Tuesday, May 02, 2006
A Blast from the Past
While doing an archeological dig through an old computer, I found this transcript of a Wall Street Journal Live event that featured Yours Truly as the guest speaker. This was an online chat format, with a moderator from the WSJ, Ravina Khosla. As I vaguely recall, it ran from 8-10PM New York time, and since I was living in Tokyo at the time, that made it just before lunchtime for me.
My online broker story had just run; in 1999 it was 8 or 9 pages and was also featured on the cover. This event had about 300 attendees, and I remember typing furiously for the entire time with few breaks. I was thrilled by the level of interest, and by some of the great questions.
March 16, 1999
Voices Events With ...
Theresa W. Carey
Barron’s contributing editor Theresa W. Carey participated in a Voices Event on Monday, March 15, 1999. The following is a transcript of that event. It has been edited for clarity.
Hgold: Hello, this is Howard Gold, editor of Barron’s Online, welcoming you to our discussion with Theresa Carey, who has been doing the Barron’s survey of online brokers for the last four years. Theresa joins us from Japan. How are you, Theresa
Tcarey: Tokyo kara ohayoo gozaimasu, Howard-san. (I’ll do the rest in English, I promise.)
Hgold: Theresa, this is the first question. What was different about this year’s survey of online brokers and what does it say about the industry and where it’s going?
Tcarey: The big difference I noticed this year was the maturity of the brokers themselves. Most of the sites had been spiffed up and the amenities and research links much improved. I think that with 30% of retail trades being conducted online, the brokers have to appeal to the newcomers to the online world now. I visited ten of the brokers in person, and unlike past years, they are all operating out of nice offices and they look like they have some money to invest in their services.
Aditya: It seems your list of online brokers is incomplete since at least one, “Scottrade” is not listed.
Tcarey: I’m really glad you asked that, aditya. There are about 100 online brokers out there right now. I contacted 35 for the story; many of them declined to participate. Scottrade was one who declined. To be included in the survey, the broker had to provide me with an account with which I could place some trades. Scottrade wouldn’t do that, so they aren’t in the survey. Same with Dreyfus and several others—I asked, but they said no.
Era: Would you consider an “online broker” as a totally different broker or just a broker with different tools?
Tcarey: Era, when I started surveying online brokers for Barron’s, the brokers who operated online didn’t have other ways to reach them. Now that online trading has hit the mainstream (with a vengeance), I consider online trading just another way to reach a broker. It’s a good way for the self-directed trader to keep tabs on an account, and to quickly make trades ... . provided the broker’s servers are running!
Hgold: Theresa, this is Howard again. DLJDirect was the number one online broker for the first time this year. Why did they get to the top and why did Discover slip to number two?
Tcarey: Howard, regarding DLJ Direct they got to the top this year by really improving their trading screens. Discover slipped a touch because some of the services they offered last year for customers are now either unavailable, or fee-based. Also we considered the commissions on limit orders, which knocked Discover down a point on that score. I was really impressed with DLJ’s new trading screens.
Msgven: How do you think the growth in online brokers would influence the overall market?
Tcarey: Msgven, my theory is that we’re going to see a decline in mutual fund investments as the baby boomers—who are pumping their retirement money into the market right now all start to decide they can out-perform the folks at Fidelity and other funds. I see it as a way to get new capital into the market. Many of my friends—and I’m your typical over-40 thinking-about-retirement and investing like mad sort of person—... (Howard, stop laughing) ... don’t want to hand over our money to fast-talking brokers. We want to handle it ourselves. So online trading appeals to independent investors.
Pmll: What percent of all trades are online?
Tcarey: Percent of all trades, including institutional? Piper Jaffray’s latest figures show 17%. Of the trades placed by individual investors, 30% were accomplished online in the second half of 1998.
Harmony4: After a trade is placed how long does it take to execute?
Tcarey: Harmony4, that depends on the trade. If it’s a market order, it can go through remarkably quickly. Some of the executions I watched occurred in less than a second for market orders. If it’s a limit order, it will depend on the price you set. Mutual fund orders are executed at the end of the day.
Kippesp: Which on-line brokers make switching convenient and without fees?
