Investor Brain

Saturday, July 03, 2010

Merrill Plays Defense Online

The big brokerage firm upgrades Bank of America system and tries to hold on to electronic trading clients.

MERRILL LYNCH WHICH WAS ACQUIRED by Bank of America in early 2009, is putting its stamp on the banking giant’s online brokerage. 

Merrill Edge (http://www.merrilledge.com) opened its virtual doors on June 21, and essentially replaces BofA’s existing online offering. The plan to convert the bank’s online brokerage to Merrill Edge was announced in late February. (If you try going into BofA’s brokerage via http://www.bankofamerica.com/investing, you’re now redirected to the Merrill Edge site.)

During the site’s introduction in February, Sally Krawcheck BofA’s head of wealth management, said that it would be aimed at “those clients who today have ‘play money’ at one of the online brokers.” The “play-money” concept was certainly true in the late 1990s, but today, online brokers such as Fidelity and Charles Schwab, can snatch entire accounts from full-service brokers. That trend accelerated in late 2008, amid the credit crisis.

Merrill Edge appears to be an attempt to hang on to those full-service clients, who may trade online elsewhere. However, the service will only be extended to Merrill customers on request. BofA brokerage clients have been automatically converted to Merrill Edge.

The main benefit for BofA (ticker: BAC) clients is online access to some Merrill research. Otherwise, the site doesn’t offer much that’s new beyond the rebranding and a fresh coat of paint. Merrill Edge boasts on the site that it already has 1.16 million customers with $48 billion in assets, which averages out to $41,400 per customer. That’s less than the December 2009 average that E*Trade and Schwab reported for our annual online broker review; it’s slightly more than TDAmeritrade.

Merrill Edge extends BofA’s “free” trades (30 per month) for customers with more than $25,000 in assets. Those who don’t qualify, or who trade more than 30 times per month, will be subject to fees that vary with account size. The price breaks start with accounts of $250,000 and up. Commissions for online trading range from $4.95 to $8.95 per stock trade. Broker-assisted trades are $50 to $75 for stocks and exchange-traded funds. Margin rates are currently 7.5% for a $50,000 debit balance.

COST-BASIS REPORTING BEGINS soon. Starting with stock purchased in 2011, your broker will be required to report the cost basis—as well as the proceeds—of your closed positions to the Internal Revenue Service. The main purpose is to cut down on underpayment of capital-gains taxes. While the IRS will, presumably, collect more from taxpayers who are forced to be honest, financial-services firms are investing large amounts of money to try to provide accurate reports.

Cameron Routh, senior vice president of Scivantage, the publisher of performance-reporting system Maxit, says the main problem for retail investors will be collating transactions made at several different brokers. Routh says that the average number of online-brokerage accounts per trader is 2½, which means that most investors will be dealing with reports from several brokers.

One related trouble spot is wash sales. A wash sale occurs when shares of a particular security are sold at a loss and a substantially identical security is purchased within 30 days. It doesn’t matter whether the sale or purchase happens first, so long as there’s a 61-day window.

Let’s say you sell a stock from your E*Trade account on June 1, then buy a “substantially identical” one in your TD Ameritrade account on June 10. The IRS doesn’t care where the transactions took place. Under the law, you must report the wash sale accurately when you prepare your Schedule D. We’ll be checking tax programs to make sure they can handle transactions done in different venues.

NEW TOOLS: ZECCO (http://www.zecco.com) recently rolled out its Zap Trade tool, which lets you have an open Zecco order ticket while you peruse other financial sites. Zap Trade is a browser plug-in. It currently works only with Firefox, although Zecco plans to introduce versions for other popular browsers.

Zap Trade scans and prefills an order ticket, while you browse compatible financial and investing Websites. It works with Bloomberg, CNN Money, Google Finance, Yahoo! Finance, MSN Money, Reuters, MarketWatch, the Motley Fool, and The Street. It’s also active in the public-research areas of E*Trade, Scottrade, and TD Ameritrade.

You can trade stocks and ETFs with Zap Trade. Trades of mutual funds, options, and other products haven’t yet been enabled. Zecco’s usual commissions apply, although use of the plug-in is free. 

Published in Barron’s, June 28, 2010. 

