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Man using an Alpaca Trading systemAlpaca Trading is not a trading platform. This company offers two services: a brokerage and an application programming interface (API). As a brokerage, Alpaca offers exchange-based products. It does not offer a client or other form of trading platform. Instead, its API allows third parties to trade with it. A financial advisor can help you find the most suitable trading platform or brokerage service, given your financial goals, risk profile and time horizon.

As a brokerage service Alpaca handles the transactions between the buyer of a security with the seller. For example, say you place an order to buy a NYSE-listed stock. No matter how you place this order, it eventually is sent to a broker. This broker would go and purchase the stock from the New York Stock Exchange, which is itself a form of middleman called a “clearing house” that organizes all of the sellers and buyers in the marketplace. Then the broker would bring your stocks back and place them in your portfolio.

Today brokers act as buyers and sellers, but also as financial gatekeepers. One of the major reasons they have not been swept aside in favor of direct access to a stock market is that the regulatory system depends on brokers to maintain ethical trading standards and guard against predatory financial products.

Services & Features: What Does It Offer?

An investor's workplace

So what does Alpaca Trading itself offer? As a brokerage it focuses on exchange-traded products. This means that it buys and sells stocks and exchange-traded funds (ETF) on behalf of investors. Alpaca Trading is the backend of the financial system. It actually executes the trades. However it does not run the trading interfaces themselves. As discussed more below, the actual trading platforms that deliver orders to Alpaca Trading are operated by third parties.

Alpaca Trading limits its services to exchange-traded products. At time of writing it traded on the New York Stock Exchange and NASDAQ, offering the equities and ETFs available on both markets.

Fees: How Much Does Alpaca Cost?

There are usually four types of fees to look out for when choosing a trading platform. You should look out for these when evaluating any investment or trading service:

  • Trading Fees – Any fixed charge attached to each trade that you make. This can come in the form of a flat fee or what’s known as the “spread.” This is when your broker charges you based on the difference, if any, between the buying and the selling price of an asset.
  • Trading Commissions – This is when a broker will charge you a percentage based on the volume or value of each trade.
  • Inactivity Fees – Any fees that the broker charges you for not trading, such as for keeping money in a brokerage account.
  • Non-Trading/Other Fees – Any form of fee for trading on this platform not covered above. For example, a brokerage might charge you for making deposits into your brokerage account, taking money out of it or signing up for additional services.

Alpaca Trading offers no-fee trading, meaning that it does not charge investors when they make a trade. Instead the company makes its money primarily off interest on uninvested balances and payment for order flow.

Now, this does not mean that trading with Alpaca Trading is necessarily free. Third-party platforms may add additional fees and commissions on top of Alpaca Trading’s zero-commission model. This will depend entirely on the individual company operating that trading platform.

Effectiveness: How Well Does Alpaca Work?

Alpaca Trading is well regarded as a brokerage. Its trades are timely and efficient with relatively little “drift,” meaning that the price at which you place your order is generally the price at which the transaction goes through. This is a well regarded firm from a transactional end.

It does have some weaknesses, however. Alpaca does not offer trading in foreign exchange, options, futures or trading in international markets. Also, it does not offer historical data directly. Rather, it uses two third-party data providers. That could be important to traders who depend on accurate data as the prices being traded on the platform may differ from the historical data that is provided.

What Is An API?

Woman using Alpaca TradingBesides being a brokerage, Alpaca offers an API. That’s a toolkit that developers use to build software. It creates a series of protocols and standards that allow multiple different computer systems to talk to each other. For example, an API might allow two different software applications to share data, or it might allow an application to run on a specific piece of hardware. When an email client fetches mail from your Gmail account, it uses an API to communicate between the third-party inbox software and Google’s servers. When your weather app tells you the temperature, it uses an API to communicate with the National Weather Service’s servers and another to communicate with the hardware on your phone.

Instead of releasing its own trading platform, then, Alpaca Trading has released a sophisticated API which allows third parties to build their own trading platforms. Using this toolkit, those third parties can then build their trading platforms to communicate with Alpaca Trading’s servers. The result is that Alpaca Trading can act as the stand-in for any number of fintech companies that want to invent a better way to trade, but which don’t want to have to handle the financial aspect. Those firms can design their software, interfaces and trading algorithms, and Alpaca Trading will handle the actual financial transactions. In fact, Alpaca has specifically designed its API toolkit around algorithmic and AI trading. As far as this company is concerned, bring on the bots.

The Bottom Line

Alpaca is a low-cost brokerage that specializes in exchange-traded products that are traded in the two main U.S. exchanges. Also, instead of releasing its own trading platform, Alpaca Trading has released a toolkit, its API, that allows other companies to build their own trading platforms powered by Alpaca’s financial transactions.

Tips on Investing

  • You may not know you’re working with Alpaca Trading, but they might make your portfolio stronger. But the best way to live your best financial life is with the right advice. SmartAsset’s matching tool can help you find a financial advisor to help you build a better portfolio one investment at a time. If you’re ready, get started now.
  • Whether you’re considering getting started with investing or you’re already a seasoned investor, an investment calculator can help you figure out how to meet your goals. It can show you how your initial investment, frequency of contributions, time horizon and risk tolerance can all affect how your money grows.

Photo credit: ©iStock.com/ktasimarr, ©iStock.com/howtogoto, ©iStock.com/Orientfootage

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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