Monday, May 23, 2005

Trading Online Brokers

INVESTORS WHO TYPE 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.”

Scottrade’s Makeover

As this issue of Barron’s hits the streets, a redesigned version of Scottrade’s Website ( 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

Posted by twcarey on 05/23 at 01:21 PM
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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 4ยต 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 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

Posted by twcarey on 05/09 at 01:25 PM
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