Investor Brain

Saturday, August 28, 2010

New Apps With Investor Appeal

HERE’S A COLLECTION OF APPLICATIONS that I’ve recently tested and believe could help your trading, portfolio analysis, or tax reporting. Some are free, or nearly so. 

REALIZED (http://www.realized-app.com), published by New Forge Technologies, is a free (for now) Web-based application intended to help maximize your after-tax return. It bills itself as an alternative to the popular software GainsKeeper, used to import trade information onto a Schedule D for tax purposes, and there are similarities. Realized is especially useful for those with multiple brokerage accounts, allowing you to keep track of potential tax problems, such as wash sales in which you buy back shares you’ve recently sold for a loss. Depending on the timing of these transactions, among other things, there can be tax consequences if you don’t pay close attention.

To get started on Realized, all you do is create a user ID and enter your e-mail address, then click on a link to activate your account. That’s the easy part—now it gets a little bit tricky. You have a couple of methods of entering your trading history. The easiest is to go to your online brokerage account and download all your transactions in a comma-delimited (.CSV) format, in which each column of data is separated by a comma and each row starts a new line.

Almost all online brokers give you the option of creating a comma-delimited file, which you save on your computer. This is a step that can create a bit of pain if you’re not comfortable mucking about on your computer for a file, but it eliminates the need to enter your brokerage-account login information, which makes some people nervous. These files load quickly (even one that had several hundred transactions); at this point, you check over your transaction history to make sure it’s correct. You can also enter your transaction history manually, but that can introduce errors if you type the data incorrectly.

Once all the transactions from your various accounts are entered into Realized, the application creates tax lots, or records of transactions and their tax implications. By knowing the purchase date you can specify what shares to sell later on to maximize tax advantages. If you’ve fully or partially closed a particular tax lot, Realized will let you match the sale with the appropriate purchase.

One tricky bit of portfolio accounting that Realized tracks for you is corporate events, such as stock splits or reorganizations, which can change the cost basis of a particular tax lot. Realized will generate a Schedule D for you whenever you want, so you can keep an eye on your short-term and long-term capital gains as the year progresses. The program displays your largest unrealized tax losses, which you can sell to offset your capital gains, minimizing your tax payments.

The main advantage to using an application that looks at all of your brokerage activities across multiple accounts is that you may have activity in, say, your E*Trade account that generates tax consequences when you trade in the same stock in your thinkorswim account. The IRS doesn’t keep track of which brokerage handles your trading activity—your Schedule D looks at all of it together. It’s possible to sell a stock in one account that creates a wash sale when you buy it again in another account within 30 days. Realized will flag these events for you.

For now, Realized is in a late beta-test phase and there is no charge for its use. It’s worth checking out if you don’t have any other tax-management system in place.

FREESTOCKCHARTS.COM, as you might imagine, is a Website that offers (mostly) free stock charting. Published by Worden Brothers, the site also offers “almost-free” tools, including complete real-time data—the data you can see for free is from the BATS exchange platform, an alternative trading system that accounts for approximately 10% of all U.S.-based transactions. Adding NYSE or Nasdaq will run you $2.99 per exchange each month. There is a banner ad on the right side of the chart display; you can turn that off with another almost-free service for $4.99 per month. I simply move my browser window off to the right so that the ad is invisible.

This is a slick little charting application, which allows you to add a variety of technical indicators with a click. You can generate a chart and send it to others via Twitter or Facebook. One of the features that I appreciate most is the ability to look at the components of a particular index or exchange-traded fund using the site’s Watchlist function. I also like the ability to add columns to the tabular data display, such as whether a particular stock has broken through its 30-day moving average.

If you create an account, you can set up your own personal watchlists to track, and share them with your friends. Freestockcharts has its own social-networking capability, but the ability to connect with Twitter is also very useful.

