Monday, January 09, 2006
EVEN IF YOU’RE FAMILIAR with trading equities and options online, venturing into the wide world of currencies can be daunting. After all , you’re suddenly trading against professionals with your (relatively small) retail account. No less an investor than Warren Buffett, who famously bet against the dollar, can wind up on the losing end of currencies.
Into this void steps COESfx (http://www.coesfx.com), which has created an electronic-communication network for currency trading that’s patterned after the more familiar equity ECNs, such as Archipelago or Island. COESfx’s book looks like a Level II ECN, where the best bid and offer float to the top.
Mike Weiner, COESfx’s co-founder and managing partner says, “All customers—from mom-and-pop to large hedge funds and institutions—trade on the same platform. There’s no separation between platforms.”
The system takes quotes from multiple dealers and sifts through them to present the customer with the best bid and best offer. Weiner’s background is in equities, which is why the firm built its model this way.
On the main page, COESfx displays four currency pairs with real-time pricing. The firm offers 22 currency pairs, plus spot gold and spot silver. Weiner says that a key difference between COESfx and other online currency-trading firms is that his firm doesn’t have the ability to manipulate the spread; the platform can only display what the banks are passing through.
COESfx charges a transaction fee, rather than taking the spread, as most platforms do. The fees charged vary, based on volume. In 2005, customers were charged, at most, $10 per $100,000 traded—but Weiner says the firm plans to cut that to $7.50 early this year.
New customers can open an account with $5,000, then use leverage, comparable to trading on margin, to trade 50 times that amount. Weiner says that 50-to-1 leveraging is relatively low in the currency-trading industry. He has seen 400-to-1 leveraging (investing with borrowed money), but believes that can kill the beginning trader. “We recommend that when you start out, you use at most 5- or 10-to-1 leverage. The less leverage you use, the less exposure you have.” There are no additional fees for using leverage.
COESfx has set up risk-management tools so that nobody will have a margin call where they have to come up with additional funds. Weiner says that when a customer has a loss of 80% of their starting daily volume, they get stopped out. With $10,000 they can buy $500,000 of currency but their exposure is only $8,000.
You can sign up for a demo account, which displays trading through just one of the banks available. But depending on the currency pair, you’ll still see a good depth of market with the one bank. The platform is Java-based and, similar to direct-access brokers, must be downloaded and installed on your computer. A high-speed Internet connection is most helpful both with the download and with running the platform once it’s installed. (But if you’re still using dial-up, you probably shouldn’t be trading online.)
There are other ways to get in touch with your inner Warren Buffett. The first currency exchange-traded fund—the Euro Currency Trust (ticker: FXE), which tracks the euro’s exchange rate against the dollar—began trading last month. In addition, EverBank (http://www.everbank.com) offers money-market accounts and certificates of deposit denominated in an array of currencies (including the Icelandic krona, which yields over 8%) and gold.
FIDELITY (http://www.fidelity.com) has updated its Wealth-Lab Pro tool, which is available to customers who qualify for Active Trader services (120 trades per year). Wealth-Lab allows traders to design, build, back-test, and execute customized-trading strategies.
The main pieces of this upgrade are a new user interface and a “wizard” that helps the user build a trading system. Also new is the ability to plug both fundamental corporate data and technical indicators into a model, which is unique as of this writing. (TradeStation plans to add fundamental data to its trading systems in its next release, due out in the spring.)
There are several steps to building a trading model. First, you define the stocks you will be examining by setting up a watch list. You can create numerous lists, and mix and match them as necessary. Then, you define the specifics of the model, which can include both fundamental and technical data, plus your entry and exit points. The wizard then generates the code to run the model; if you want, you can manually modify the code.
Once the model is built, you run it on historical data to see how it works. Wealth-Lab Pro builds tables of results, letting you compare the model’s performance to a simple buy-and-hold strategy, as well as utilizing margin. One key enhancement to this version is that you can tell the model to only buy and sell in round lots—the prior version might have told you to buy 362 shares of a stock at one entry, then sell 278 at the next exit.
