Saturday, September 25, 2010
Futures Are the New Options
Online brokers are pushing further into futures trading—and taking retail investors with them.
JUST PAST THE TURN OF the millennium, retail investors began to trade options using tools and platforms from online brokers. It caught on. More recently, a few brokers introduced futures trading to the small investor. Now nearly half of the firms in Barron’s 2010 review of online brokers allow futures trading. There’s more to come.
TD Ameritrade (http://www.tdameritrade.com) last month launched futures and spot foreign-exchange trading through its thinkorswim platform. And trademonster (http://www.trademonster.com), the focus of our attention this week, has just joined the fray.
“Futures as an asset class is becoming more and more accepted and recognized, understood and used, particularly by active traders,” explains trademonster CEO Wade Cooperman. “People who understand options are looking for additional vehicles for their portfolios,” he says.
Futures, which allow traders to speculate on the prices of everything from pork bellies to orange juice to currencies as well as the level of housing starts, is a highly regulated business. Because they allow more liberal use of margin, and therefore more leverage, they can be more risky. In the past, investors who wanted to trade in futures either had to open an account with a specialized broker or have multiple accounts with a single broker that offered futures as well as other types of securities. The idea was to keep futures separate, as a precaution.
Since you can be more leveraged on margin, you can generate larger profits. Conversely, you can lose more, too; trading on margin also creates interest expense for you. As TD Ameritrade’s Website cautions, “This allows for strong potential returns, but can also result in significant losses.”
ANOTHER CONSIDERATION: Commodities are not covered by Securities Investor Protection Corp. insurance, the way stocks and bonds are, should a dealer go bankrupt. All funds have to be separated from the firm’s capital, which is why most brokers require customers to open separate accounts. Trademonster’s futures trading platform requires an account unconnected to your equity account. You must also log in to a different Website, though the firm plans to integrate the platforms in the near future.
When you sign up for a futures account at trademonster you’ll see three trading platforms: a Web-based browser version, a mobile app, and a downloadable desktop software application. The latter is the group’s Lamborghini, offering real-time quotes, profit and loss calculations, and a variety of advanced-order types. The mobile version runs on the iPhone, iPod Touch, TMobile G1, MyTouch, Verizon Droid and Palm Pre.
You can register for a two-week trial of a simulator version of any of these platforms. We glanced at the Web and mobile apps, but focused on the downloadable software version. Trademonster customers have access to all the electronically traded contracts at the Chicago Mercantile Exchange; a list can be found on the firm’s Website. Trademonster’s futures platform is called T4; it was written by a third party and has been adapted to look more like the firm’s stock and options trading platform.
Commissions run $1.50 per contract for either side of a transaction, plus exchange fees and a levy of 50 cents per contract for the platform. The platform itself requires a minimum charge of $25 per month; if you generate more commissions than that, the $25 is waived. Charting and news feeds increase the platform fee to $200 per month.
A new feature, liveAction, has also joined trademonster’s stock and option platform. It’s an interesting scanner that looks over real-time options activity, including volatility metrics. Most options-oriented scanners monitor measures such as unusual activity, trading volume, or changes in premium, and are often run on delayed or overnight data.
But liveAction’s calculations are based on a couple of databases that stream live data all day long, tick by tick. The database tracks whether contracts were traded on the bid, the ask, or in between. There are dozens of volatility scans. For instance they can compare this month’s volatility to the volatility of a contract that expires two or three months from now. You can also scan for changes in premium to see what options traders believe will happen to the stock price in the future.
At present, the scans are pre-set, and you can select the one you want from a drop-down menu. The top stocks that fit the scan, up to 50, are displayed sorted on key value, but you can click on another column and change the sort order. If you click on a particular symbol, you will see information specific to that particular contract, and you can also place a trade. This new tool has been nicely integrated into the workflow of the trademonster platform. There is no added charge for liveAction.
Published in Barron’s, September 20, 2010.
Saturday, September 11, 2010
Tool-o-rama
Online brokers use the end-of-summer trading lull to release new investing and analysis tools for their customers. This year there’s lots to choose from, and some customer-friendly pricing to boot.
THE DOG DAYS OF SUMMER mean lower trading volumes on the exchanges, and new tools from online brokers.
FIDELITY (http://www.fidelity.com) recently relaunched its Exchange-Traded Funds research toolkit. And 25 ETFs sponsored by iShares, including iShares S&P 500 (ticker: IVV), iShares Russell 1000 Growth (IWF) and iShares MSCI Emerging Markets (EEM), can be traded for free.
Jim Burton, Fidelity’s president of retail brokerage, says that the firm updated its stock-research area earlier this year, then did the same in the ETF arena. We saw a late beta version of the new ETF tools a few weeks prior to their launch last month.