Tcarey: Kippesp, I have to admit that I didn’t study that issue carefully. I have horror stories in my mailbox about people trying to get OUT of certain brokers, but I wasn’t able to follow up on those stories so I’m reluctant to share them. Kippesp, before you sign up with a broker, be sure to look over their commission and fee schedule. Most of the brokers had a $25-50 fee for moving an account out.
Dcole: What about trading foreign stocks that don’t have adrs or after hours?
Tcarey: Dcole, some of the brokers are able to handle foreign exchanges. Web Street Securities is going into cahoots with several European brokerages, and Schwab is setting up a unit in Japan. They’re tippytoeing into foreign markets. I expect to see a lot more in the next year, DCole.
Hgold: Theresa, let’s talk about E*Trade. They’re a big success, with a huge marketing budget, but they’ve never been near the top of our survey, and they always seem to be having problems. How do they rate, and what are their strengths and weaknesses?
Tcarey: Ah, E*Trade! They offer a great product line. It’s just that they’re growing beyond their current infrastructure. I’d love to see E*Trade slow down a bit and get their technology caught up with their customer base. I think they have a good line of products that’s got a lot of “baby boomer appeal” but they’re overloaded right now. I had a few problems with their trading screens, and navigating the site is difficult in comparison with DLJ and Discover.
Sthubbins: What is your opinion of the “day trading” phenonenon, especially the courses offered to the amateurs?
Tcarey: Sthubbins, my personal feeling about day trading is that it’s crazy. It’s gambling. The courses make me think of the saying about “a fool and his money are soon parted.” I have to credit my husband with the line in the article about get-rich-quick schemes turning into get-poor-quicker realities. I’ll close this question by saying I’m extremely uncomfortable with using capital markets as a slot machine.
Daniel29: For a more serious day trader, which online broker is recommended—speed of execution being critical and reliable?
Tcarey: Daniel, I liked Web Street and the AB Watley Ultimate Trader for day traders, even though I think they’re nuts… Serious day traders should invest in Level II quotes and some technical analysis software as well.
Hgold: You mean, day traders are nuts, Theresa, not those brokers, right?
Tcarey: Yes, the day traders are nuts, I think (Thanks for the clarification). Howard, I’m trying to get a copy of a financial statement I saw from one broker that caters to online traders—they said they have 7% customer turnover EVERY MONTH.
Shakil: Hi, I just wanted your opinion about Citicorp Investment Services.
Tcarey: Shakil—I’m sorry but I haven’t looked closely at them yet. I want to cover some of the bank’s online trading offerings in my Website of the Week column on Barron’s Online in the near future.
Jwschneck: Did you get a chance to understand the internal structure (e.g., how many people in the different functions)? If so, did you learn anything about the brokers’ structures that would signify success in the future?
Tcarey: Jwschneck, when I visited the brokers in person I got to tour their main facilities I was especially interested to see how many people were working the phones, the help desk, etc. at the various brokers. Some of them have dozens of associate brokers all sitting in one big room taking phone calls. Some of the others are spread out to the point that I couldn’t see everything without taking 2 or 3 days to travel around the country ... . I got to see the computers that some of these trading systems are running on too. The technical staff at Discover has always impressed me.
Daygecko: Could you compare the criteria for rating brokers in your survey with the Gomez site. Do you in general think the Gomez results are as useful for investors as the Barrons survey?
Tcarey: Gomez’ ratings are interesting for a number of reasons. I have to admit a slight reserve about them though. Unlike Barron’s, Gomez Advisors consult to many of the online brokers. So they’re ranking their customers and some non-customers too. I’m really uncomfortable with this. Though Barron’s accepts advertising from online brokers, I have never been told to adjust my rankings based on advertising dollars. I don’t know that that’s true about Gomez’ clients. Anyway, I do check out his reports, but they don’t affect my rankings.
Jwschneck: Do you know of a good, inexpensive way to get analyst reports on the different online brokers?
Tcarey: Hi again, JWSchneck. If you mean financial reports on the brokers that are publicly traded, I’d set them up on a Company Sleuth watch list (http://www.companysleuth.com) and check out the reports as they’re updated. Company Sleuth is free.
