoretically, start with much less. Some brokers only require as little as $3K and the FXCM platform can go live with only $25 (no “K” there). If you are low funded (under the intial recommended $25K) then absolutley check out Aerilon’s Challenge Project.

For the most part traders do not use Dealing Desks as they exist to trade against their own clients – their “book”. They usually have bigger spreads and higher commissions. And day traders do not use retail brokers because they are slower to execute trades and charge higher commissions. Direct Access Brokers allow the trader to send their orders directly to the ECNs for faster trade execution and better prices that reduce the costs of trading.

Commissions vary greatly among brokers depending on if you’re using Full-Service (to trade for you) or Discount brokers (for self-directed trading). Amoung discount brokers the difference usually amounts to how much volume they’re getting from their clients, both on the individual level and overall. Common retail brokers usually charge high commissions regardless of your trade size or quantity. With direct-access brokers the more you trade, the cheaper the commission is. A direct-access broker may charge as little as $0.004 per share traded, or $0.25 per futures contract.
Consider your commission structure as some brokers offer both a per share or the per trade basis.

Other brokers charge based on commission and/or the Spread. The spread (also known as slippage) is the difference between the bid and ask prices. Wikipedia explains how “Some day trading strategies attempt to capture the spread as additional, or even the only, profits for successful trades.”

Remember that trading on margin means that your broker loans you money to make a purchase and charges interest on that loan. Options has a list of intial costs in the form of margin requirements depending on your strategy or creature.

Don’t forget about the potential drawdown costs of using a margin’s evil cousin: leverage.

And finally, familiarize yourself with tax consequences and advantages. There are regulations coming down that might make scalping, especially robot-type, high-frequency trades less profitable.