What is Deep Discount Broker? Definition and Example

A deep discount brokers is an agent who mediates transactions in exchanges between buyers and sellers of securities at commission rates even lower than those offered by a regular discount broker. 

Unsurprisingly, deep discount brokers provide fewer services to clients than standard brokers; These brokers typically offer little more than returns on stock and option trades, charging a flat fee for each.


What is Deep Discount Broker?

In trading, there are various brokers. As common brokers, they provide services for sellers and buyers who are in the transaction of trading.

In addition, you can also find many kinds of brokers in trading, and the deep discount broker is one of them. The other brokers are the full-service and discount brokers.

Each of them has specific roles and functions. Although they share the same services to manage and facilitate the trading process, lately the deep discount brokers are more popular. These agencies are picked by the market participants.

Deep Discount Broker Definition

In term of definition, the deep discount broker refers to the agent who provides services in facilitating and mediating the trading.

These can be in a form of sales and exchanges depending on the clients who request or hire the service from agent.

As what is mentioned above, there are also two other brokers in correlation to the trading, and each of them has different services.

In term of services, it is true that the deep discount broker is different from the other two brokers.

In term of rates of commission, this broker offers lower rate and of course it is good point. However, the lower rates can be given by the deep discount brokers since they also have fewer kinds of service to offer.

Understanding Deep Discount Brokers

With the advent of online trading, deep discount brokers have grown in popularity. Deep discount brokers may even offer other services besides equity trading.

These days, when it comes to trade execution, discount brokerages often use the same third-party services as brand ones.

For example, TD Ameritrade uses third-party execution services such as Knight, Citadel, and Citigroup — the same third-party services are used by TradeKing, (purchased by Ally Invest), but for about half the price.

Most brokers offer flat-fee stock trading. However, some brokers, especially active trading-focused brokers, offer per-share trading. Both have their pros and cons; it depends on an investor's average trade order size. 

For example, placing 2,000 share orders, on average, would make a per-share broker expensive, compared to a flat-fee broker. The vast majority of investors, over 99%, trade with a flat-fee broker. Brokerages may also require a minimum balance of anywhere from $500 to $2,000. However, the brokerages may waive the minimum requirement for investors who are opening an IRA.

Over the last few years, commission-free trading has been all of the rage. The reason a deep discount broker can afford to do this is that they sell the order flow to high-frequency trading (HFT) firms and hedge funds. Some firms that now offer commission-free trading on stocks, ETFs, and options include Robin Hood, Fidelity, Etrade, and Schwab.

Deep Discount Brokers vs. Full.Service Brokers

Full-service brokers are licensed financial broker-dealer firms that provide a large variety of services to their clients—including research and advice, retirement planning, tax tips, and much more. All brokers will execute trades for their clients, but a full-service broker will also research various investments and give advice.

The ideal client for a full-service broker is a person with a large investment portfolio but lacks the time or desire to manage his or her own investments. In return for these services, full-service brokers typically charge high fees when a client buys or sells stocks.

For example, a client may pay $150 or even $200 per trade with a full-service broker, while the same trade would cost between $5 and $10 online with a discount broker and $1.00 or even $0 with a deep discount broker. Full-service brokers may also charge annual service charges or maintenance fees on their clients' accounts that are not found with discount brokers.

What Does a Deep Discount Broker do? Example

Although the brokers offer fewer kinds of services for clients, they get popularity since the development of online trading. In the online trading, the sellers and buyers can easily communicate and the market is also easier to access. That is why clients will need fewer services in the trading process, and the deep discount broker becomes the option.

Related to services, the brokers facilitate clients in trading process. In this case, they become the representative of clients in doing market dialogue. It is important process and they really know how to get the solution in the discussion.

Before facilitating in discussion and trading process, the brokers will have communication with clients. They will try to figure out what the clients need in the trading. Then, they will help the clients in finding the recommended market to start trading. Furthermore, they also provide some options of trades and stocks.

In this case, the fee or charges of deep discount brokers is lower and even the agent gives flat fee. Therefore, many clients tend to use this kind of broker. Moreover, things are easier with internet, so various services of full-time or discount brokers are less necessary.

How to become a discount broker

To become a discount futures broker, a person must pass the Series 3 exam, register with the National Futures Association (NFA), and secure a position with a futures brokerage. An alternative to obtaining a position with an agency is to establish your own brokerage business. Some brokerages solicit candidates for sponsorship. The sponsored candidate will temporarily secure a position with the agency, but must pass all testing and licensing requirements.

The first thing you need to do to become a discount futures broker is decide if you want to get Series 3 sponsorship from an agency. Job board sites on the Internet, as well as local newspapers and trade magazines, may feature advertisements for brokerage positions. In the job advertisement, you can state that the agency is willing to train and hire candidates who successfully complete the Series 3 exam requirement within a specified time period.

Passing the National Commodity Futures Exam or the Series 3 exam is a requirement to become a discount futures broker. The exam covers the market rules and regulations involved in trading commodities and futures. Proper preparation for the exam is strongly recommended. Test preparation materials are available through a variety of providers if you choose to earn your exam certification without sponsorship.

To register for the Series 3 exam, contact the Financial Industry Regulatory Authority (FINRA). They administer the exam from multiple locations most weekdays. The exam consists of 120 multiple-choice questions and takes approximately two and a half hours to complete. A score of at least 70 percent is required to pass.

Once you have passed the Series 3 exam, the next step in becoming a discount futures broker is to register with the NFA. This registration must be completed as an “Associated Person”. You will need to submit an online registration form, fingerprint cards, proof of your Series 3 exam results, and a non-refundable fee. A verification of the registration form must also be carried out.

After you have registered with the NFA, you have the option of starting your own business or obtaining a position with an established agency. If you obtained sponsorship from an agency prior to completing your exam and registration, you have completed all the necessary steps. The company that sponsored you may have additional requirements and training that you will need to complete.

If you did not obtain sponsorship prior to taking the exam, you will need to conduct a job search to become a discount futures broker. Professional organizations, professional services, job placement agencies, newspapers, and online classifieds are a good place to start. As an applicant who has already obtained the Series 3 license and registration, you may have an advantage over other applicants who have not.