Foresight Capital Partners

My preferred UK brokers are:

• iDealing.com – Only retail DMA provider, covers all Crest settled securities.
• TD Waterhouse – No DMA, good source of liquidity for non-Crest securities, allow up to 20 days to settle trades, international stocks, and good interest rates of cleared funds (presently over 5%)

Which together offer a comprehensive brokerage solution for the UK based investor.

iDealing.com

iDealing.com offers a transparent Direct Market Access brokerage service that includes the possibility to place contingent orders for a fixed fee of 10 GBP per trade for trades up to 10,000 GBP, and 0.1% thereafter. Brokerage fee discounts of up to 25% can be obtained when buying credit in advance. If you trade Crest settled securities (covering almost everything) then iDealing.com in terms of quality of execution, and over-all cost is the clear leader in the UK.

The infrastructure is very functional and as a user I really like the Dealer Dashboard where I can simultaneously view my holdings P&L, my watch list all with streaming bid-offer quotes and cash balances on the same screen. Trades are entered by just clicking on the bid or offer quote and then entering the transaction details.

The disadvantages of iDealing.com service are:

• No support for non-Crest settled securities: For the majority of investors this is irrelevant since such securities are now very rare.
• Not the best Interest Rates: In an ideal world, iDealing’s interest rates could be a little higher (at present they are 2.7% + a bonus of 0.65% for 50K GBP cash holdings).
• No BACS transfers through electronic interface: They could offer an electronic interface to send BACS transfers to a designated UK bank account (rather than needing to complete a form that needs to be faxed or posted).

TD Waterhouse

TD Waterhouse allows trading in non-Crest settled securities, overseas listed securities, has an excellent interest rate (at present, over 5%), and allows 20 days in order to settle trades. For UK residents the TD Waterhouse service is also available (with slightly higher charges and lower interest rates) through a Natwest Stockbrokers branded service. Hence, if you like a familiar brand and the possibility to quiz your local bank manger if anything goes wrong then you could consider taking this route.

A TD Waterhouse account can be closely integrated with any UK bank account through direct debit, which is very convenient particularly for income seeking investors. Also by allowing 20 days to settle purchases means that you can earn interest for 17 more days over the usual 3 days settlement while still participating in the growth in the asset you have purchased.

The only real disadvantage of TD Waterhouse is that it does not provide direct market access (DMA) to the SETS, SETSmm electronic order books.

The introduction of electronic order books (see Direct Market Access (DMA) on the LSE) for many of the LSE stocks means that for those stocks on an order book the broker(s) who offer by far the best QoE will be those who offer DMA to the order books themselves. At present, the only retail discount broker offering this service is iDealing.com, and for those for which quality of execution on (for example) FTSE 350 stocks is the key criteria iDealing.com will always be the natural choice. Note that the LSE has indicated that eventually all Crest settled securities will be traded on an electronic order book. It is also important to point out that the regulation of DMA brokers requires that their customers be deemed to have sufficient experience and expertise to be classified as “intermediate customers”.

For Crest settled securities which are not (at present) on an electronic order book then all the major brokers will very much perform similarly with regard to QoE. Most brokers will typically trade within the indicative spread by polling Retail Service Providers (RSP) who offer liquidity off the order book. In terms of particular brokers, I would suggest iDealing.com, TD Waterhouse, SelfTrade.com, and Barclays as offering a good service with pretty much a similar QoE.

For non-crest settled securities (which will never be available on an electronic order book) then I would suggest using TD Waterhouse, which aggregates liquidity from a number of sources including in-house client-client, broker liquidity pools. The trading of such securities is highly illiquid and obtaining liquidity at the indicative market spread will be the key consideration. In fact, because of the additional costs involved in offering non-Crest securities the (electronic) broker’s iDealing.com and SelfTrade.com do not offer trading is such assets.

