Q&A
Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.
FRONT ENDS AND BACK ENDS
I’m almost embarrassed to ask you about what is probably a simple thing. I keep getting emails from vendors wanting to know if I’m satisfied with my “front end.” They talk about how easy it would be to have better filtering for stocks and better integration with order entry, and I’m not sure what they’re talking about. I called my broker, and they tell me everything is handled on their “back end.” Am I missing something? Hope you can help. —eqtrdr
Good question, especially these days. There are dozens, if not hundreds, of software developers who have entered the trading arena in the last decade or so. The market has become saturated with “new and better” platforms. Let’s break it down.
Most retail brokers and even professional broker/dealers have an order entry platform. Mine is RediPlus, which is provided by Goldman Sachs. RediPlus has recently spun off so it can be made available to other firms, not just Goldman Sachs firms. We see it as a group of windows that show market data, allow for entering and updating live orders, keeping track of positions, and keeps your profit and loss up to the second.
Your broker has the same type of setup, which may be their own proprietary platform, or they may use another vendor’s service for a fee. Many developers will allow themselves to be “white labeled” so that a brokerage may put its own brand name on it. In any case, what you see and use is referred to as the “front end.”
Now, many software designers and developers have worked with brokers and clearing firms to allow their software to interact with their services.
I’ll get back to that in a second, but first, let’s look at what the back end is and does. The back end is where the orders are sent to exchanges and electronic communications networks (ECNs) for execution. This is where the actual transactions take place, and where all the money is accounted for. Imagine giving your friend a $100 to place a bet for you (front end). If he doesn’t actually place that bet (back end), then you won’t have a bet, right? If your team won, you would expect to be paid. In trading, the back end is where all the actual executions take place, and trades are posted.
Back to the front end. Since there are various ways of entering an order and many ways to set up a screen, vendors are offering all sorts of stuff to facilitate order entry and so on. There are additional fees with these third-party front ends; some are worth it, some are not. For example, our friends at eSignal have worked on ways to connect via RediPlus through their charting packages and are still working on other ways.
Our traders can write their own programs, and many have, to go directly to the back end for automatic execution. Some use FIX protocol to bypass Redi altogether and enter the system directly.
Conclusion: Don’t get bogged down. Let the vendor demonstrate what they think will save or make you money (after you’re sure your broker will allow “XYZ front end” to interface with their software). Base your decisions on ease of use and ease of view. Some have great mobile phone apps as well.
I hope this helps. Remember, all we can really do is “buy, sell, or cancel,” right?
WHAT IS PORTFOLIO MARGIN?
Can you explain what portfolio margin is? I’m told it’s better than pattern daytrader margin, but what is the difference? —Tntrdr
Some brokerages offer their bigger accounts, usually $100,000 or more, access to what is referred to as portfolio margin. This is 15% in most cases. So, with $100,000, you may be able to use $600,000 in capital. However, there are other risk margins that may apply as well, which would dramatically lower your access to capital. The problem arises when you don’t know ahead of time exactly how your broker will define your portfolio’s risk, day to day. Hope that helps.