Chris Johnson: Are there any online brokerage firms offering yearly flat- fee prices?
Tcarey: Chris, someone did that last year… Now I’m racking my brain to try to remember who it is. Some of the brokers reduced fees, or waived them completely, depending on the number of trades executed. AB Watley Ultimate Trader does that, and Fidelity’s fees drop by 50% when you’re considered a frequent trader. Chris, I’m looking at my notes and I don’t see any annual fee figures jumping out at me. I have a vague recollection that SOMEone offers that, but I don’t know who, sorry… Chris—Wall Street Access and All Street Electronica offer reduced fees for heavy traders.
Hgold: This is Howard Gold again. I’d like to remind everyone that Theresa Carey writes regularly for Barron’s Electronic Investor column, and she will be doing reviews on online brokers for our new Website of the Week column ...
Tcarey: You folks are giving me some great ideas for the new column. Thanks!
Hgold: The Website of the Week column debuts March 18th, and runs every Thursday in Barron’s Online. Also, check out our new Electronic Investing page, with everything Barron’s has on electronic investing in one place!
Spynne: I’ve noticed that several online traders have opted to display a “certification” seal such as Web Trust at E*trade etc… Do you have an opinion on these?
Tcarey: Spynne, those certification seals have to do with online security. The brokers who display that seal have passed some tests regarding encryption and hacker defense. It’s a nice thing to see on a broker’s site.
Greenler: I currently use Web Street, however I have major trouble keeping their quotes from freezing up, are there any other brokers with similar formats?
Tcarey: Greenler, you’re probably having trouble with the intense Java usage on Web Street. Datek also has a rather lively, Java-based site, though you can turn the Datek ticker off. How much RAM have you got on your computer? Bump it up to at least 64MB if you’re going to be hanging around Java-based sites a lot. (128 is even better!) The new NDB site, which will debut soon, also uses Java, but it’s not as lively as the Web St. site.
Vcf2jlc: Which of the companies that you rated is the best in giving you instant confirmation of your trades?
Tcarey: Instant confirmation? The new NDB site has a screen that pops up on top of everything else running as soon as a trade executes—I liked that. Datek and Web St. do a nice job, and Discover’s trade confirmation is snappy too. The non-browser based programs like Watley’s Ultimate Trader and the Web Street Java trader also pop up an execution box. I don’t like the ones that make you click repeatedly on an “Order Status” report, like Schwab and Waterhouse.
Blaine: Why has Datek fallen from grace?
Tcarey: Blaine, mostly because of customer complaints, filings with the SEC, etc. They’ve got a back-office mess that I think needs to be cleaned up. I wouldn’t say that 3.5 stars is a huge fall from grace though!
Nicole: What brokers offer executions in other international exchanges?
Tcarey: Nicole ... wow, deja vu all over again. Dang, my earlier answer has scrolled off the screen. Ameritrade currently allows Canadian exchanges, and quite a few other brokers are in the midst of putting together some international alliances. Schwab, Discover, DLJ Direct and Web Street will have international access in the next six months, I think.
Dcole: Which online brokers offer charts of mutual funds to users?
Tcarey: Charts of mutual funds? I’m unclear on this question. Do you mean analytical reports? I’ll answer the question as though that’s what Dcole means. Fidelity, DLJ Direct, E*trade and Discover have some very good mutual fund screening tools. Fidelity’s are probably the best.
Prodyot: Are there any online brokers who have set a minimum standard by when a client can activate an order when the online or telephone service is down? Should this be regulated or will the market determine?
Tcarey: Prodyot, I asked this question of a lot of the brokers. Most of them said that they have a notice up on the Web site if service is blocked for all customers, and some can tell when a server that affects just a group of customers is down. Most of the brokers are relatively good about extending the online commissions to those who say they had trouble getting into the Web site. BUT!
WSJ_Host: Uh-oh, there’s always that “but” ...
Tcarey: Some investors are new enough to the game that they can’t tell the difference between a problem with their own ISP and a problem on the broker’s side. That’s where many of the disagreements with the online brokers originate. Customer says, “I couldn’t get in!” Broker says, “Hey, everything was fine here.” Then what do you do?