When selecting a broker there are a number of criteria to take into account. An appropriate broker should offer all the services you need, be cost effective and offer complete peace of mind in terms of reliability and service levels.

Key Variables

The key variables (in my mind) in the selection of a brokerage service are:

1. Quality of Execution – The ability of the brokerage to obtain the best volume adjusted price within the relevant markets.
2. Charges – Though the ‘quality of execution’ will generally be by far the largest cost, dealing charges are generally the second highest cost.
3. Interest Rates/Charges – The interest paid of cleared funds and if relevant the charging costs of any gearing.
4. Coverage – Crest/Non-Crest, International coverage, range of instruments (warrants, CFDs).
5. Infrastructure – Trading platform, Settlement (Direct Debit, T+3-25, trading credit), banking services, ease of funding/withdraws, reporting.
6. Support – Online and/or telephone based support, reporting/statements/records.

Researching Providers

Comparison charts and reviews are available at the follow sites:

• BlueSky Ratings
• Motley Fools Broker Comparison

Another good source of information in this topic will be discussion boards such as Motley Fool’s Brokers board at http://boards.fool.co.uk/Messages.asp?bid=50070, where you can discover the experiences of other investors with various brokers.

Testing a Provider

With any financial service provider, I tend to start to asking 20 questions to the front line support staff and seeing if I get 20 reasonable answers back. Remember, if anything goes wrong you will be dependant on these parties fixing the problem before you can get on with your investment activities. If you are happy with the staff then I would proceed with testing the account, by either using a demo account or opening an account depositing a nominal amount of funds and trying out a few trades. Only after a month or two, when the account has behaved well, the reporting has been clear and comprehensive, would I consider moving forward.

Brokers I do and have used

Over the year’s I have used the following brokerage service providers:

iDealing.com, TD Waterhouse, SelfTrade.com, Cater Allen, Barclay’s Stockbrokers

All of which with the exception of Cater Allen (my first broker in the mid-90s) are still in operation today. At present, my primary brokerage providers are iDealing.com and TD Waterhouse, which together offer me, for my needs a comprehensive and cost effective solution.

Direct Market Access (DMA) in short is about ‘making the spread’ and not ‘paying the spread’. By using a DMA platform you can sell at the offer price and buy at the bid price. Say for example say BT Group PLC is trading at a bid-offer spread of 300-300.5 pence. Through a traditional broker you will be able to buy BT shares at 300.5p, and sell shares at 300p each. However, if you are able to place orders directly onto the LSE SETS order book then you would most likely be able to buy at 300p per share and sell at 300.5p per share. In fact, this is exactly what the traditional broker does, after taking your order and pockets the spread along with the usual dealing charges.

For further explanation of the exact workings of the LSE electronic SETS, SETSmm and shortly SETSqx order books, I refer the interested reader to:

• iDealing Explanation of Direct Market Access
• The LSE web pages on the SETS/SETSmm/SETSqx platforms at:
1. SETS Homepage at LSE
2. SETSmm Homepage at LSE
3. SETSqx (mid-07) Homepage at LSE

By taking advantage of these direct access platforms allows the execution of LSE trades at the lowest possible cost. There is also the option to generate an income stream via these platforms by acting essentially as a market maker, and/or pairs trading strategies between products with a high and consistent correlation.

Over view of LSE Electronic Order Books

The SETS platform offers users to place order directly onto the order book for all FTSE 100 constituents the most liquid FTSE 250 securities. The SETSmm service allows order to be place on the order book for:

1. FTSE Mid Cap index securities not traded on SETS
2. FTSE Small Cap index securities
3. Other liquid Main Market equity securities outside the FTSE All share
4. Liquid AIM securities including all of FTSE AIM UK 50 index constituents
5. Liquid dual listed Irish securities
6. Large London secondary listed securities eligible for central counter-party clearing
7. Exchange Traded Funds
8. Exchange Traded Commodities

The SETSqx system is due to become available by mid-2007 in accordance with the MiFID directive. The SETSqx platform will replace the SEATS Plus system and rather than offer an order book/market maker system will offer an uncrossing auction system at the open, close and 2 intra-day auctions at 11am and 3pm.

