1/7/08

Review: Scottrade Individual Account

Regular Individual Account

Here's the good:


1. If your bid price is between the bid and ask, your order is executed with lightning speed. You confirm your limit order, go back to your account home page, and notice that it's already been completed.

2. You can buy OTC stocks

3. There's a large selection of mutual funds, bonds, CDs, and preferred stocks.

4. Depending on your starting capital, $7 a trade is not too bad.

5. They have a lot of physical locations, so you can always stop in to talk to somebody.

6. Check writing from your cash balance if you qualify.

7. Decent free research--there's a pretty good stock screener, and many stocks have either Reuters, S&P, or Second Opinion Weekly reports.

8. Real time stock quotes, and a streaming ticker (there's also a streaming Java chart), along with a Java based order entry window (for quick orders). It's very simple in design and easy to use--my favorite thing about Scottrade. Images are below.



9. Free account transfers.

10. Depositing money into your account is now same day. It used to take three days. This is a big improvement.

11. No account minimums or maintenance fees (but to open an account you need $500, $2000 for margin, and $25,000 for day trading).

12. Your order history is easily accessible. Just enter the ticker symbol and the date range, and everything is displayed for you (today's orders are displayed in history tomorrow--that is, there is a one day delay for your most recent transactions).

The not so good:

1. No automatic dividend reinvestment, and no fractional share buying (except for mutual funds). If you want to reinvest your stock dividends, you have to make a regular trade, and pay commissions.

2. If you want to take your money out and you don't have check writing whereby you can write yourself a check (only the first 50 checks are free), you have to request a check from Scottrade or a wire transfer. You can call or request the check online. This takes time, from Scottrade writing the check, to sending it, to you having to go to the bank to deposit it. (You can visit a branch and pick up a check, but depending on your location this may be a hassle). The wire transfer costs $20. In other words, there is no free electronic funds transfer to withdraw your money in the same way you deposit it.

3. If you want to buy certain foreign OTC securities, you have to do so through a broker over the phone or in person, which is more expensive. Also, see the bad below.

4. No multi-leg orders. For example, suppose you want to buy a stock and at the same time write a call on it, specifying a net debit. You can't do this with Scottrade. To do a covered call or protective put, you have to make two separate transactions. If you want to do an option spread, you have to make as many transactions as you have legs. As prices tend to wobble around, you might get a bad deal on one of your legs as you're placing orders separately.

5. No naked calls or (even cash secured) puts.

Scottrade does offer multi-leg orders and the ability to write naked options through its OptionsFirst platform, but you must apply for this separately. It is a new account with a separate login. For all intents, OptionsFirst is like another broker unaffiliated with Scottrade (they don't know anything about it at the physical locations).

6. Options are expensive at Scottrade: $7 a trade plus $1.25 per contract. Want to buy 10 contracts? That's $19.50 in commissions to buy, and another $19.50 to sell. There's also a $17 dollar assignment fee if your option expires in the money (most other brokers just charge the regular commission for buying and selling stock).

The bad:

Customer service is terrible.
Everything is designed so you would either come in to a physical location, or call someone at a physical location. If you don't like it or are too busy for the phone, and email is easier for you, good luck.

You may have to wait a week or more for a response. When it comes, it's something vague and does not answer the question. Or, someone leaves you a phone message, requesting you to call back. You call back, only to get that person's voice mail. One of the drawbacks to having a physical location is that when a customer comes in, the customer representative can't answer the phone--or, if he or she does answer the phone, the visiting customer is left unattended.

Customer service also does not seem to be very knowledgeable. When I inquired about whether I could do a multi-leg order, specifically a covered call or a "buy-write" (I wanted to know if I could buy a stock and sell a call on it at the same time), the person I spoke with had to put me on hold three times to go ask her manager because she did not know what a covered call was. In the end, she said, "why do you want to do it all in the same transaction? It's the same commission separately."