Janix500: In your report you did not talk about how different discount brokers execute customer orders. From customers’ point of view, would you say that some are better than others. Which ones? Please discuss.
Tcarey: Are we having fun yet? I’m going to need a sushi break in an hour or so. Janix, you just asked a question that I could answer by filling an entire issue of Barron’s. Whew. Let me see if I can do this one quickly. Some of the brokers handle an entire trade electronically. Others have a human do a quick review of each trade to make sure it doesn’t violate any rules.
WSJ_Host: Audience, Theresa Carey is live from Tokyo.
Tcarey: Quick and Reilly, for instance, passes each order by a broker. Some others, like Web Street and DLJ Direct do most of the error checking during order entry, so your order goes straight to the market. AB Watley does that as well (puts order straight to the market.) Now the next question is, what happens next? Does it go to a market maker or what? That depends on the trade—the block size and the issue being traded. Muriel Siebert says she likes to pull the large orders out and handle them with a live broker to give better service and improve the price… Well, as you can see, I could babble on about this one for another 2,000 words or so. Another future column topic—thanks. I hope this answer was good enough for the live format.
Coconuts: As a financial advisor, eager to go on my own, I am currently looking for an online firm that might be able to support me with a multiple account management system. In your research have you studied any online brokers that offer such capabilities?
Tcarey: Yes, there were several that had multiple account management facilities. Wall Street Electronica is actively pursuing independent financial advisors, for instance. So is E*Trade and Net Investor. I asked Muriel Siebert about this, and though her site doesn’t state it explicitly, she’s willing to work with IFAs. Coconuts, if it was me, I’d want to work with an online broker I could go visit in person to drop off checks and deal with technical difficulties if I was handling multiple customer accounts. Just an idea.
Crstyn: It appeared to me as though only AB Watley was covered as far as level 2 brokerages. Will Barron’s ever cover those in detail as trading escalates, and what made you choose AB Watley as your primary L2 covered broker?
Tcarey: Crstyn, I’d like to cover them in more detail soon. Putting Ultimate Trader in the piece this year was an experiment. There are a few others out there I’d like to test, but technologically it’s a major challenge. But look for that kind of coverage in the next year. I really want to do it. Ultimate Trader snuck in because I was already reviewing Watley Trader, by the way. (Speaking of Java-heavy—Watley Trader has LOADS of it.)
Alejandro: During your survey, did you hear of any case of stolen passwords or things like that?
Tcarey: Alejandro—no I haven’t heard of any stories like that, but I did make note in the text of the sites that didn’t have a “Log Out” button. There Are Two Issues With Security—One Is Server-Based: can a hacker get in and intercept my information? There’s no sign of that happening yet. The Other Is User-Based: Does the user leave a piece of paper with the password scrawled on it sitting around on the desk at work? Can someone else hit the “back” button a few times on your computer and get to your online brokerage account? In the case of the latter, I STRONGLY recommend (please note, I’m jumping up and down to emphasize this) that you CLOSE YOUR BROWSER when you’re done with your account, just to be sure.
Gctseng: Some of the online Brokers provide service for mutual fund exchange. What’s the difference between exchange and “sell and buy,” if the commission is low?
Tcarey: Gctseng, in an exchange, you directly swap shares of Fund A for Fund B. It’s a clean transaction, includes the fractional shares, and at a minimal fee (usually zero, can’t get much more minimal than that). In a sell and buy, which is necessary if you’re going to go outside the universe of funds available to exchange, you just end up with the commissions and possibly some fractional shares left laying around. I was thunderstruck at the way the DLJ Direct mutual fund screens work now. Really a nice site.
Lisaleft: What is the NDB site?
Tcarey: Lisaleft, National Discount Brokers—http://www.ndb.com. They’re putting the finishing touches on the new site, which is much improved over the one you’ll see if you go there now. Go look at it in about 2 weeks. They’ve made some fabulous improvements.
Daygecko: Do you have an opinion of GroTrader, a day trading firm somehow connected with Telescan?
Tcarey: Daygecko, sorry—I haven’t seen them yet. We’re trying to figure out how much interest Barron’s readers have in day trading to decide whether to investigate those guys in depth.
