Monday, May 23, 2005
Trading Online Brokers
INVESTORS WHO TYPE http://www.ameritrade.com in their Web browser may wonder what may pop up in the future. Datek, J.B. Oxford or National Discount Brokers customers already know how it feels to log on to their accounts and end up at a different Website from the ones they were expecting. And again the rumblings of realignment are being felt in the online-brokerage industry.
More than seven years ago, we expected “shrinkage in the numbers of Internet brokers out there. Consolidations and shakeouts seem all but certain in this crowded marketplace” (Barron’s, “Beyond Cool,” March 16, 1998). Two years later, when concluding the annual review of online brokers, a peek into our crystal ball revealed this industry forecast: “Several smaller brokers reportedly are up for sale, while other aggressive firms are burning cash furiously to buy market share. Look for consolidation in the industry.” ("Better, Not Just Bigger,” March 13, 2000.)
We were a few years ahead of the game, as it turns out. The industry ballooned to approximately 150 online brokers in 2000, just before the bubble burst, when it seemed that everyone was getting into the act.
Ameritrade went on a buying spree that took off in 2002, and after absorbing several erstwhile competitors, seriously improved its online offerings. Industry insiders have reported for a few months that Ameritrade and TD Waterhouse are talking about a merger.
On May 9, the news hit that E*Trade Financial had made an offer for Ameritrade, which the latter publicly turned down on May 12. “With seven merger-and-acquisition transactions in the past four years, Ameritrade is a leader in consolidating this industry,” said Joe Moglia, chief executive officer, in a statement. “ We will continue to explore strategic opportunities, basing our decisions on whether a transaction will enhance shareholder value and benefit our clients.”
“The board believes there will likely be further consolidation in the industry, but confirmed Ameritrade is not for sale,” adds Joe Ricketts, founder and chairman.
Are they just being coy in order to drive the price higher, or will Ameritrade continue to fly its own banner? Time will tell. In the meantime, it’s obvious that mergers and buyouts will be prevalent in the industry, as firms deal with reduced trading activity.
Officials at other brokers weighed in on the issue of industry consolidation. “We’re watching the situation and keeping an eye on it, but being privately held, we’re in a different league,” says Kelly Doria, Scottrade’s director of corporate communication. “We’ll keep doing what we’ve been doing, which is focusing on our customers. It’ll be interesting to watch and see what happens in the next few weeks.”
“We see it as opportunistic,” says David Kalt, optionsXpress’ chief executive “When you see a big deal like this one go through, it diverts the consolidating companies’ attention and will create some opportunities for us. We have historically benefited from consolidations in the past.” He adds, “We benefited hugely from Ameritrade/Datek consolidation,” which took place in 2002. Schonfeld Group President Andrew Fishman, whose firm does extremely high volume in the short-term-trading space, says the possible merger would not affect his firm. But he notes, “If E*Trade drops the ball, there will be some opportunity for my company to pick up some of their more active traders.” From figures supplied by Graham Mudd of comScore Networks, it appears that there is little overlap between E*Trade and Ameritrade’s customer bases. Mudd says that only 3% of the total 2.36 million unique visitors to these two sites visited both sites in March 2005.
Although consolidation is likely to characterize the year 2005, competition is a good thing for end-users. My initial reaction when I heard the rumors was disappointment—Ameritrade is doing so many things right these days that I’d hate to see its site completely disappear.
“Ameritrade’s site is so nice now,” optionsXpress’ Kalt says. “If E*Trade is focusing on banking, I think it will be a struggle to see which system prevails. To get the complete financial-services solution they’ll have to fold one of them.”
Based primarily on letters readers have sent to The Electronic Investor’s mailbox, I would guess that E*Trade and Ameritrade attract customers who are very similar in terms of portfolio size and trading styles—fairly well-heeled independent types—and that their customers have made deliberate choices to go with one or the other. I can imagine that current Ameritrade customers would be unhappy about being swallowed up by E*Trade, which could lead to an exodus if such a huge consolidation wasn’t done right.
If you’re worried that your online broker might be the Jonah in a takeover, consider the firms that appear to be immune from acquisition. Scottrade has firmly stated its intention to remain private and independent. Fidelity has pumped so much into its customer offerings and service makeovers in the past year that it looks safe. And Schwab’s size makes it an unlikely takeover target.
Of course, I thought Ameritrade was also safe, owing to its size and market positioning. So much for my crystal ball. As the Laws of Forecasting states, “He who lives by the crystal ball soon learns to eat ground glass.”
As this issue of Barron’s hits the streets, a redesigned version of Scottrade’s Website (http://www.scottrade.com) is hitting the Internet. Says Kevin Dodson, Scottrade’s manager of online trading platforms: “We brought in features and functionality requested by our customers. We’ve been testing the new site for 11 months now, going through multiple iterations of the redesign with actual customers.”