THIS LAST ONE IS A BIT QUIRKY, and isn’t free, but will appeal to those interested in industrial and sector organization. Maptool X, published by Wall Street Images (wallstreetimages.com), uses old-world style maps to show the relationships between companies competing in a particular industry, and takes a stab at visually describing barriers to entry and forces of competition. This creative app can be downloaded from the iTunes App Store for $19.99.

Frankly, it took me about 20 minutes of puzzling over one particular display to figure out what it was describing, but once I got it, I had a great time checking out a variety of industries. I imagine those more experienced at playing video games will grasp the concepts more quickly. I checked it out on an iPhone; I’m sure this app would be magnificent on an iPad.

You can set up particular companies to follow, but the displays that most interested me were organized by industry. The larger companies are shown “protected” by a wall that keeps out potential entrants. If you hover over a company name, you will see some financial data (including market cap), while clicking on the company brings up recent trading data.

The displays will change depending on a firm’s market cap and its position within the industry. Maptool creates pictograms for nine industries, from basic materials to utilities with anywhere from 10-30 subindustries for each category.

These changes aren’t as dynamic as a real-time stock chart, but they will give you an idea of how a particular company fits within its industry. It’s thought-provoking at the very least. 

Published in Barron’s, August 23, 2010. 

Saturday, August 14, 2010

Here Come the Third-Party Apps

[Author’s Note: apparently my editor at Barron’s didn’t like my working title: “E*Trade for Geeks."]

E*Trade, TradeStation and Interactive Brokers encourage the development community to build apps that link to their trading platforms.

LAST MONTH, E*TRADE (http://www.etrade.com) announced the launch of its Open Application Programming Interface, or API. This set of technical programming instructions allows you to write your own trading application, or app, that ties into your E*Trade account. It can also tie applications and Websites from other developers to customize the appearance and functionality of your E*Trade connection.

For most of us, this “open” collection of obscure programming utensils and standards—including, for example, a programmers’ tool kit with the memorable name SDK, or files tagged with the extension .XML—will be close to meaningless. But you may already be using some kind of trading app or plug-in that customizes your connection to E*Trade, and there’s no question that, with the proliferation of gadgets and third-party Websites, more such customizing and control programs are on the way. Like other online investment outfits, E*Trade doesn’t want to restrict its customers’ interface and functionality options to its in-house offerings.

E*TRADE IS FAR FROM THE FIRST brokerage to allow third-party programmers to tie into its trading system. MB Trading actually started out as a trading platform for a variety of analytical programs, such as ESignal (http://www.esignal.com) and Ninja Trader (http://www.ninjatrader.com). TradeStation’s (http://www.tradestation.com) developer network lists approximately 100 add-ons that tap into its own trading and analysis platform.

Interactive Brokers (http://www.interactivebrokers.com) also has a list of third-party firms that utilize its trading system, such as Covestor (http://www.covestor.com). TD Ameritrade (http://www.tdameritrade.com) has had its API available for the last three years and now lists over 20 developer partners.

These brokers offer a long list of third-party applications that you can tie to your account that include technical analysis and charting, mobile trading, idea generation, and a range of automated trading programs. Most involve paying an additional monthly or annual subscription fee.

Kevin Delo, E*Trade’s vice president of brokerage product management, said that the launch of its API was a response to customer demand. “We received calls from certain high-end customers who wanted to be able to develop their own applications,” Delo says. He also mentioned that many E*Trade customers are using applications from other vendors, and they would like to execute their trades in their accounts without having to leave those applications.

THE FIRST THIRD-PARTY APPLICATION E*Trade links to is CoolTrade (http://www.cool-trade.com), an automated-trading application which you customize with your own personal-trading criteria. Once you’ve got it set up, when a particular stock hits your targets, the CoolTrade application will execute a trade for you through your E*Trade account.

CoolTrade’s CEO, Ed Barsano, says, “I’m glad they chose us as their first API partner. It presents a tremendous opportunity for growth in the number of traders using our product.” CoolTrade also executes trades on Interactive Brokers, MB Trading, TD Ameritrade and OptionsHouse (http://www.optionshouse.com).

