Problems with Your Stockbroker?

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Below is a portion of an e-mail that arrived recently.


My broker is xxxxx. Apparently they send my orders to preset exchanges.  Also when I enter an option order, near the close on expiration day, those orders are sent to their trading desks for review.

On another matter, when complaining about my inability to get filled on an order, the broker I talked to said I could file a complaint, and they would review it – but he persuaded me not to bother since the customer always loses and the decision goes to the broker.


One of the biggest problems for customers of the brokerage industry is that the brokers work for themselves first, second and always.  Oh sure, they'd like their customers to make money.  After all, profitable customers are likely to continue trading – and trading  more actively (as their accounts grow).

But, the customer just doesn't matter in the long run.  There are always new customers – or at least that was the belief at one time.  Almost all brokers will disagree, pointing to the huge efforts they make to offer good customer service.  And customer service is important – I frequently ask questions of my broker.  But when it comes down to money, that's the point at which service ends.

There are always news stories about brokers churning (over-trading to earn commissions) accounts and people suing because the broker made inappropriate investments for them.  I have no sympathy for this latter group.  If you allow a stock broker – who knows nothing about how to make money in the stock market (or else he/she would be wealthy from investing) – to have discretionary power over your account, you deserve what you get.

But when brokers put commissions first and suitability of an investment second, that usually ends badly for the customer.

JM, your broker sends orders to pre-determined exchanges for one reason.  That exchange is the one that offers the largest bribe for order flow.  Of course, in the brokerage industry, the term 'bribe' is not used.  The gentlemanly term is 'payment for order flow,' and it's legal.

Thus, it's possible for your order to sit by it's lonely self on one of the smaller exchanges at the same time that many of those options are being bought and sold at your limit price on other exchanges.  If the volume is significant, the probability is high that your order will be filled.  But, there's no guarantee.  Your broker is gambling with your trade.  If the order is filled, he gets the highest fee.  If it's unfilled he gets nothing.  Your desire/need to make the trade is ignored.


It's annoying to have your orders delayed for review, and I would not tolerate it from my broker.  But the reality is that too many people don't know how options work, have no conception of the exercise process, cannot determine if a trade may result in a margin call (after expiration), and need to be protected.  These are investors who are NOT regular visitors here and who have not read the Rookie's Guide to Options.  Thus, the firm is doing them a service.  But it's an inconvenience for you and other more experienced traders.  I know of no solution, except to find another broker.


In theory when there is a dispute, a customer can get an arbitration hearing with the broker.  But as you were told, the game is unfair and your chances of success are minute.  The rules are such that it's easy for the broker to receive a favorable ruling (most of the time).


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