If you qualify for active-trader status at Fidelity, Wealth-Lab Pro is a terrific tool to use to build and test trading strategies. The truly brave can let it automatically execute trades as well.
Monday, December 26, 2005
New Kids in Town
THOUGH 2005 HAS FEATURED SERIOUS consolidation in the online brokerage industry, some brave souls are still starting up new firms, dangling enticements such as low prices or different ways to invest.
One that might appeal to the cost-conscious investor is TradeKing (http://www.tradeking.com), which features commissions of $4.95 per equity transaction, and $4.95, plus 65 cents per contract for options. The firm was started by a group that in the 1990s founded Suretrade, which at the time was one of the low-price leaders, with $7.95 trades. Suretrade eventually merged with Quick & Reilly’s online brand, which was part of Fleet Financial; Fleet since has been absorbed by Bank of America.
"Over the past couple of years, we’ve felt, with all the industry consolidation going on, that online investors are being neglected,” said TradeKing’s co-founder and CEO, Donato Montanaro. “We came together and said, ‘We can do better.’”
Montanaro, when putting together the package for his potential customers, wanted a pricing scheme that is easy and understandable. He feels that tiered pricing is confusing and divisive, so the firm’s commissions are a flat $4.95, including trades placed with a live broker. Margin interest is also flat, currently at 6.75%, regardless of the outstanding balance. The firm also eschews fees for low balances or lack of activity. “We despise hidden fees,” says Montanaro.
The Electronic Investor was given a preview look at the site prior to its public opening on Dec. 19. At the initial login, the customer is presented with a Summary page, which can be customized. The main menu is displayed at the top of the screen; additional choices display as your mouse rolls over the menu boxes.
The site has quite a few features that will appeal to options traders, including a way to build multi-leg options that displays the net delta—a measure of risk—of a potential position. You can select the strategy you’d like to look for, such as a “calendar call spread,” and it will find contracts that fulfill your needs.
Another interesting feature for options chains is that the pricing is displayed as bid, ask and “mid.” If you click mid, a trade ticket is populated with the price between bid and ask, rather than assuming that you’ll buy at the ask and sell at the bid. Montanaro says this feature is designed to save investors money on their trades, since the price they can get is more to their advantage.
Filling out an order ticket can take several pages, however, including a step that has disappeared from most online brokerages: entering your password to confirm the placement of an order. You can turn that requirement off if you’d like.
The Holdings page lists your current positions; each option contract has a checkbox to its left. If you’re in a multi-leg option, you can click on the box for the various legs, and then identify the strategy for that group of options—for example, a “butterfly.” Clicking on the strategy opens a multi-leg trade ticket with the symbols filled in that will allow you to close the position quickly. The way it’s organized forces the trader to remember which strategies have been employed, however.
Another research tool that provides intriguing results is the Probability Calculator, which shows the odds of success for a given strategy. To use this, you enter a stock symbol, and the date in the future for the calculations. You can also estimate two potential future prices, perhaps representing your stop-loss and your desired gain. The tool shows the probabilities of the option expiring at the underlying price shown, which also translates to the stock reaching the prices you’ve entered.
TradeKing is also introducing some community-building features, such as blogs and rankings of articles of interest to customers. The firm says it will offer downloadable educational podcasts, and will also track the truth of what bloggers post to avoid pump-and-dump scams.
Setting up a quote watch list is a little clumsy. Users have to type their desired symbols into a box in the Setup area; it would be easier to use if you could design the watch list while you’re looking at a quote screen, which is the method used at most brokerage houses that allow user-specified watch lists. Similarly, customizing reports has to be done from the Setup area rather than while viewing the report itself. These sort of issues, however, aren’t unusual for a brand-new offering.
If you’re cost-conscious, want to work with an investing community and are willing to deal with a few startup idiosyncrasies, check out TradeKing.
ANOTHER START-UP, aimed at those focusing on exchange-traded funds, is XTF Advisors (http://www.xtf.com). The firm, which launched its Website in mid-September, is offering both online brokerage accounts and separately managed accounts (SMAs), and has set themselves a lofty goal: to change the way Americans invest.
