Review of Datek Direct and Interactive Brokers

This week I review the two more brokers that offer programs for active traders, Datek and Interactive Brokers. I wrote about the beefed-up offerings for active traders at Schwab and Fidelity two weeks ago, and last week I wrote about the active-trader fare at TD Waterhouse and CSFBdirect (formerly DLJdirect).

Related Active Trader Columns

Fidelity's Powerstreet Pro v. Schwab's Velocity

Review of CSFBdirect MarketSpeed and TD Waterhouse Select

Direct-Access Treats at Mainstream Brokers

These last four brokers all are full-service, catering to lots of different types of investors. Their active trading platforms form part of an array of products that may also include bond trading, financial counseling, proprietary research and the like.

Datek and Interactive Brokers, or IB, while not quite as fancy as pure daytrading platforms, have eschewed the aforementioned frills and focus on active trading customers. Unlike full-service online brokers, Datek and IB don't require you to make a minimum number of trades to receive the things at the heart of active-trading software, like streaming real-time quotes and streamlined order entry.

And their software's pretty potent. Trader Workstation 4.0 from Interactive Brokers and Datek Direct from Datek are both more nimble than any platform I've looked at so far. These brokers don't bombard you with a dozen or more windows that track indices, perform technical analysis and screen for trading opportunities in real time, the way daytrading firms do. Still, when it comes to their ability to route orders, they're in the same ballpark as full-featured direct-access platforms used by institutional traders and daytraders. (See this related story about direct-access firms.) You could call Datek's and Interactive Brokers' programs direct access lite.

Distinctive Features

Like daytrading software, Datek Direct and Trader Workstation let you -- the user -- decide how to route your orders. Do you want to "preference," that is, to direct your trade to a particular market maker or ECN? Just click your mouse. Do you want to let the broker's own "smart-order-routing" software scan the market and automatically find the best price? Just indicate as much when you place your order. (See this related story on preferencing and smart order routing.)

Contrast that approach with the way most other brokerages, including the four we've talked about thus far, typically route orders. Let's say you send off an order to buy 100 shares of xyz stock. That order's first stop might be your broker's own trading desk. From there, it might be routed to a market-making firm and finally to an ECN. Any small delays along the way can mean you don't get the best possible price.

With direct access platforms, if the price is right, the match occurs. Instantly. That's where direct access platforms can save even moderately active traders money. If a direct access platform allows you to shave an average of 1/16 point off each round-trip trade, that translates into savings of $625 a year, assuming you made 100 round-trip trades of 100 shares each.

So why doesn't everyone trade with direct access software? Until now, only the hard-core daytrading brokerages have offered it. Their wizzy software platforms can be intimidating, even for veteran traders. Also, they charge high commissions and some charge software rental fees.

Interactive Brokers and Datek have bundled direct-access features into platforms that are fairly easy to use. In fact, the Datek platform is easier to master than the software a lot of full-service online brokers give you. Moreover, both brokers charge commissions that are in line with or better than what those brokers charge.

Interactive Brokers

Interactive Brokers' Trader Workstation was a groundbreaker in the retail online trading business when it debuted in 1999: a deadly fast direct-access platform that didn't cost $300 a month to rent. Indeed, IB's commissions are among the lowest around, at a penny a share for equities. Options trades cost just $1.95 per contract.

Little wonder IB has acquired an almost cult-like following. Go to Silicon Investor and there's a whole discussion thread centered around IB. Whenever this column mentions IB, emails pour in saying I didn't give it enough space.

So what's the attraction? Many talk about the platform's Spartan design. All of Trader Workstation's trading tools can be found within a "trading screen," a kind of watch list displaying streaming real-time quotes. Enter a stock, a futures contract or an options contract on the trading screen. When you're ready to trade, you simply click on the bid or the ask column.

An order entry box pops up that allows you to modify your order and send it to the market. If that's not fast enough, you can create hot keys -- designate single keys on your keyboard -- that automatically set up certain types of orders such as a buy-limit (glossary limit). When the trade executes, your account balance is updated in real time.

All these features stream to your desktop as a Java application. A previous version of Trader Workstation existed as a front-end program that was stored on your computer's hard drive. The new version 4.0 is currently being rolled out to new customers.

What's missing from Trader Workstation 4.0? Two things that might be critical to day traders: charts and Level II quotes. Charts are said to be in the offing. For now, some Trader Workstation users tell me they buy their data feeds from a separate provider such as eSignal, WindowOnWallStreet.com or DTNiq. If you want to do the same, plan on adding at least one more monitor so you can view charts and the IB trading screen simultaneously.

If you use Trader Workstation as a stand-alone application, you'll have to forget about Level II quotes. In most instances, that shouldn't be a problem. However, if you're planning to preference orders, as the Trader Workstation allows you to do, you really need a Level II screen, so you can get a sense of the size of orders up for grabs from each ECN or market maker.

Lacking charts and Level II quotes, Trader Workstation is not the ideal daytrading platform. Futures traders tell me they love it, however. So do swing traders, who hold stocks over a few days. Learning to use Trader Workstation does take time. The site's manuals and demos, however, are excellent. And those penny-per-share equity commissions and low options-trading prices should help make the learning curve worthwhile.

Datek

Datek's commissions are somewhat higher at $9.99 for market and limit orders. Options trades cost $9.99, plus $1.75 per contract. What you get in exchange is a highly intuitive direct-access platform that may be ideal for active traders who are just starting out, and even for those more experienced.

Datek's current trading platform displays streaming real-time quotes and has smart order routing. Datek Direct, Java-based, adds some valuable additional features to that basic package. The Datek Direct rollout is taking longer than the firm had anticipated. While 25,000 customers are already using it, Datek says it should be fully available by the end of this quarter.

Datek Direct uses a trading-cockpit interface similar to TD Waterhouse Select. A Level II screen sits on the left side of the window. (Level II quotes cost $10 a month if you make less than 20 trades during that time.) A screen showing the Island ECN order book resides on the window's right side. The order-entry controls sit dead center.

Their design is elegantly simple. Fill in the blanks with a ticker symbol and the desired quantity. Then scroll through a list of options that determine how the order is to be routed: Direct to Island or to another ECN? You can also choose a market maker, or Nasdaq's small order execution system known as Soes. Alternately, you can let Datek Direct's smart-order-routing software find the best price. Your account is updated in real time within the order entry area along with a message confirming the order. No need to flip to another screen to follow your order.

Datek Direct also lets you trade right from the Level II quote display. You set up the order by highlighting a price you see. That makes Datek Direct a better execution vehicle if you plan on preferencing orders a lot.

Finally, you can get real-time charts. As for real-time quotes, like IB's trading screen, Datek's displays your watch list with streaming real-time quotes.

About the only negative on Datek is that it gets a lot of use. I've heard stories of people being summarily logged off during heavy trading days. Also, it's not ready for sophisticated options traders. Right now you can do basic options trades, but the company has yet to set up a timetable for when it will support more complex options strategies.

The Verdict

Both Datek and Interactive Brokers show that direct access trading can be greatly simplified. Datek has cut down on the information overload that full-featured direct access programs throw at traders. Yet the brokerage has managed to maintain the powerful order-routing features that are the reason people use direct access in the first place. IB seems better suited to traders who want to trade futures and put together more complex options strategies.

Will mainstream brokers mimic what these brokers currently offer? They will if they want to hold onto their active trading customers.

Once again, thanks for all your emails describing your experiences with the brokers we've talked about in this series. Next week, I'll be doing a mailbag column addressing some of the super feedback I've received on this series. Please email me at [e-mail].