Saturday, June 19, 2010

More Brokers Join Price-Cutting

It’s usually a good thing when an online brokerage gives its customers what they have asked for, especially when it comes to pricing.

In the latest case, Interactive Brokers (http://www.interactivebrokers.com) says it cut fees based on the buzz on its bulletin boards. Andrew Wilkinson, director of media communications, said he had “picked up on the thoughts of a customer wondering why IB’s futures commissions were as high as they were.” He passed the note on to the firm’s CEO, Thomas Peterffy, who subsequently cut IB’s commissions for U.S.-based futures and futures-options trading.

As a result, the two new fee plans for futures trading at IB include bundled, which cover all exchange and regulatory fees, and unbundled, a kind of à la carte menu in which fees are added to the basic transaction cost. Exchange and regulatory fees, as you would expect, depend on the trader’s membership status at the exchange where the trade occurs and the country in which it takes place. The array of fees can be bewildering, though a savvy trader who understands the details of the products can save money by choosing the unbundled plan.

The bundled commissions, as of mid-April, are 85 cents per contract, a significant decrease from the previous $1.24 to $3.75 per contract that IB reported for the Barron’s online-broker review in March. For those who would rather figure out the additional fees on their own, the volume-tiered unbundled plan now costs 25 cents to 85 cents per contract plus exchange, regulatory and carrying fees. Previously, the top commission was $1.25 per contract. Four price tiers based on monthly trading volume are available. Full details can be found at http://www.interactivebrokers.com/en/p.php?f=commission&p=f&p2=futures3#e; click on the “US Exchanges” tab.

Wilkinson says the tiered pricing structure for foreign futures and futures options has been simplified; it still looks fairly complex to me. Though I’m generally against tiered pricing structures, I understand that these prices are dictated by the exchanges rather than by IB’s policy. IB clients can trade equity, foreign exchange, fixed income, energy, metals and other commodities futures and futures options worldwide from a single account.

IB isn’t alone in attacking prices. Schwab, E*Trade and Fidelity have already reduced their trading costs. And now ING Direct’s ShareBuilder (http://www.sharebuilder.com) is cutting fees for real-time transactions for its Advantage customers, who pay a monthly subscription, to $7.95 from $9.95. ShareBuilder is designed to encourage regular investments; Advantage clients subscribe to the site’s services for $12 per month, which entitles them to make as many as 12 stock purchases in specific dollar amounts every month. For instance, you could set up a program in which you buy $100 of Apple (ticker: AAPL) stock every week, plus $250 of a favorite exchange-traded fund monthly. When you want to sell stock, you place a real-time trade.

ShareBuilder also has a pay-as-you-go pricing plan, Basic. Under this program, you pay $4 for each automatic investment and $9.95 for each real-time trade. The site offers a one-month free trial of the Advantage program to new customers. The firm eliminated a third pricing tier, and for that, hooray.

New tools of the trade: TD Ameritrade (http://www.tdameritrade.com) clients who use the platform of its thinkorswim unit can now access an innovative trading simulator called thinkOnDemand. ThinkOnDemand lets investors replay a trade with tick-by-tick data, allowing them to review the conditions at the time of the transaction in slow motion.

The thinkorswim system from the TD Ameritrade trading platform enables thinkOnDemand to paper-trade stocks, futures, foreign exchange and options. Traders can select any date from the previous four months and replay, fast-forward and pause the archived market data. You can enter simulated trades and see the hypothetical results. It’s an extraordinary learning tool integrated with the live trading platform; we raved about its inclusion in the thinkorswim platform back in March.

TD Ameritrade clients who use the thinkorswim platform also have access to several other new tools, including Gadget 360, which displays complex options data in graphical form, the Market Cast squawk box with live discussion of market conditions, and additional charting, analytics, alerts and news.

Published in Barron’s, June 14, 2010. 

Friday, March 12, 2010

Scoring Rubric for the 2010 Barron's Online Broker Review

An abbreviated version of this will appear in Barron’s.  I wanted to spell out exactly what went into the point scoring.

