Investor Brain

Saturday, April 12, 2008

A Bond, A Bear and a Bind

LOOKING FOR MUNIS TO ADD TO YOUR PORTFOLIO? Fidelity Investments has teamed with the electronic bond-trading outfit TheMuniCenter to increase the mutual-fund giant’s municipal-bond offerings by about 40%. Fidelity’s Open Bond Market service, available to customers online at http://www.fidelity.com, contains educational material as well as screeners and other tools designed to make trading of all sorts of bonds more accessible and understandable.

Fidelity’s customers also can now trade Treasury Inflation Protected Securities (TIPS) online at Fidelity.com; previously they could only trade TIPS through Fidelity’s phone representatives or in person at an investor center.

Launched in 2004, the Open Bond Market offers U.S. Treasuries and CDs (certificates of deposit), as well as corporate, municipal, government agency and principal-protected notes. The fees were lowered last year to $1 per bond (subject to $8 minimum); Treasuries can be traded at no cost.

IN THE WAKE OF BEAR STEARNS’ RECENT COLLAPSE, industry analysts worried about the financial stability of the Customer Assets Protection Company, which carries the brokerage firm’s coverage beyond that of the mandatory Securities Investor Protection Corp., or SIPC, coverage. Capco is backed by a consortium of brokers and SIPC is funded by member-brokers. SIPC covers individual accounts up to $500,000, and firms like Capco cover amounts in excess of that. (See “Are You Covered If Your Broker Fails?,” Dec. 17, 2007, and “If Your Broker Goes Belly Up, Part II,” Dec. 31, 2007 for more.) A Bear unit is a major securities-clearing firm and therefore handles transactions for lots of regional banks and brokers. The concern is that any failure would jeopardize these trades.

Standard & Poor’s issued a bulletin on March 19 in which it said that Capco is maintaining its A+/Stable rating, in spite of the claims that may ensue in a post-Bear Stearns universe. Of interest is the rating agency’s assertion that “In the event of an excess SIPC claim related to Bear Stearns, Capco should benefit from a guarantee provided by JPMorgan Chase for Bear Stearns’ obligations. In addition, clients withdrawing funds from their personal accounts actually reduces CAPCO’s potential maximum loss.” (Sentence Italicized by Barron’s.)

As the S&P bulletin spells out, SIPC, and excess coverage like that of Capco, is aimed at restoring missing, lost or stolen accounts. They don’t cover a decline in the market value of a client’s investments.

We’re looking at a problem of market value, which was adversely affected by management choices that turned out to be inappropriate, rather than outright theft. Alas, there’s no insurance against poor judgment.

A BARRON’S READER WHO’S A CUSTOMER OF A MAJOR online brokerage and lives outside the U.S. described an interesting situation via e-mail recently:

“I am a long-time investor who generally purchases shares of undervalued micro-caps that are often thinly traded, which I usually hold for periods of over a year. In recent months, my broker is refusing to allow Internet purchases for many of these companies, requiring me to phone a broker. They are vague about why they are doing this; for legal and security reasons, they say. This requirement has even been in place when I wanted to add to a holding that I originally purchased in an Internet trade, and when I tried to adjust the price of an open order by a few pennies.”

My theory, verified by the broker in question, is that the trading pattern—even though it’s completely above board—resembles that of a crooked pump-and-dump scheme that usually involves stealing an online trader’s identity and then redirecting his account to buy securities at huge premiums that benefit the thief. The broker, in my view, is being appropriately cautious, particularly since this is a ploy often used by overseas scamsters. It may be really inconvenient for an honest trader, which is a terrible drag, but it’s just part of the current reality.

The writer’s broker verified that it monitors securities for suspicious activities and will, from time to time, restrict those transactions until the client phones a broker so that the firm can verify that he or she is in fact a client and not an identity thief. “It is for the protection of our clients that we make these decisions, and while we realize that it can be an inconvenience to them, it is done with their best interests in mind,” says the broker.

More patience—or a change in investing strategy—may be needed.

Published in Barron’s, April 7, 2008

Saturday, March 29, 2008

A Timely Boon for Small Investors

WHEN THE MARKETS ARE MOVING RAPIDLY, WITH THE PRICE OF A stock changing every millisecond, how can you know whether you received the best available price when your trade was executed?