Msgven: Do you think that growing numbers of online brokers are likely to generate enough volume through individual investors to seriously tilt the market in face of “investor panic”? Is this likely to happen more often now than, let’s say two years back?
Tcarey: Msgven, great question. The huge jumps in volume from online trading in the last year have been focused in Internet-based stocks. On the good side, as we’ve seen during market meltdown days, the online broker’s systems all crash and burn so the amount of panic is somewhat ameliorated. (I can’t believe I’m using words like that live. What’s come over me? OK back to the question) ... Anyway, as the infrastructure for online trading improves, more trades will be executed that way by self-directed investors but I doubt that an overall market panic will be started/executed online. I think individual stocks will be greatly affected though. Especially those that are favorites of day traders.
Lampadare: How do you rate Fidelity as an online broker? There have been a few complaints about partial filling of an order and then filling the balance at a higher price. Lampadare, my personal feeling about Fidelity is that I’d use them for mutual funds, but I don’t like their site for equity trading. Too slow, and they don’t do much in the way of price improvement. But if you hold any Fidelity funds at all, like in your 401k, it’s great for that sort of thing.
Tcarey: Anyone for shiro maguro? Ano, akagai o tabetai desu yo! We have temporarily lost our host. Oh, she’s back!
WSJ_Host: Uh ... English, please.
Tcarey: Sorry, when I get hungry, I lapse into Japanese.
Jts: Do you know of any online brokerage firm working forward emerging markets?
Tcarey: Jts, I’ve gotten some info on that I can’t write about yet because it’s under NDA. I’ll let you know as soon as I can talk about it!
Devin: Should online brokers be held responsible for tech failures?
Tcarey: Devin—I believe they should. I’ve had the opportunity (and the bully pulpit) to hold a few feet to the fire. We ran an e-mail address in the Electronic Investor column for a few months and I got hundreds of e-mails. Some of them detailed horrendous problems, and in the worst cases, I contacted the brokers to say, “What the are you going to do about this one?” It was interesting. Sometimes it’s hard to figure out exactly where the technical problem originates. For instance, Schwab blamed their outage on supplier ADP. Who pays? I said I don’t really care—the customers deserve some relief. It’s comparable to a customer sitting at a broker’s desk and having the broker completely ignore a series of reasonable requests.
Lisaleft: Is there a survey we can fill out to let you know how we feel about our brokers?
Tcarey: Not yet. I’d like to put something up on the Electronic Investor page. I had a very informal survey, done via e-mail, during the course of the article.
Daygecko: Any comment on the turmoil at FarSight? I have an account through the Lindner association and everyone has been notified that they have three weeks to liquidate the account of have it transferred.
Tcarey: Daygecko, I had about half a dozen calls in to FarSight and none of them were returned. I’d like to know more about that situation too—making note of that idea for an online column! (Thanks again!)
WSJ_Host: Well, folks we’re nearing almost two hours of this session so we must let Theresa go ... or she’ll break out in Japanese again.
Tcarey: Nihongo ga sukoshi jozu ni narimashita. I really appreciate the interest of all the participants. This is obviously a hot topic and I love being right in the middle of covering it. If you have any comments for me directly, please send them to email@example.com . Randy Forsyth and I keep an eye on that account.
WSJ_Host: We try to answer as many questions as we can but unfortunately the time limit of the Voices Event doesn’t enable us to answer all of your questions ...
Tcarey: I told Ed Finn I could fill the entire magazine with online trading coverage! Looks like I could sit here all day and talk to you folks.
WSJ_Host: Thank you for joining us tonight, Theresa. We’d love to have you as our guest again soon to cover other areas of this topic.
Tcarey: Any time, Ravina ... you know where to find me! Thanks for coming, everyone. Mata ato de. Dozo yoroshiku onegaishimasu. See you all in cyberspace, or in Barron’s every four weeks. Good night to those of you in the U.S.!
WSJ_Host: Audience, thank you for all of your questions. And Sayonara to those of you in Japan !
Tcarey: Sayonara is good-bye ... mata ato de is see you later!
WSJ_Host: This is your host Ravina Khosla saying good night.