The first two options are implemented through XTF’s self-directed brokerage service. If you want to go it alone, you pay $14.95 for online transactions, and the Website functions much like a traditional online brokerage—albeit one that focuses on ETFs. You can also go through one of the asset-allocation programs on the Website and pay a fraction of a percent of your account value. This latter approach is similar to Ameritrade’s Amerivest and requires an opening deposit of $5,000.
The third option is to open a separately managed account with a minimum of $50,000 and let the advisers at XTF manage your portfolio for you. They use a specialized ETF planning tool to set up your initial investments, then rebalance the holdings periodically. This approach costs an annualized 0.65% of your account value, due in quarterly payments. If you have $100,000 in your account, you’d pay $650 per year, or $162.50 quarterly, but you would not be charged individual transaction fees.
The site offers several ETF screeners, free of charge, based on MarketWatch and Lipper data. Once you’ve built a potential portfolio of ETFs, you can backtest their performance against other types of investments. XTF’s proprietary econometric model substitutes indexes for the ETFs to simulate how an index-based ETF would have behaved in the years prior to its existence.
Sander Gerber, XTF’s Chairman and CEO says that the company is in the middle of an internal study about the tax efficiency of mutual funds compared to low-cost index mutual funds and ETFs. He says that “The bottom line is that as the population of mutual fund holders drops the remaining holders will take the hit on capital gains.” The firm plans to summarize the conclusions on its Website, with the intention of educating investors about the tax inefficiencies of mutual funds.
XTF’s President Robert Adler says that the firm is setting up a mutual fund analyzer that lets clients compare mutual funds with ETFs. Punch in the ticker for a fund and the tool will show an analogous ETF and compare the performances. Adler says the tool is ready, but there are still some regulatory issues to overcome.
Gerber says, “We’re not looking to be a trading shop. We want people who buy and hold. Our website exists to guide people into ETFs as investors—not traders.”
Monday, December 05, 2005
Fighting over Brownies
EVER SINCE E*TRADE FINANCIAL ANNOUNCED in late September that it planned to acquire online-brokerage BrownCo, Electronic Investor’s mailbox has received dozens of e-mails from worried Brown customers. The fear: that they’ll be hit with higher commissions, and higher margin interest costs, when E*Trade takes over.
Fear no more. Hours after the deal was signed Thursday, E*Trade e-mailed BrownCo customers to tell them they would continue to be charged the same commission and margin fees when their accounts are moved to E*Trade in the first quarter.
The relatively small but affluent coterie of BrownCo clients clearly are coveted by the industry. Another big online broker, Ameritrade (ticker: AMTD), is trying to lure away BrownCo customers. Ameritrade’s Jay Pestrichelli tells Barron’s the company will extend BrownCo’s commission schedule to anyone who transfers an entire account of $5,000 or more by Jan 31.
“Ameritrade wants to be the new home for BrownCo accounts,” says Pestrichelli, managing director of Ameritrade’s active-trader segment. Ameritrade, which says it is responding to the concerns raised in this column, already has set up a special Website for interested BrownCo customers: http://www.ameritrade.com/browntransfer.
Although the BrownCo takeover would contribute, at best, 200,000 accounts to E*Trade’s (ET) total of more than four million, these are active traders who maintain high margin balances and are therefore very valuable. E*Trade (http://www.etrade.com) announced in a September press release that the BrownCo (http://www.brownco.com) customers would bring with them $3 billion in margin loans, nearly doubling E*Trade’s outstanding margin-loan balance. That’s an average of $15,000 in margin balances for the BrownCo customers, compared with under $1,000 for the existing E*Trade client base.
Unlike the spate of takeovers by these rivals earlier this year—Ameritrade’s purchase of TD Waterhouse and E*Trade’s acquisition of Harrisdirect—this latest deal would mean a significant change in fees. And clearly BrownCo’s high-balance customers are focused on costs.
