Saturday, February 23, 2013
Wading Into Dark Pools
The NYSE’s dark pool for small investors hasn’t been disruptive to trading as some had feared, in part because it’s still so small.
The New York Stock Exchange announced last summer that it was launching a new venue for orders called the “retail liquidity program.” The idea, the exchange said, was to level the playing field between retail investors and institutional traders, giving individuals better pricing terms on stock transactions that only they could access. The proposal caused a small firestorm among the bourse’s rivals; they worried that the NYSE was muscling in on their turf and could disrupt order flow. It’s been about six months, so how has the program done?
First, we need some basic information. The exchange said at the outset that this new system would “provide potential price improvement to incoming order flow in the form of nondisplayed interest that is better than the protected best bid/offer.” What does that mean? Price improvement is the execution of an order at a better price than what’s being publicly quoted.
The phrase “nondisplayed interest” is industry code for a dark pool—a fluid, private institutional stock market that trades large amounts of shares outside of the normal stock exchanges. Here anonymous participants, often hedge funds or high-frequency traders, can enter orders that, if matched by others in the pool, get executed. The price of the trade has to be at or between what’s known as the national best bid or offer. So the NYSE was creating a dark pool that would give the small investor a chance to get a better price.
Some questioned the Big Board’s motives because more than half of all stock orders are completed outside public exchanges. That doesn’t please the NYSE and may cut liquidity for small investors.
Other exchanges and electronic clearing networks complained that it could hurt the order process. In the past, established exchanges like the NYSE were prevented by the Securities and Exchange Commission from offering price improvement. The private venues offering price improvement usually used the exchanges’ publicly displayed prices as a basis for comparison. If the NYSE was offering price improvement, the relationship would change, possibly creating order problems, said critics.
As far as we can tell, the NYSE liquidity program, which doesn’t allow algorithmic or black-box trading, is a minor success and hasn’t disrupted order flow. However, that could be due to the limited number of retail brokers participating. The NYSE says that about nine million shares per day are being exchanged in the system now, up sharply from its start but still a small piece of the action.
Interactive Brokers added the NYSE retail liquidity program as soon as it came online, says Steve Sanders, executive vice president of marketing and product development. So far, Sanders says customers who have executed trades on the RLP have enjoyed price improvement and exchange rebates that have reduced their trading costs by about $0.0023 per share. In January, IB customers executed three million shares via the new exchange.
Don Montanaro, CEO of TradeKing, says that orders placed by his clients are processed through a variety of smart routers from a number of liquidity-providing partners, and that some of those routers connect to the NYSE RLP. “We do not provide our clients with the ability to direct specific orders,” Montanaro notes.
A couple of online brokerage officials say that they do not route to the NYSE at all, because they want to keep their clients from incurring added trading costs.
Shawn Herrin, a senior vice president at eOption, says his firm’s routers do not access the NYSE program. His clearing firm, Apex Clearing, “has put a number of restrictions on our ability to use non-Apex destinations,” he says. Herrin expects that situation to change later in the year.
Owing to some of these limits, Montanaro says it’s too early to tell about the RLP. But, he adds, “More liquidity and price improvement are always good for small investors. If they can grow the volume and liquidity, it should be beneficial.”
Published in Barron’s, February 18, 2013.
Saturday, February 09, 2013
Brand New at Brokers
A look at the ways online brokers are polishing their platforms so far in 2013.
Online brokers have been busy sprucing up their platforms in the new year. Here are some of the goodies.
TRADEMONSTER HAS enhanced its scanning tools to allow traders to create their own customized searches in a database of streaming quotes and other metrics. An extension of the brokerage’s liveAction tool kit, which searches through about 100 preset market scans, this new wrinkle lets customers define up to 50 of their own scans, which can be named, stored, and used again, as desired. The idea behind the liveAction feature is to permit clients to search in real time for emerging profit opportunities, rather than waiting until end-of-day data are available.
The main liveAction scanning tool is organized into preset areas—unusual activity, volatility, fundamentals, and technical activity. The new item on the menu is “my scans,” which lets you create your own parameters. You tell the scanner whether you want to look for securities or optionable securities. The latter will return only stocks that have options available. As you add a filter to a scan, such as a price range for the underlying stock or a market sector, the running total of stocks that fit the scan is displayed on the top right of the screen.
You can preview the result of your scan in a list on the screen, or save the ticker symbols as part of a watch list. You also can bring up a trade ticket if you see something that spurs you to immediate action.
Also new for TradeMonster is a weekly educational program titled “I want to be a trader.” The series combines a Webinar with feedback on your trading and is hosted by TradeMonster’s own “professor,” Don Pratl. It’s open to customers as well as noncustomers.
TRADEKING AND ZECCO have completed their merger under the TradeKing banner. That’s all for the Zecco brand, as its most popular tools are integrated into the TradeKing platform. The Website now sports a redesigned research center, along with an alerts center that allows customers to receive notices of specific events delivered to both e-mail and a mobile device.