The Nasdaq Data Store has introduced a new program called Market Replay (https://data.nasdaq.com/MR.aspx) that might answer this key question. You can access a demo at the Website, although the program itself isn’t available yet. Eventually, online brokers and retail market-data providers will license this technology and begin offering it to their customers.

Claude Courbois, head of product development at Nasdaq/OMX Data Products, says that Market Replay was born out of a frustrating problem he has encountered as a small investor—executing an order, but finding that he has paid a price that appears to be higher than the current quote.

The question an investor asks himself when this occurs is uncomplicated: What the heck happened? But getting an answer isn’t easy.

The small investor doesn’t have the tools for retrieving quotes at an exact moment. If that person complained to Nasdaq and it agreed to help, Courbois relates, “we would have to pull quotes out of a database and rebuild the order book to figure out when something weird had happened. It was not a user-friendly experience.” He says that the Market Replay system is intended to give people confidence and understanding of the markets—not to catch brokers doing something bad.

To use Market Replay, you enter a stock symbol and a date, then the time you want to examine—for example, 10:15 a.m. The standard replay is 10 minutes of market time, but you can request an hour or a day. The pertinent data get pulled into the program in 10-minute increments; it can take some time to download the information if you try to get a long-time-span record of an actively traded issue. Currently, 2008 trading data for Nasdaq securities are available, and the Data Store is moving backward through 2007.

If the information for a requested date hasn’t yet been loaded, the customer will get a message stating, “We don’t have this data ready yet, but will have it tomorrow morning.”

When the replay is downloaded to your computer, you’ll get a list of available information under the “Replays” menu on the display’s left side. A vertical blue line in the middle of the screen denotes the time requested. A few minutes of additional data, showing earlier and later prices, will be displayed on either side. Users can move forward and backward to the exact time that the trade went through, and take a screen shot that captures the display. Hit “Play,” and you can watch the market move in real time. You can also pause it and play it backward.

The program can also do a time-span analysis by highlighting a range around the time of your transaction that will display the range of prices at the Nasdaq and other exchanges during the specified period. “It’s comforting to be able to prove to yourself that you’re getting the best price. It’s amazing how valuable information is, even if you know the system usually works,” says Courbois. “You can find times when a price is available for literally a millisecond; no way to see that unless you have access to this kind of data.”

By the end of March, Courbois says, the program will cover NYSE- and Amex-listed shares, too. It’s fascinating for a data junkie to be able to track market movements, like the craziness that erupts at the close of the trading day or the action when news hits.

The Data Store would like to work with brokers to create tracking numbers for transactions, similar to those UPS and FedEx use for packages. Customers would simply click on the number and get a replay of the transaction. “One of the biggest problems any broker has is educating customers so they understand why something happened,” Courbois concludes. “This product helps investors gain confidence in the markets.”

Published in Barron’s, March 24, 2008.

Friday, March 21, 2008

S&P Says CAPCO is OK

In the wake of the Bear Stearns collapse, industry analysts grew concerned over the financial stability of the Customer Assets Protection Company (CAPCO), which carries their excess SIPC coverage.  (Please See “Are You Covered If Your Broker Fails?” and “If Your Broker Goes Belly Up, Part II” for an in-depth explanation.)

Yesterday, Standard and Poor’s issued a rare bulletin in which they said that CAPCO is maintaining its A+/Stable rating in spite of the claims that may ensue in a post-Bear Stearns universe.  Of interest in their bulletin is the assertion that “In the event of an excess SIPC claim related to Bear Stearns, CAPCO should benefit from a guarantee provided by JP Morgan Chase for Bear Stearns’s obligations.  In addition, clients withdrawing funds from their personal accounts actually reduces CAPCO’s potential maximum loss.” (Italics are mine.)

As the S&P bulletin spells out, for an excess SIPC claim to occur, all of the following must happen: client assets must be found to be missing, lost or stolen, and customer property, SIPC advances, fidelity bond proceeds, if any, and distributions from the general estate of the member, if any, to customers are insufficient to satisfy customer account obligations. Neither SIPC nor excess SIPC cover a decline in the market value of a client’s investments.  Clearly the Bear Stearns collapse is not due to missing, lost or stolen customer assets. 

We’re looking at a problem related to market value, which is due to some management choices that turned out to be inappropriate, rather than outright theft. 

Too bad there’s no insurance that protects against inappropriate choices.