Barsano, a retired Microsoft developer, notes that E*Trade created a very efficient and secure process to enable third-party applications to link to it, noting, “From a programmer’s perspective, they’ve really written it well. I think it will be extremely easy for other companies to connect to it.”

Delo says that several other programs, including AbleTrader and ESignal, have applications in the works that will link into the E*Trade platform.

LIGHTSPEED FINANCIAL (http://www.lightspeed.com)—which offers direct market-access trading technology, risk-management tools and brokerage services for professional retail active traders and institutional investors—launched its Black Box Software Development Kit (SDK) for algorithmic traders last month. Lightspeed’s Black Box SDK allows algorithmic trading applications that target U.S. equities to automatically execute trades on the Lightspeed platform.

Andrew Actman, chief strategy officer for Lightspeed, says, “We are continually enhancing the brokerage services and technology infrastructure offered through Lightspeed Gateway [an automated trading system linked to U.S.-based equities exchanges], making it easier, faster, and more efficient for clients to implement their trading strategies.”

J. David Lipsett, MB Trading’s president, says, “We don’t view ourselves as a proprietary platform company, even though we have built our own software-based, Web-based and mobile GUIs,” or graphical user interfaces. Lipsett says that the purpose of his firm’s SDK is to allow access to those tools in all asset classes to any customer or third party developer who wants to tap into their trading system.

“The fact that we built our own platform on these very same tools demonstrates the confidence we have in the system that we have created,” Lipsett concludes.

IF YOU’RE A PROGRAMMER, or just want to build your own trading strategy, you can write your own custom interface that links to your trading account at an appropriate brokerage. Since it’s prohibitively expensive to bypass a broker and link directly to the exchanges, writing your own interface is the ultimate in customizing your trading experience.

There are some hurdles that a developer has to get over. Every API is different, usually written in a variety of programming languages. In addition, every broker’s compliance department has slightly different interpretations of the various rules and regulations.

So once you’ve got an application–whether it’s technical analysis, automated trading, or a mobile app–you have to make sure it works properly with the broker’s system. Then you have to make the lawyers happy by ensuring the customer’s privacy, and by seeing to it that the app places trades legally.

Is this something an individual investor should consider? If you’re handy with programming tools, and have time to tinker, it could be an interesting project. If it’s good enough, you could even make some additional money by attracting subscribers. 

Published in Barron’s, August 9, 2010. 

Monday, July 26, 2010

Psst, Wanna Borrow Some Shares?

Author’s note: I think this should have been headlined, “Psst, wanna LOAN some shares?”

Some brokerages now allow certain customers to lend shares to short sellers, nabbing profits in the process.

SEVERAL BROKERAGES RECENTLY instituted programs allowing wealthy investors with big positions in hard-to-borrow stocks to lend those shares to short sellers, generating interest income in the process.

The ability to place shares into the lending market differs significantly from selling a covered call, which nets the seller income, or premium, in return for giving the buyer the right to purchase the stock at a particular price at a future date. If the stock doesn’t hit that price, the call seller gets to keep his shares, as well as the premium.

Lending shares affords an investor who doesn’t want to risk having a stock called away an opportunity to maintain ownership and also profit from the loan.

Says Fidelity (http://www.fidelity.com) customer Ron Kimmich of Chardon, Ohio: “I’ve been fortunate to have stocks that people want to borrow—and they have paid me handsomely for” the shares.

Kimmich has about 100 stocks in his portfolio, and is lending shares of eight companies. He says that Fidelity Capital Markets contacted him in March 2010 and informed him he had several stocks that were in demand by short sellers, who make bearish bets on securities. The shorts sell borrowed shares, in the expectation that they will be able to buy them back at lower prices later.

Kimmich says he was “uncomfortable” with the idea initially, but that the steady income stream has changed his view. He says he uses the income generated from lending to help defray trading costs for his shorter-term holdings.