Zecco’s foreign-exchange operation has been rebranded as well, and now appears as TradeKing Forex. Customers can trade over 50 currency pairs, as well as gold and silver. The forex platform is a separate entity from the regular TradeKing site, though, so you will need a separate log-in. You can start with a practice account on the forex platform, and take advantage of the educational tools available as well, before putting real dough to work.
LIGHTSPEED ADDED advanced options trading to the latest, 8.0, version of its platform, allowing customers to trade multi-leg strategies—such as debit and credit spreads, straddles, strangles, and butterflies—or a custom strategy that can include equity legs. This platform is built for sophisticated frequent traders, and though it is flexible enough to allow you to define a huge variety of complex options orders, it is not warm and friendly, or immediately intuitive.
The Lightspeed platform lets you route your order to the options exchange you prefer, and reverse the strategy quickly should your feelings change about the market. You can also save your favorite strategies for faster input in the future.
Another feature recently added is the “executions” window. It allows you to view the margin requirements on all your open orders and trades, so you can more efficiently make use of margin loans. It lets you manually hedge your positions and strategies, or use an automatic-hedge feature to hedge all eligible positions for the best utilization of margin. For high-frequency traders who make use of margin, this feature could save you money, or just permit you to use margin more efficiently.
A FINAL NOTE: Those of you who wrote us regarding our coming annual review of online brokers were very concerned about the miscellaneous fees that various brokers charge. We have added queries about many of them to our survey, such as voluntary reorganization fees for corporate actions. Thanks to everyone who responded.
Published in Barron’s, February 4, 2013.
Saturday, January 19, 2013
New Assets to Trade
A start-up will allow retail investors to trade options on futures. Also, a new sentiment index from TD Ameritrade and a Barron’s survey.
A start-up venture launched a new electronic platform on Jan. 7 that allows retail investors to trade options on futures. There are other online brokers that permit trading options on futures, but this particular platform is dedicated to that asset class. Online traders have been able to participate in the equity options market for years, but this new site from Optionshop permits them to trade options on futures in interest rates, equities, currencies, and commodities.
The new Chicago-based company is backed by OptionsCity, a provider of trading software for professional futures-options traders, and Third Stone Partners, the private investment arm of Third Stone Capital, a proprietary futures-trading firm. The two firms aim to give retail investors a suite of professional-quality tools. They also offer a lot of educational resources to help guide buyers into options on futures. Portfolio diversification is just one benefit.
Options on futures once changed hands almost exclusively in Chicago’s trading pits but have been moving to screens in recent years. An individual can now track several markets electronically rather than being confined to one physical marketplace.
“We believe that equity-options investors will be comfortable with futures options, and our bite-sized futures-options education content—both video and text—is designed to help them see how futures options can play a role in their portfolio,” Optionshop CEO Robert Fitzsimmons explains to Barron’s. The Electronic Investor will have a chance to test the new system shortly and will get back to you with her assessment. Meanwhile, you can check it out at optionshop.com.
TD AMERITRADE JUST unveiled an index designed to reflect retail-investor sentiment called the Investor Movement Index, or IMX. The firm mines data from its six million accounts to indicate how clients feel about the market, based on their actual trades and holdings. This snapshot can be compared with other indicators and monitored over time. In the past, TD Ameritrade would survey its customer base to determine bullish and bearish sentiment; now it can add the IMX to those more qualitative methods.
The index looks only at accounts with trading activity in the previous month, and weights all accounts equally, so trades placed in an account worth $10,000 have the same weight as those in an account with $1 million. Account data are considered only in the aggregate to protect client privacy.
When the index rises, that means investors are becoming more bullish; a drop indicates a bearish trend. The number measures the amount of buying versus selling among TD Ameritrade clients. Data for the prior month will be released between the 6th and the 8th business day of the month. When the index was launched on Jan. 8, values dating from January 2010 through December 2012 were released.
Each monthly report also includes commentary on the sectors that were most popular with customers, as well as the stocks most purchased and sold.
The IMX has ranged from a low of 3.4 in January 2012 to a high of 5.6 in June 2011. The December 2012 calculation puts the IMX at 4.94, showing a small increase from the November reading and reaching the highest level since August 2011. When compared with the S&P 500, the index displays a slightly following trend. Learn more at tdameritrade.com/imx.
ARE YOU INTERESTED IN checking out the credit rating of a firm before you invest–especially in fixed-income securities? You might want to install Fitch Mobile on your iPad. Though some of the content is for paid subscribers only, those who access the app for free can view credit research reports on corporations and government entities from around the world. The reports contain Fitch’s rating rationale and changes from previous ratings. Good stuff.
WE ARE RAMPING UP for our 18th annual survey of online brokers, which will run on March 11. Last year, we focused on mobile access to brokerage services, which, as predicted, exploded in 2012.
Are you using an online broker? If so, what do you like best about your current broker? What features could a different broker offer that would entice you to switch? For those of you who don’t use online brokers, what features are you waiting for? Please let us know by e-mailing electronicinvestor@yahoo.com .
Published in Barron’s January 14, 2013. Note: an error that was edited in to the original print version was changed back to my original copy here.
