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.”

Posted by twcarey on 12/26 at 05:54 PM
Published in Barron's • (0) Comments • (0) TrackbacksPermalink