BrownCo customers are among the last in the industry to pay different fees for market orders and limit orders. Market-order commissions are $5, while limit orders cost $10. That’s for up to 5,000 shares; larger blocks carry a surcharge. E*Trade’s current customers with over $50,000 in assets pay $9.99 per stock transaction, regardless of whether the trade is a market or limit order; lower-balance accounts are subject to $12.99 stock-trade commissions, while extremely active traders pay $6.99 to $7.99 per trade.
Michael Curcio, who heads E*Trade’s retail division, acknowledges that BrownCo clients are price-sensitive as well as service-sensitive. He says that E*Trade is “maniacally focused” on keeping the BrownCo service teams in place.
Adds Ameritrade’s Pestrichelli, “based on some of the needs that Barron’s has assessed—$5 and $10 trades, plus trading tools—we want the BrownCo customers to come over to Ameritrade and have the tools they need.”
Ameritrade, however, isn’t extending its offer to margin fees. Pestrichelli says margin rates for Brown customers taking up the offer will be the same as those paid by existing Ameritrade customers—and those are similar to E*Trade’s rates. Ameritrade charges 9.5% interest on margin balances under $25,000, while those with $100,000 and over will pay 8%.
But competition in margin rates is clearly heating up. Fidelity has announced a drastic cut in its rates for those who carry more than $500,000 on margin—to 4.75% from 7.825%. “We believe that is the lowest published rate for that margin balance,” says Fidelity spokesman Adam Banker.
Separately, Bank of America slashed its pricing, bringing it into line with banking peers. B of A said last week it will cut its trading fees for checking-account customers to $7-$10 from $19.95. Private-banking customers will be able to trade online for as little as $5 per transaction.
Ameritrade’s commissions for former Brown customers, meanwhile, would be $5.99 per trade lower on market orders than for Ameritrade’s other customers, and 99 cents lower on limit orders. Ameritrade’s customers now pay $10.99 per stock transaction regardless of order type or size.
What happens when a client already has an Ameritrade account and a Brown account? “We’ll work it out,” Pestrichelli says, adding that those who want to fold a Brown account into an existing Ameritrade account to give the company a call at 866-273-2739.
Scottrade’s Next Level
Nasdaq and Scottrade recently announced that Nasdaq’s TotalView data-display program is now accessible to ScottradeELITE customers (http://www.scottrade.com). TotalView is available in several high-end direct-access platforms, and for many active traders it has supplanted the old Level II as the way to look at the market.
“The more active investor loves this kind of stuff,” says Rodger Riney, Scottrade’s chief executive. Riney says that Scottrade saw an opportunity to embrace the TotalView technology early-on, and become the first mainstream broker to offer it to retail investors.
The original customers for TotalView were the more sophisticated black-box-programmed algorithmic trading boutiques. Then the higher-end direct-access platform, such as Townsend Analytics, started offering it earlier this year. Scottrade is now making TotalView available on a Web-based brokerage platform, becoming the first mass-market retail brokerage to make TotalView available to its users.
Bill O’Brien, senior vice president of Nasdaq, says Scottrade’s adoption of TotalView is, “the ultimate sign that TotalView has become the standard not only for serious traders but for serious active retail investors.”
Many traders have relied on Level II quotes to help them make trading decisions. The difference between Level II and TotalView, however, is significant. TotalView shows you twice as many shares available for execution within a nickel of best price. Level II shows you best bid and offer from each Nasdaq firm, whereas TotalView shows you all the current open orders.
Rolled out in mid-November to ScottradeELITE customers, TotalView will supplant Level II quotes for customers that choose it. Level II quotes have been available for a monthly fee of $9.95, or free with 10 trades per month. TotalView costs $15 monthly, or free with 15 trades per month, and the price also includes Level II. Riney says that customers can opt for receiving only Level II quotes if they find they don’t want TotalView.
When asked whether Scottrade was going out of its way to woo clients of BrownCo, Riney said he’s more interested in improving technology than “focusing on our competition.” He added, however, that Scottrade carries no surcharge for large orders, so the trader exchanging large blocks of stock is better off at Scottrade’s $7 commission than at Brown’s $5 with the surcharge for over 5,000 shares, or at E*Trade’s with a surcharge for orders of more than 2,000 shares.