WE RANKED OUR 22 BROKERS USING THE FOLLOWING MEASURES:

Trade Experience: Working with a live account, we looked for a real-time quote and executed equity trades during market hours, making market buys and limit sales of a stock or exchange-traded fund. A real-time quote that is displayed without any additional user input (such as typing the symbol into a separate box or hitting a “Quote” button) receives credit here; if the trader has to make a duplicate entry of the ticker symbol to get a quote, the broker got zero.  We checked out the ways a trader is told that an order is executed, such as pop-up notices or an order status screen that is updated when the order fills. 

Following the market buy, we tracked the execution and portfolio reports. We looked for pre-filled order tickets when selling a position, which eliminates possible errors during the closing process. After entering a limit-sale order, we examined the open-order reports and looked at ways to check the progress of the order, as well as ways to adjust the limit price or cancel the order. We also placed options orders, using options’ order-entry screens when available. We also examined mutual-fund, bond, and (when available) futures, commodities and foreign-exchange order-entry screens.

An overall score of 5 in Trade Experience means the order entry-and-execution process flowed easily from one step to the next, with real-time information (including buying power and margin balance) available when needed.

Trading Technology: The availability of price-improvement strategies and smart-order routing technology (which finds the best bid or offer) were necessary to earn a 5 in this category. Brokers offering price improvement—a sale above the bid price, a buy below the offer—received a fraction of a point depending on the portion of their transactions that benefited. Top marks were earned by brokers who offered a wide array of order types, including conditional orders. The ability to place a trade from a graph earned a fraction of a point. In addition, we looked for ways to customize the trading experience, such as setting a default number of shares or contracts, to speed order entry.

Usability: A 5 here means the site or program was easy to use and well-designed, didn’t bog down when moving from screen to screen, and can be tailored to the user’s needs. Constant availability of a trading ticket, and easy access to research and account status data is key. Being able to easily switch from one area of the website or program to another is key here, as are customization options. 

Range of Offerings: We awarded points for the diversity of investments that can be traded online, with partial points given for those that can only be traded offline. Since all the brokers allow long and short stock-trading, as well as single-leg options orders online, we don’t award points for those transactions. We asked brokers how many stocks, on average, their customers can sell short, and awarded up to a half-point based on their answer. Complex options trading, and the availability of mutual funds, bonds, futures, commodities and international trading were also considered. A 5 in this category means you can execute all of these transactions online.

Research Amenities: This category measures the quality and accessibility of research, quotes and charting. We looked for research, news and charting linked to a customer’s portfolio and watch lists; the quality of third-party research and its integration with the rest of the site; and the availability of screeners, with special emphasis on options-strategy screeners. Brokers also won points for offering real-time streaming quotes at no additional cost, powerful charting capabilities, and Level II quotes.  Partial credit was awarded for features that generated an extra fee. 

Portfolio Analysis and Reports: The emphasis here is on clearly laid-out reports, updated in real time, showing current balances, positions and margin status. Portfolio-analysis reports, with links to news and research, as well as extensive transaction history, are most desirable. Tax reporting also falls in this category. Full credit is given for reports that can be created on the broker’s website, with no additional fees or data entry required.  Partial credit is awarded to brokers that populate services such as GainsKeeper and Maxit (tax analysis and reporting programs) for an additional fee.  This year, an additional consideration was the availability of a trading journal, allowing the user to capture market conditions at the point of the trade and take notes on the thinking behind entering that order.  A Barron’s reader requested this feature. 

Help and Customer Access: We sized up online help such as live-chat capability, user guides and frequently-asked-question files. Offline help was assessed by making calls to customer service, and weighing the brokers’ reports of the average time spent on hold when a customer calls in. We took a look at the education offerings, both online and live. The ability to visit a broker in person, and to access the account via a mobile device, is taken into account here. This year, we increased the points awarded for mobile access in this category.

Costs: We looked at commissions for stock and options trades and margin interest rates, giving more points for lower costs. We scaled the points awarded so that the lowest costs in the group earned the maximum number of points, with fractions (and occasional zeros) given to the more expensive brokers. Stock commissions are the biggest factor here, but options and mutual-fund transaction fees are also considered. A 5 could be earned here by very low stock and mutual-fund commissions, $5 or less for 10 options contracts, margin interest rates below 2.5%, and no account-maintenance fees.