Alpaca Trading Review – Pros and Cons

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Last Updated on August 2, 2020

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Table of Contents

  1. What is the Alpaca Trading Brokerage?
  2. Pros and cons summary
  3. Why should I use the Alpaca Trading Brokerage?
  4. What’s the catch? How does Alpaca make money?
  5. What are the downsides to trading with Alpaca and using its API?
  6. Can I get free data from Alpaca?
  7. Can anyone open an account with Alpaca?
  8. Are my funds secure with Alpaca?
  9. Is the Alpaca API easy to use?
  10. Is support easily available for Alpaca and its trading API?
  11. Final thoughts on the Alpaca API

What is the Alpaca Trading Brokerage?

Alpaca is a brokerage that allows you to buy and sell stocks on US exchanges. The broker has gained popularity as it does not charge a commission for buying or selling stocks.

What makes Alpaca unique, in addition to commission-free trading, is that it is very much focused on API trading. While most brokers prioritize offering a good client for their customers, Alpaca doesn’t offer one at all!

So far, this seems to have worked out for them as developers have created several different solutions and third-party providers have created integrations.

Pros and Cons Summary

Pros

  • API is easy to work with
  • Commission-free
  • Free data (via third-party data vendors)

Cons

  • Higher interest costs
  • Only offers US stocks
  • Live accounts are only available to US clients for now (As of 8th April 2020)

Why should I use the Alpaca Trading Brokerage?

Alpaca is known for its commission-free model and this is one of the main reasons you might consider trading with them.

Commissions are often underestimated by new traders and can quickly add up to a significant sum. Traders can increase their edge by cutting out this additional cost with Alpaca.

Further, traders with automated systems will appreciate how easy it is to work with their API.

» Not sure if retail traders can beat the hedge funds? (Hint: Probably not, but it doesn’t matter. They take the sundae but we earn the cherries). Check out this guide: How Can Retail Traders Beat Institutional Traders and Hedge Funds?

What’s the catch? How does Alpaca make money?

Alpaca has published two main sources of income – interest on cash balances and payment for order flow.

Interest on cash balances

Traders don’t always have a position in the markets and when they are in cash, they are entitled to collect interest on their balance. Alpaca takes a cut of this interest.

This is of particular interest to day traders who typically don’t hold positions overnight as they are eligible for an interest payment.

Whether this ultimately has a big impact on your bottom line or not depends entirely on how large of a balance you hold in your trading account. If the balance is large enough, it might negate the savings on commissions. This is especially true for those that aren’t active enough in buying and selling to fully take advantage of the commission-free trading.

Payment for order flow

Brokers receive a small payment for sending orders from their clients to a specific exchange. This is a common practice and many brokers do the same. According to Investopedia, they typically receive about one cent per share.

The above two points come straight from Alpaca’s website, where they explain their business model and how they make money. However, it is not inclusive.

There are other areas, again things that traders often overlook, where their fees are higher.

Take for example the margin interest rate. Alpaca charges 3.75% on margin balances which they claim to be competitive.

To clarify, if you had $10,000 in your account, and purchased $20,000 worth of securities, you would be liable to pay interest at an annual rate of 3.75% on the amount that you’ve borrowed. 

In this case, you would have borrowed $10,000. Annually, that works out to $375, not a negligible amount.

To provide a comparison, Interactive Brokers offers a tiered margin interest rate. In other words, the larger your balance, the lower your margin interest. 

At the highest tier, they charge 1.75% interest. This calculates out to $175 per year in the same example used above.

So it’s clear that despite the offer of commission-free trading, trading costs can actually be significantly higher with Alpaca. This all boils down to trading frequency, the size of your balance and your trading style. It’s worth running some calculations to ensure trading with Alpaca is, in fact, saving you money.

What are the downsides to trading with Alpaca and using its API?

Aside from higher costs in interest, there are a few other downsides to trading with Alpaca. For starters, they have a limited range of markets.

Alpaca currently only offers trading in US stocks. They don’t offer options, futures, Forex, or trading in international markets.

Another potential downside is that Alpaca does not offer historical data directly. Instead, it utilizes two different third-party data providers. This could be important to algo traders who rely heavily on accurate data as the prices being traded on the platform can differ from the provided historical data.

Can I get free data from Alpaca?

Unlike some of its competitors, Alpaca does not charge a fee for data.

The broker currently has two separate offers for data. There is an integration with Alpha Vantage and with Polygon.

Before using Alpha Vantage, Alpaca was sourcing data from IEX. They aim to eventually offer data directly through their own API.

Alpha Vantage is available for paper trading accounts. They are a well-known company as they are one of few that offers free data to everyone. Simply navigate over to their website to get a free API key with a reasonable rate limit. If you have an Alpaca paper trading account, you don’t need to sign up directly with Alpha Vantage and will be able to use your Alpaca API credentials.

Polygon data is available for free to clients with a funded Alpaca account. You can also obtain data directly from Polygon although they currently charge $49 per month for Forex and Cryptocurrencies and $199 per month for US stocks.

Can anyone open an account with Alpaca?

Alpaca Markets has currently restricted their service to US clients only. 

We have found that clients outside of the US are still able to open a paper trading account. 

Alpaca does not have a minimum deposit requirement to open a live personal account. Business accounts require a minimum deposit of $30,000.

UPDATE – Alpaca announced on July 30, 2020 that they are now accepting Non-US residents as part of a beta program. The announcement on their website contains full details.

Are my funds secure with Alpaca?

Alpaca is regulated by FINRA and is a member of the SIPC. The SIPC offers protection up to $500,000 per customer if anything were to ever happen with Alpaca.

Is the Alpaca API easy to use?

The Alpaca API is fairly straightforward. Those that have used other API’s for trading cryptocurrencies or other instruments will find Alpaca’s API to be very similar to other REST API’s.

A Python library is available which makes things even easier. It takes care of authentication and error checking while simplifying the process of sending requests and receiving information.

There are a few code examples available on the Alpaca website if you’re using the library. Further documentation can be found on the Alpaca GitHub page which goes through the functions and provides usage examples.

Alpaca also offers WebSockets which is an efficient way to get your account and order information. Live accounts are further eligible for streaming data which eliminates the need to constantly poll for price data.

Is support easily available for Alpaca and its trading API?

It was a bit disappointing to see that Alpaca does not have a Contact Us page. When clicking on the contact link in the footer of their main webpage, we got prompted to send them an email. We were unable to find a support phone number or an online chat interface.

There are three avenues of support for their API – a forum, detailed documentation, and their GitHub page.

The documentation contains a lot of information on how to get started with trading and using the API. There are how-to guides on things such as connecting with Tradingview and how to make your first deposit.

Further, several code examples show how to interface with the API. Coding examples were seen in C#, Go, Javascript, and Python.

If you’re interested in learning more about interfacing with the API in Python, make sure to check out our guide – Alpaca Trading API Guide – A Step-by-step Guide

Final thoughts on the Alpaca API

Alpaca has a unique approach to the markets with its commission-free trading and a strong focus on its API. We expect to see interesting projects surface from the developer community and are looking forward to seeing what comes out of it.

While the commission-free angle is certainly enticing, it is important to compare total trading costs to ensure additional costs in other areas don’t wipe out the savings potential from commissions.

Alpaca is still a young company and it appears poised to grow. They may benefit from expanding their range of markets and offering their services outside of the United States.

Jignesh Davda

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