Posted by twcarey
on 05/02 at 03:37 PM
Saturday, April 29, 2006
ONLINE TRADING ISN’T JUST FOR FOLKS WHO TRADE STOCKS and options. Some Web-based brokers appeal specifically to those with an interest in trading currencies, commodities and other instruments.
OANDA (http://fxtrade.oanda.com), which was launched as a Website that provided exchange-rate quotes in the late 1990s, morphed into a foreign-exchange platform called FXTrade in 2001. Based in New York City, it has about 15,000 customers, but more than 100,000 have “demo” accounts that allow them to trade currencies with model portfolios, not real money. The platform makes extensive use of price/time graphs.
Late last year, OANDA introduced an options contract called FXBoxOption, which allows a customer viewing a price chart of a particular currency pair, such as the U.S. dollar and euro, to indicate via a box on the chart where the price, or exchange rate, is likely to be at a subsequent time, be it five minutes or six months later. The system then calculates the payout that would accrue if the price of the currency pair in question reaches the level stipulated. Lower-probability price targets have higher payouts, and vice versa.
Once the payout is calculated, the customer can decide whether to purchase the option and, if so, how much to invest. If the price hits its target by the prescribed time, the customer receives the payout. If it misses, there is no payout.
This option is intriguing, though risky, because it is priced in real time after the customer defines it. As noted, it can be held for minutes or months. BoxOptions aren’t traded on any exchange; they are a contract made between the customer and OANDA. You can learn more about BoxOptions at http://fxtrade.oanda.com/boxoption/.
Like most forex-trading firms, OANDA doesn’t charge commissions. Instead, it collects the spread between bid and ask. Spreads are relatively tight; the U.S. dollar (USD)/euro spread is 11/2 pips, though some pairs have much higher spreads. (A pip is 1/100th of a cent.) The pound/yen spread, for instance is 6-to-6 1/2 pips. The spread is the same whether you’re trading a lot of $1,000 or $1,000,000, which is somewhat unusual. Many other forex firms tighten the spread as the size of the transaction increases.
Another key component of forex trading is utilizing leverage. Stock and option traders know this practice as trading on margin, but their use of margin is significantly less than that employed in foreign-exchange trades. OANDA lets customers enter a trade with 50-to-1 leverage, and lever up to 100-to-1 to maintain the position. If the price moves against them, they either have to liquidate the position or put up more money to maintain it.
OANDA has no minimum for opening an account, and you can trade lots as small as $1. Interest accrues by the second, rather than on a daily basis, which is customary.
SOME BROKERS LET YOU TRADE COMMODITIES ONLINE, though most restrict you to electronically-traded contracts such as S&P 500 futures. Xpresstrade (http://www.xpresstrade.com) offers 24-hour trading of electronic and open-outcry futures products, including crude oil and gold, around the world. Customers also can trade 20 currency pairs on the same platform. The firm provides access to more than 25 exchanges and more than 300 products. Based in Chicago, it has customers in more than 100 countries.
The Xpresstrade platform, developed in-house, runs from a browser using Java. Dan O’Neill, Xpresstrade’s principal, says the site aims to offer a full suite of trading tools and resources, including conditional and trigger-type orders. Many electronic-futures platforms operated by the exchanges don’t accept GTC (good until cancelled) orders, so the platform simulates one by maintaining it on the broker’s computer and on the exchanges for you. You can also place time-directed orders, which might, for example, work for 20 minutes and then be canceled, or activated, two hours after the order is placed.
All the quotes on the Website are real-time, offered at no additional charge. O’Neill says, “It’s a huge expense for us, especially the overseas exchanges, but our customers can’t afford to trade off delayed quotes.” The platform allows customers to trade futures/options combinations, such as butterflies, condors and spreads.
If you’re wondering how the commodities and futures markets work, Xpresstrade offers 11 self-study courses on its site that can be accessed at any time. Topics include Oil Market Basics and How to Trade Futures.
Commissions depend on what you’re trading. Futures commissions range from $5 to $11 per contract. Options on futures are $10 per contract. Currency trades don’t carry a commission. Like OANDA, Xpresstrade makes its money on the bid/ask spread, which ranges from 3 pips (USD/euro) to 15 pips (euro/Australian dollar).
Published in Barron’s, April 24, 2006