Navigation has been seriously streamlined, with just four tabs—labeled Home, Trade, My Account and Quotes & Research—across the top of the screen, as opposed to the nine tabs in the current system. The menu displayed on the left side of the screen changes based on which tab has been selected at the top.
The new home page displays an overview of a customer’s holdings and activity, as well as communications from the broker. Specific notices regarding the account are displayed at the top of the list, followed by Scottrade’s broadcasts below. One feature, the “quick-quote widget,” follows the customer through the site.
The main reason the number of tabs has been cut from nine to four is that all of the trading activity takes place under the “Trade” tab. The old Website had a tab for each type of trade—you’d click “Trade Stocks” or “Trade Options,” for example. This streamlining makes the site considerably easier to use.
The enhanced Website rolled out after the close of the market on May 19. The old site will still be available throughout the summer. “We’re giving people a transition over to the new site, while letting them use the old site if they’re more comfortable there,” Dodson says. He expects to shut the door on the old site by end of summer.
Published in Barron’s May 23, 2005
Monday, May 09, 2005
Back to the Future
Much has changed in computers and investing since this column began 10 years ago
A SPECIAL DAY SLIPPED PAST US a few weeks ago—the tenth anniversary of the “Electronic Investor” column: It was on March 27, 1995, that our initial attempt to shed some light on financial software and online services aimed at individual investors appeared. In that column, we reviewed WealthBuilder 4.0 for Windows, a collection of financial-management tools to help investors choose, implement and monitor effective investment strategies, which was essentially a financial-news search engine coupled to an asset allocation model.
It cost about $30 per month to supply the user with portfolio-linked news clipped from Money magazine, Reuters, Dow Jones (including Barron’s) and some investment newsletters. At that time, it evoked a certain “gee whiz!” response, along with some complaints about its propensity to crash, requiring additional manual data entry.
A couple of months later, the column compared the big three online services at that time, and what they offered for investors. We figured that it would cost around $25 to $40 per month to subscribe to either America Online, CompuServe or Prodigy, and pull together quotes, news, and discussion forums.
That was before the before the World Wide Web stretched so wide.
“One of these days, the Internet will blossom into the ultimate financial tool, offering an amazing array of information and services at almost inconsequential cost. Then, anyone with a PC, a modem and a phone will be able to use the Internet to dig up investment ideas, research them, share findings with other investors, even buy the securities and track their performance. In fact, to a surprising degree, you can do most of those things right now.”
So wrote Eric J. Savitz, now one of Barron’s West Coast editors, in this column on June 26, 1995. And the rest, as they say, is history. Now, however, broadband connections via cable or digital-subscriber lines are supplanting dial-up modems.
Later that summer of ‘95, the column delved into quote services, finding some that cost around $200 per month for real-time data—and that fee didn’t include the hardware necessary for tapping into the satellite feeds. The big-name players in the real-time data world were hooking people up through satellites, coaxial cable and FM antennae.
Over the ensuing 12 months, a technological revolution shook up the ranks of data suppliers as several of them moved to the Internet, allowing data-hungry traders to use their modems and PCs to get the information they need. By mid-1996, it was possible to find free delayed quotes, but real-time data still came at a price.
We reviewed online brokers for the first time in May, 1996 (see below), taking a look at 12 online brokers and ranking them based on criteria such as ease of use, depth of offerings and services provided. Our first winner was Lombard Institutional Brokerage, a San Francisco based subsidiary of Thomas F. White. One of its key attributes was the display of the stock’s real-time price prior to placing an order. Other brokers would display a delayed quote on the trade-confirmation screen, which was a little late, especially for those entering limit orders.
Following several acquisitions and spinoffs, Lombard no longer exists, except as a shadow of its original award-winning implementation, buried within Harrisdirect’s online brokerage.
The lowest commissions charged in April 1996 were $14.95 for market orders and $19.95 for limit orders at E*Trade’s then-brand-new Website. In May 1996, however, a brokerage called eBroker, which was the predecessor of Ameritrade, busted out with a $12 commission. At that time, E*Trade’s chief executive was quoted as saying, “A commission of under $10 for a routine trade isn’t out of the question in the near future.”
How far we’ve come since then.
Real-time data is, for the most part, free. Online commissions are at an all-time low even as technology offers retail investors the tools that pros could only dream of 10 years back. There are free sites that allow you to put together the information and recommendations for which WealthBuilder once charged $30 per month. The ubiquitous nature of Internet access means there are thousands of sites that appeal to investors; our job here at The Electronic Investor is to steer you to the sites that provide meaningful, timely and relatively unbiased information.
Online brokers tend to roll out their big upgrades in January and February, just in time for our annual review. Our most recent roundup of online brokers features 30 offerings, nearly triple the number of our first review.