Yes, it is, but there are reasons why one would want to do two or more transactions simultaneously. Let's say I think a call is mispriced. Say stock XYZ is trading at $100 on January 15, and the 80 strike call, which expires on
January 16, is trading for 20.50. I want that $0.50. I want to buy the stock for $100, and have it called away from me for $80, while I keep the $20.50, for a profit of $0.50. Doing a buy-write (buying stock and selling a call simultaneously), in leg one I'd buy 100 shares of XYZ and in leg 2 I'd sell to open 1 January 80 strike call contract. Then I'd specify a net debit of $79.50. If my order is filled, $7,950 leaves my account, and I get 100 shares of XYZ and -1 call. Provided the stock stays above $80 a share through the next day, it will be called away, and $8,000 will be deposited in my account. If the $0.50 difference disappears while I'm placing my order, either because the call drops in value or there aren't any willing call buyers, my order expires, and I don't lose anything.

Now suppose I have to do two separate transactions. I buy the stock for $100, and then enter a new order to sell the call. During this time, the stock price will change, and so will the call. If the call now sells for $20, there's no point for me to sell it, and I'm stuck with the stock. It may also happen that no one wants to buy the call. Once again, I've already bought the stock, which I don't even want. Now I might have to sell the stock for lower than I bought it. The entire purpose of the transaction was to get the $0.50; I don't want the stock. If I have to do two separate transactions, things may not go my way, making it too risky to try without multi-leg orders. This is to say, with a multi-leg order I know exactly how much I'll pay if my order is filled, and if it's not filled, I lose nothing.

I tried to explain this to the customer service representative. After putting me on hold to go ask her manager, she once again said that I'd end up paying the same commission. I understand that options are confusing for many people, but someone working for a broker that offers options trading should be able to follow along.

I mentioned in a previous post that I used my last free trade to buy DuPont. My girlfriend did the same in her Scottrade account to buy the Jim Rogers RICI Agriculture Index. My free trade worked. Hers did not, leaving her account with a small negative cash balance. I immediately emailed customer support, notifying them of the error. Several days later, Scottrade sent an email about the negative balance, requesting a deposit and threatening to sell stock.

First, as this is not a margin account, the cash balance should never have been negative. If there was not enough money to complete the trade, it should not have been allowed. The trade was allowed because the $7 trading fee was not included, as it should not have been since it was a free trade. Second, Scottrade completely ignored the email. We replied, reiterating the error and requesting a $7 refund. When Scottrade got around to replying, they said that the free trade was unavailable that day, but was available on the following day, the $7 fee stood, and they again threatened to sell stock (and charging another $7, no doubt) if a deposit was not forthcoming.

Now, $7 is no big deal, but it's the principle of the matter. That trade wouldn't been made through Scottrade if we thought it wouldn't be free. We are firm believers in having broker commissions at under 2% of the trade, and usually go for under 1%.

The Bottom Line

If you're a regular trader with a lot of money, you'll no doubt like Scottrade. The trades are super fast, and stock order fees are relatively cheap. Bigger clients might get better customer service. I wouldn't know. I don't recommend Scottrade.

Free Trades

If you don't already have a Scottrade account you may be wondering about how to get free trades. Scottrade customers can refer others to Scottrade, and in return, Scottrade gives both the referrer and referee 3 free trades which expire after 6 months. I don't recommend Scottrade, but if you'd like to open an account and get 3 free trades, find my email link near the top right corner of this page. Send me an email with Scottrade in the subject line, and I'll be happy to refer you using your reply address.

Scottrade Elite

Scottrade Elite is a platform, which you download and install on your computer, available to all Scottrade Customers who have $25,000 in account equity or over. It comes with many neat features, including a backtester and streaming charts you can draw trendlines on. You can even view a streaming chart tick by tick. It's comparable to Fidelity's Active Trader Pro (which I like very much and have been using recently--a review will be posted in the next few months) and TD Ameritrade's Command Center 2.0 (review coming sometime this year).

Scottrade Elite is very customizable and intuitive to use. It has no faults that I have noticed. One bad thing is that you have to pay a monthly fee for Nasdaq Level II quotes.




This Scottrade Review was last updated on January, 13 2009.

More information is always better than less. Click here for analysis on any stock, commodity, currency, or ETF.