Says Burton: “We are recognizing our clients’ interest in ETFs, so our strategy is to provide a full range of third-party offerings, plus offering certain trades at no commission. With this update, we’re giving them more research so they can screen and compare.”
One welcome change: the screening tool for ETFs is now identical to Fidelity’s stock-screening tool, with more than 100 criteria from which to choose. These include basic facts, such as geography, sector, market capitalization and sponsor. When you select a screening criterion, a list of the ETFs that fulfill it is displayed at the bottom of the window. ETFs that trade for free have a green check mark. If you know what criteria you’re looking for, typing in a few characters gets you a list to choose from—a real time-saver.
Another very helpful update is the ability to customize the results page and save it for future use. There are Quick Screens already set up, such as Fixed Income and Top Rated, and Fidelity has added Expert Screens, such as Dividend Generating ETFs and Large International or Global Equity ETFs. Most of the screening tools can be used even if you’re not a Fidelity customer. From Fidelity’s home page, click on ETFs on the left-hand side of the screen, then the ETF screener., but Expert Screens are available to customers only.
CHOICETRADE (http://www.choicetrade.com), a low-commission online broker, recently updated its Web-based trading application so it can run in any browser, without the need to load additional plug-ins. “Early on, we made a decision to create our new site without plug-ins,” says CEO Neville Golvala. “While there are many upsides associated with Flash applications, they do not work well with certain machines, mainly Apple products. We wanted to give online traders an alternative to Flash applications, while still offering them state-of-the-art utility, whether it be on an iPad, iPhone or standard PC.”
We struggled a bit to log into the Virtual Trading area of the ChoiceTrade Website, but finally got to the demo. One major improvement from ChoiceTrade’s old Web-based platform is a complete redesign of options research and trading. You can build a complex strategy from the options chain, and the new “Strategy Identifier” checks the trade legs you’ve chosen and identifies your strategy as you add them. This is a bit of a reversal from the way many other options-trading applications work—those have you choose a strategy and then add the appropriate legs.
Quotes are displayed in a streaming real-time format, and you can trade an unlimited number of shares of a stock for $5 per transaction. Options transactions will set you back $5, plus 55 cents per contract.
The firm has made it fairly simple to set up an account online. With a minimum of $2,000 in your account, you can use the new trading platform for free for four months. After that, you will be billed $14.95 per month for basic data, and $23.95 per month for the Pro data feed. The latter includes advanced charting and streaming data on the mobile platform.
The new platform is a big step up from ChoiceTrade’s previous, and very basic, Web-based toolkit. ChoiceTrade also offers a software-based trading platform for $29 to $79 per month.
TEXAS-BASED TRANSCEND CAPITAL recently launched an online brokerage, JunoTrade (http://www.junotrade.com). It offers $4.95 commissions per stock transaction, and $4.95, plus 95-cents-per-contract options trading. JunoTrade CEO John McMorris formerly served as chief technology officer and chief information officer of CyberTrader and ShareBuilder, respectively.
JunoTrade has two Web-based platform, JWeb and JWebPro, as well as a software-based platform called JunoTrade Pro. JWebPro is a streaming platform that offers most of the features of the downloadable platform; it’s built on Microsoft’s Silverlight technology, so it can run on Windows, Macintosh and Linux operating systems. All the trading tools focus on stock and options transactions.
There is back-testing capability built into the Pro platforms. It includes a fairly basic scripting language, allowing you to write your own trading strategy and test it. JunoTrade also has an API (applications programming interface) for those who want to write their own front-ends. JunoTrade also has an iPhone app, which you can download from the iTunes store for 99 cents. This is the first mobile app we’ve seen that incurs a charge.
The firm’s Website is a bit light on information that most investors need when deciding whether to open an account, however. Though you can locate basic stock and options commissions (click on the “Compare Pricing” tab on the main page), other fees are impossible to find.
Dan Micovic, JunoTrade’s vice president of marketing, says, “The active traders and groups like to call in and negotiate their per-share rate based on their trading volume. We can be quite accommodating.”
TRADEKING (http://www.tradeking.com), one of the first brokers to tie social networking into its trading platform, has expanded its “Trade Notes” functionality by tying it to Twitter. As of late July, TradeKing customers who generate a Trade Note and choose to connect to Twitter automatically will tweet their confirmed trades.
If you follow @TradeKing on Twitter, you can see what the firm’s customers are trading, and learn the rationale behind particular trades. Says TradeKing’s CEO, Don Montanaro: “Twitter Trade Notes only showcases clients’ actual trades that have been verified by TradeKing. This functionality underscores our commitment to providing innovative educational tools and resources to help clients expand their trading knowledge by learning from their peers’ trading successes and miscues, and the strategies behind those trades.”
Published in Barron’s, September 6, 2010.
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.