Sometimes it is best to take a step back and invest some time in developing a deeper understanding of finance, investing, economics, and associated areas such as mathematics and software. Since a young age I have always been interested in these topics and since 1996 I have been an active investor. However, I am still very much on the learning curve and I really see no end in my personal training program.

Below I point out some useful educational resources:

Investing

The Apprentice Investor - “In this special series of articles from RealMoney contributor and market strategist Barry Ritholtz, learn about becoming a better investor — not just a better stock picker”.

Investopedia - Huge resource which is useful for just about any investor. The site also contains (cost effective) guides which can be purchased for those working towards formal professional qualifications (NASD Series, CFA, CFP).

Warren Buffet’s Berkshire Hathaway letters to shareholders (1977-present) - Warren Buffet is not only an exceptional investor but also a very good communicator of investment ideas. His letters to shareholders offer numerous valuable lessons for us all.

Economics

Wikepedia - Homepage on Economics at Wikepedia

Economics Network - Online Texts and Notes list at Economics Network a UK base resource of learning and teaching economics.

Internet Resources for Economists - Good selection of links to blogs, books, journals and more.

Mathematics & Software

FreeTechBooks.com - Online computer science and engineering books (+ lecture notes).

MIT’s OpenCourseWare - MIT’s is a world class university which values the teaching process. Now much of there teaching materials have been made available over the web to self-learners. When I visited MIT in 1998, I discovered that because the education system in the US is basically a product which is sold to fee paying parents the quality of the education is very high.

Paris Tech - Similar idea to the MIT’s OCW but the resources here are provided by the collection of world class universities in Paris, France known as the Grandes Ecoles. Like MIT I also had the good fortune to visit a number of these institutions when I was in academia.

Textbooks in Mathematics links by Alex Stef - An updated collection of links to math’s texts kindly provided by Alex Stef.

To be continued…..

Though a certain amount of care should be taken when reading information and discussing ideas on forums they can form a useful source of information and/or an arena to test/exchange/find ideas. Please note I use the term information (rather than tips) and I use the term care because forums are used to propergate “ramping”, “pump & dump” scams, so please take care!

General Investment Forums

Motley Fool - Just about the oldest investment and personal finance forum in the UK which cover a wide range of topics for a wide range of users.
iii Community - User moderated finance forum in which mainly individual stocks are discussed.
Elite Trader - Mainly US focused traders (rather than UK investors) but still very useful to know about.
ADVFN Forum - Forum for LSE focused investors and traders.
Raging Bull - Mainly US focused investors where I recall having a number of detailed discussions on IT hardware.

Quantitative Finance Forums

Wilmott.com - The large and active Quant forum which has many informed and helpful users. Though I am not as active on this forum as I once was you may see me post from time-to-time as DrBen.
Nuclear Phynance - Quantitative finance forum with an orientation towards trading rather than analysis. I post on this forum as MrBen.
CQF.info - Forum and Resource on Maths, Finance & LaTeX; which has a rather academic atmosphere.
Global Derivatives - In there words, “a site aimed at promoting the education and expansion of all things related to financial engineering, derivatives and quantitative finance”.

Directories

Money Science - As the name suggest this site offers links, articles and a forum, seemingly on all topics associated with the application of the scientific method to the domain of finance.

My personal goal/guideline in terms of performance with regard to investment is that I intend to earn a return of 25% (ideally more) consistently each calendar year. As with any business activity you should have a clear idea with regard to its profitability before you start. For me the 25% compound return level is the level which I believe is the long-term level of profitability which I should expect. Thankfully, I have just passed this bench mark for the year so I can look out of my office window tonight (as shown below) and feel slightly more relaxed.