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Direct-access trading geared toward aggressive investors

By ROB CARRICK
Saturday, August 24, 2002

You might have gathered from the disarray on the stock markets that day traders have left and gone away, like Joe DiMaggio or the dinosaurs.

But if this is so, then why has there been a virtual explosion in the number of on-line brokers specializing in a service for hyperactive investors called direct-access trading?

The fine points of direct-access trading vary depending on who you speak to, but generally it means that your order doesn't rattle around in your on-line broker's computer for a few moments and then potentially make other stops as well before hitting the exchange floor. Instead, it goes directly to market for near-instant execution.

What's more, the commission fees can sometimes be lower than traditional brokers, especially in the U.S. markets. Other benefits include vastly more detailed stock quotes and a more sophisticated trading platform than any mainstream on-line broker offers.

Direct-access trading is pure overkill for casual on-line investors, but it's a major asset to the time-sensitive buying and selling that aggressive investors and professional traders require.

Brokers offering direct market access have been a feature of the U.S. on-line trading world for a while, but they've had only a minimal presence in Canada up until this summer.

A new Montreal-based direct-access broker called Jitney Online (http://www.jitneyonline.com) will formally announce that it's open for business next week. Questrade (http://www.questrade.com) is another new player, as is the Canadian arm of U.S.-based Interactive Brokers (http://www.interactivebrokers.ca).

These new guys will vie with TradeFreedom (http://www.tradefreedom.com), a 2=-year-old direct-access broker based in Montreal, and Swift Trade, which made a name for itself as a day-trading firm in the boom times of 1999 and 2000.

There are also a couple of more mainstream brokers that can arguably be considered direct-access brokers, E*Trade Canada (http://www.etrade.ca) and Datek Canada (http://www.datekcanada.com). Datek, another U.S. import, should be up and running shortly after securing the necessary regulatory approvals.

It's tempting to say the target client for these brokers is the day trader, but that may not be the best choice of words.

"The term day trading has acquired a pejorative side," says Richard Morin, vice-president at the parent company for Jitney Online. "We are addressing the professional trading community. The least active of clients that we're looking for would on average do one trade per day."

Jitney Online is licensed only in Quebec right now, but it has filed for regulatory approval to serve clients in Ontario and several other provinces. The firm offers access to both U.S. and Canadian equity and options markets.

A big attraction at Jitney Online is the speed at which client orders are filled. Mr. Morin said it takes about half a second, as opposed to 30 to 60 seconds at the typical mainstream on-line broker.

Cheap commissions are available as well. Jitney Online and TradeFreedom offer Canadian-market commissions as low as $20 and $22.95, respectively, while traditional on-line brokers typically charge $25 to $29.

The real savings from direct-access trading are in the U.S. market. For example, Interactive Brokers charges $7.50 (U.S.) for an order of 1,000 shares of a U.S.-listed stock, while a typical on-line broker would charge $25 to $29.

These fees are not as simple as they appear, however. Some direct-access brokers require you to sign up for a data feed that can cost several hundred dollars a month, although some or all of the cost may be rebated if you trade actively.

Some brokers also have account inactivity fees and minimum account sizes. The minimum account at Jitney Online is $25,000 (Canadian), while TradeFreedom requires a minimum $10,000 deposit on opening an account.

Another limitation on the popularity of direct-access trading is that some players don't offer Canadian stocks. Interactive is one such firm. Also, the availability of registered retirement accounts is spotty.

The mainstream broker most vulnerable to the new direct-access brokers is E*Trade Canada, which has been actively courting aggressive investors with its Power E*Trade product. With Power E*Trade, you can trade for as little as $19.99 if you make 75 or more trades in a quarter.

Colleen Moorehead, E*Trade Canada's president, questioned whether the new direct-access brokers have the breadth of services and products necessary to keep customers satisfied. While E*Trade bills itself as offering direct market access, it also offers the same services as mainstream brokers.

On the other hand, Ms. Moorehead said she believes that active investors remain a viable target market, even after the stock market carnage of the past two years.
rcarrick@globeandmail.ca

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