Following that initial review of online brokers, we delved into the world of payment for order flow, and explained why some brokers could execute trades at such low commissions. Since then, between regulations and the sound of customers voting with their feet, a much lower percentage of broker revenue is generated by payment for order flow.
Reader interest in the topics presented in this column resulted in a doubling of its frequency-to every other week-in 1998. As of January 2001, the column appeared in every issue of Barron’s. Now, of course, it’s still published weekly. As the universe of investing tools expands, I remain fascinated by the topics we cover in this column, and continue to enjoy digging up the gems. Given my extremely limited attention span, that’s close to a miracle.
Online Broker News
Speaking of tools that are now available to retail traders that were once solely the domain of the pros, how about algorithmic trading? There are several software based brokerages that allow you access to trading tools such as conditional orders and time slicing, but recently ChoiceTrade’s high-end platform, Choice-Trader Select, put institutional trading tools at the fingertips of the retail trader.
Algorithmic trading really only makes sense for those who are executing large block orders, such as hedge funds and institutional traders, but there’s a small group of retail traders who can make use of these tools. To tap into the professional tools, a trader using ChoiceTrader Select chooses the “CSFB route” when placing an order. Traders can choose between six tactics including time- and volume- weighted average pricing and nine execution styles from patient to aggressive.
You can also choose start time and end time for the block trade, as well as volume goals. Audio alerts can be set when executions occur. There are six models available that can control the average price you pay per share, or show just a fraction of the order to the open market, or route the order to the best pool of liquidity.
The client can watch as the executions are occurring and cancel anytime. John Pal De Vito, president of Bon Trade Solutions, the software developer behind ChoiceTrade’s ChoiceTrader Select platform says, “You’re not locked in from start to end. Nobody has given this kind of buy-side institutional trading power to retail traders that we know.” E*Trade’s Power E*Trade Pro is now compatible with the Mac OS X operating system. That’s not a bad move for
E*Trade to make, given that Apple Computer reported a 43% increase in the number of personal computers it sold during the first quarter of 2005 from a year earlier. (Another blast from Electronic Investor’s past: “MacOrphaned in a PC World? Good software is still available for Apple users, as publishers do Windows,” Oct. 30, 1995. The more things change )
PowerE*Trade Pro for Mac is targeted to active traders in this growing market, and doubles the number of software-based trading platforms for Mac users. The other one is thinkorswim’s Java-based trading system, which earned 4µ stars in our annual review of online brokers ("Speed or Comfort?” March 7, 2005.)
Are you wondering how the international equity exchanges work? Interactive Brokers recently added succinct, yet informative, descriptions of exchanges around the world in their “Education” menu at http://www.interactivebrokers.com. Roll your cursor over the “Education” tab, then choose “World Exchanges” from the dropdown list.
Through IB’s Universal platform, customers can trade equities, exchange-traded funds, options, futures, foreign exchange and bonds on global markets from a single account in a single currency. Keeping an eye on the evolution of those markets, and how they interconnect, is a priority for IB. Their commentary covers 17 North American exchanges, eight European exchanges, and six Asian exchanges. It’s definitely worth a look if you’re at all interested in trading international equities.
Published in Barron’s May 9, 2005
Monday, April 25, 2005
Stocks for Jocks
Ameritrade CEO applies coaching maxims to investing; plus, pump up your brain
WHEN I’M NOT DIGGING UP NUGGETS from the online world for this column, I coach a high-school volleyball team. Volleyball has been my favorite sport since I discovered it as a seventh-grader many years ago. Although I still play, I get a lot of joy out of teaching what it takes to be a champion.
And as with volleyball, true champion traders possess not only superior skills, but also the mental capacity to stay a step or two ahead of the competition. Cross-training is important as well—developing skills in one area of your life that can be put to use elsewhere.
In that regard, any conversation I’ve had with Joe Moglia, Ameritrade’s chief executive, seems to migrate to athletics and coaching. Moglia spent years as a football coach before turning to business pursuits, and has now authored a book entitled, Coach Yourself to Success: Winning the Investment Game, published by John Wiley & Sons. We don’t usually review books in this column, but this one is worth a mention.
Moglia’s book may be too basic for some Barron’s readers, and in fact I would not recommend it for day traders. His “game plan” focuses on investing over the long term, and the book goes into great detail about the various types of investments available. He’s a proponent of asset allocation, saying “The mix is more important than the picks.”
But perhaps because I’m a sports nut and go in for sports-tinged analogies, I found Moglia’s book to be both entertaining and informative. He provides practical advice, such as avoiding portfolio rebalancing in the autumn if you’ve got a lot of mutual funds. Why? Capital gains and shareholder dividends are typically paid out from October to December, so Moglia advises readers, for tax purposes, to avoid purchasing a fund just before a distribution is about to be made. Of course, one of the big advantages of online investing is that virtually every fund family makes this information available online in advance of distributions, if there are any.