Not every broker allows investors to lend out shares, and not every investor qualifies for the opportunity. The obstacles are partly technological, but also relate to whether customers hold stocks that others want to borrow. According to Peter Sosnowski, senior vice president of retail brokerage at Muriel Siebert (http://www.siebertnet.com), “it’s for more sophisticated clients, and for people looking to generate a little incremental revenue while they own a position—as long as there is a demand for those securities in the marketplace at that specific time.”

Although the criteria vary from broker to broker, those we consulted said a qualifying customer must have more than $500,000, and in some cases $1 million in assets in an account, and hold a large number of shares of the in-demand stock. Brokers report that equity-index and currency exchange-traded funds, and equities such as American International Group (ticker: AIG), Sears Holdings (SHLD) and Garmin (GRMN), are most in demand.

In most cases, candidates for lending are informed by their brokerage that they hold stock of value to short sellers, and are asked if they would like to participate in the brokerage’s program. The annual interest rate varies from stock to stock; the lowest rate is around 2% of the value of the shares loaned, but rates can range as high as 80%.

CUSTOMERS OF FIDELITY AND MURIEL SIEBERT can participate in the stock-lending program administered by Fidelity Capital Markets. Both firms clear through National Financial, a subsidiary of Fidelity. Making a stock available to lend out involves some administrative work, including the signing of a lending agreement with Fidelity Capital Markets.

Customers of Interactive Brokers (http://www.interactivebrokers.com) can lend their shares via a specialized trading tool integrated into the company’s trading platform, Traders WorkStation (TWS). The tool is available to IB customers who qualify to buy securities on margin, and it provides access to the stock-loan market. IB’s clients list their securities on the AQS platform, an all-electronic, direct-access securities-lending market for U.S.-based stocks operated by Automated Equity Finance Markets.

Another IB tool, the Yield Optimizer, lets customers see which of their holdings could be generating interest income for them if they lend these holdings out. The Yield Optimizer also helps short sellers determine whether it is cheaper to borrow stock through AQS or directly from IB.

Kimmich, the Fidelity customer, says that the stocks he is lending are displayed in his portfolio report, and are flagged with a “loan” marker. Fidelity deposits the interest income into his account around the fourth of each month in a single transaction; he can obtain a detailed report online of the interest rate he’s getting for each stock.

Fidelity enhanced its program in February, making more information available online about securities on loan. It is possible to sell a stock that you are lending out by using the usual online tools. Previously, any transactions affecting loaned stock had to be done with broker assistance. When you click on the “Loan” link in the portfolio display, you’ll get an online summary of the securities you are lending, including the current value of the loans and the interest rate accrued.

Involving retail clients in lending “has been in and out of favor on a global basis for the past 20 years,” says Tim Smith, a senior vice president of SunGard Securities Finance. “The main stumbling block has been the lack of transparency in terms of both risk and reward, and the [assurance of] protection to someone who would not be an expert in this activity.”

Loaned securities aren’t protected by SIPC (the Securities Investor Protection Corp.) if your broker or clearinghouse fails. Therefore, the clearing agent must post collateral of cash and securities equal to or greater than the value of the securities on loan, marked to market at the close of each trading day. In theory, then, the loan is 100% covered—even better than they would be by SIPC. Should the borrower go bankrupt, the shares are returned to the lender.

THERE ARE A FEW OTHER wrinkles associated with lending shares. Dividends earned on stocks lent to others are taxed as non-qualified income, meaning you’ll pay ordinary rates, not the 15% rate on qualified dividends. You’ll also lose voting rights on lent shares, although you can recall the shares if there is an important issue you’d like to vote on.

A bigger issue is the possibility that you might be betting against your own net worth by loaning stock you hold to those who believe the price will go down. According to Gregg Murphy, Fidelity’s Senior VP of retail brokerage, “those who think that way just don’t participate. Typically, we see very educated investors take part in the lending program.”

Brokerages such as E*Trade and MB Trading don’t have programs to let customers lend securities. But the success of the early adopters could mean more initiatives soon will be under way. 

Published in Barron’s, July 19, 2010.