Moving to a New Trading Platform – Part 1
by Patrick Oberhaensli, on Feb 16, 2021 10:00:00 AM
Does it matter which trading platform you use for your investment? Yes, it absolutely does! Even if you are satisfied with your current trading platform, you should regularly (and on an ad-hoc basis) monitor the offerings and performance of other platform providers. The three most important criteria when comparing trading platforms is to evaluate the costs, the risks and the extra-services.
Considering that a part of the products offered are quite standardized across providers, it’s then the varying cost levels between platforms that really makes the difference. In this two-part article, we will walkthrough the most important criteria to look for in a trading platform, to help you make the best informed decision. We begin with a discussion on the common biases that often prevent investors from even considering to change their trading platform, a move which could prove to be a potentially (very) advantageous replacement.
Pitfalls of the status quo
As for a multitude of other financial or telecommunication services, the users are often reluctant to change their provider. The most common reasons, that “it is a too big effort to make the change” or “all providers are/must be pretty much the same”, are not exactly based on rationale. In fact, in the case of changing trading platforms, there is actually truly little effort required to make the change, especially in comparison to the amount of time, labor and effort goes into developing your active investment strategy! —unless you use trading signals, then of course it’s not as labor intensive! Moreover, the Know-Your-Customer (KYC) process has been simplified drastically in the last few years, making a move to a better trading platform even easier.
Bias of realizing losses (and realizing or not the gains)
Another key reason why an investor might be hesitant to change their trading platform, is because he/she would then have to realize losses. From a valuation perspective this is not relevant: only the company’s future earnings matter (if the investment is in a stock). Even if they (the future earnings) are difficult to estimate, the investor’s entry point in the stock wouldn’t matter. Moreover, realizing losses could have a tax advantage and should be evaluated properly.
As an investor, you should constantly compare valuations of your investments, it’s what will allow you to successfully drive profits, such as selling an overvalued stock.
Depending on the type of security, your position could rather be transferred to your new platform when you make the change. Although transferring your positions platform to platform requires time and leads to costs, it could be a more valuable solution, especially in the case that your new platform provider carries part of the associated costs. If you are concerned about the transfer time, which would block you from selling the security, your new platform could for example allow you to go short via a Contract-For-Difference (CFD). This would require a much smaller amount of cash (collateral) than the notional amount involved. And it’s a pretty easy way to implement a flat position at a large index level. But traders need to be very careful when it comes to less liquid assets or stocks which could be subject to short squeezes (like the example of GameStop in January 2021). Another alternative would be Futures contracts – one common example is with the S&P500 index (US large cap equities), where a micro-contract version has been recently brought to the market allowing effective fine tuning of the exposure.
Blinded by overconfidence
As for investment decisions, the investor may exhibit an overconfidence regarding his/her choice of a trading platform. They might ignore objective decision elements, such as costs, merely because their perception is that they already use the best platform. It can also be coupled with framing matters: oversimplifying the needs regarding a trading platform and therefore missing opportunities. That would certainly lead to a similar situation as for the status quo bias that we mentioned above.
When deciding to change a trading platform, you should look at the facts and ask yourself “What will bring me the most value to my way of investing both now, and in the future”. Although one’s cognitive biases will have an influence, we are human after all, you need to overcome them to make the best-informed decision. Only with a pertinent analysis can investors accurately evaluate the performance of their trading platform. Now that we have identified and acknowledged the need to / how to overcome the typical biases, in the second part of this article we will examine what really matters when deciding to change your trading platform.
EVOLIDS FINANCE LLC, Disclaimer:
- This content is not intended to be a solicitation nor an offer
- The preparation of the information provided herein is done with a high level of care. Nevertheless, errors are possible