Once you’re out of basic training and into more frequent trading, you should check out Brett Steenbarger’s The Psychology of Trading: Tools and Techniques for Minding the Markets, which combines his profession, psychology, with his passion, trading. This book can help traders pick their own brains figuring out how to deal with loss as well as how to enjoy gains. Published by Wiley in 2002, it’s not the easiest book to find, but it’s a good read.
A Website with a package of interesting tools and tests is MyBrainTrainer (http://www.mybraintrainer.com), full of short, fun, mental exercises designed to stimulate different parts of your (trading) brain. The developer, Bruce C. Friedman, believes that just as regular workouts in a gym improve your physical fitness, regular mental workouts of only 10 to 20 minutes per day can improve your cognitive function and brain-processing speed.
Friedman got started with the Website as a spinoff of his medical imaging business, Heart Check America. One of his patients, who was looking for clinical applications for Alzheimer’s screening, demonstrated the technology for a series of brain tests and brain exercises. Friedman played with the tools for a few days, and thought they offered an interesting opportunity in the mental-training and exercise market—and from that was born MyBrainTrainer.
MyBrainTrainer.com uses a set of interactive mental challenges called elementary cognitive tasks to stimulate your neurons to fire more rapidly and to generate more connections within your brain. These tasks are believed to increase blood flow to the region of the brain being exercised; increase the number of neural receptors; and enhance the uptake and synthesis of neurotransmitters, especially those used by the brain to perform a specific cognitive task.
Friedman says that for those who have to make split-second judgments and then move on to make another judgment, cognitive speed is very important. “We feel confident that, with the use of our program, you will feel that you can think quicker, and make decisions with more confidence,” Friedman states. Exercise #4, which measures the speed and consistency of decisions, is his top recommendation for traders.
I’m several days into the 21-day “Basic Training” sequence and am seeing some improvement in my scores for the various tests. You can check out the site’s free “brain-speed test” (http://www.mybraintrainer.com/freetests) to see how quickly you think now. Speed up your thinking by signing up for a four-month membership, which costs $9.95
Online Broker News
The Securities and Exchange Commission narrowly passed a new set of rules that will govern trading in equities, called Regulation NMS (New Market Systems). The most controversial piece of the new regulations is an extension of the “trade-through” rule, currently enforced on the New York Stock Exchange, to the other U.S. exchanges.
The trade-through rule, which was first instituted in 1975, guarantees that investors will get the best price for their trade executions. A market system would not allow one customer to “trade through” an existing order without first matching that order. A customer’s order has to be routed to the destination with the best price at the moment the order is entered.
The SEC believes that, following start-up costs of $144 million for the markets plus $22 million per year in maintenance, investors will reap benefits of $320 million per year—with approximately $200 million going to those who trade Nasdaq-listed stocks. The SEC cites statistics showing that 1 in 40 trades on the Nasdaq would violate the “trade-through” rule. Both proponents and opponents of the extension of the trade-through rule point to that 1 in 40 statistic—one side saying that too many trades go off at prices that don’t benefit the investor, while the other side says the number of violations are negligible.
Over the last three years, online brokers have implemented “smart-order routing” technology, which scans the markets and finds the best place to execute a customer’s order, based on price and liquidity. Extending the trade-through rule most likely will negate much of that innovative development.
“The passage of Reg NMS was expected, but in our view it’s not a good thing for our investors,” said Vince Phillips, CEO of CyberTrader (http://www.cybertrader.com). Phillips fears that CyberTrader’s smart-order routing technology will be made ineffective next year, as the trade-through rule is extended to the Nasdaq and Amex exchanges. Analysts at Celent Communication say, “The effects of Reg NMS will be felt by exchanges, ECNs [electronic-communications networks], alternative trading systems, brokers, dealers, institutional and retail investors, and the technology vendors that provide the links between all these puzzle pieces.”
There will be an initial trial phase prior to full implementation, currently scheduled to start April 10, 2006 and run through June 9, 2006. During the beta run, there will be 100 NYSE, 100 Nasdaq and 50 Amex stocks that will be tested for functionality.
How will this affect retail investors who trade online? Daniel C. Goldberg, an analyst with Bear Stearns, says, “Regulation NMS will spur the migration of volume in listed names off the floor of the NYSE—thus benefiting Instinet, Amex and Nasdaq.”
Bill Cline of Accenture says, “The NYSE is clearly the big winner, as the extension of the trade-through rule to the Nasdaq will help it retain its dominant share in trading listed stocks, as well as helping it gain share in trading Nasdaq stocks.” Cline believes that extension of the trade-through rule will impact smaller orders much more than large institutional orders, and says, “The diversity of opinion on this ruling illustrates the difficulty in legislating best execution.”
Published in Barron’s April 25, 2005