Monday, January 23, 2006

Lost in Translation


The conversion of accounts from Harrisdirect to E*Trade, which took place between Jan. 10 and 13, turned into a disaster. As noted here last year ("Lowering the Velvet Rope,” Aug. 15.), E*Trade Group benefited in this deal by getting the affluent clients of Harrisdirect. Those folks apparently have made out less well.

Our Electronic Investor e-mail account swelled with reports from unhappy former Harrisdirect clients, telling us of problems logging in, disappearing cash, positions reported incorrectly and hours on the phone waiting on hold after the changeover.

Jarrett Lilien, president and chief operating officer of E*Trade Group (ticker: ET), told us customers with multiple accounts linked to a single log-in had been sent materials telling them how to update their passwords. That system hit what Lilien called “a roadblock” and ran very slowly, which made customers think that their accounts were no longer available or had been lost. These customers called the E*Trade support lines for help.

The conversion also involved changing clearing firms, from Pershing to E*Trade’s own system. This required E*Trade to run both systems concurrently for three days while the data were moved over.

E*Trade had hired several third-party firms to manage some of the data conversions, and although tests prior to the conversion worked fine, on the actual date they failed. The affected customers, who thought that positions had gone missing, also called the support lines for help.

Another problem arose when the cash held in Harris accounts was moved to E*Trade. Owing to the difference in database technology, the cash was logged as transactions, which could trigger backup withholding for tax purposes. The third-party vendor hired by E*Trade had turned off tax withholding for those transactions, but apparently turned it back on prematurely.

As a result, numerous customers got a shock when they looked at their balances, thinking that a chunk of cash had disappeared. This error was fixed within a few hours, but in the meantime, affected customers flooded the E*Trade support lines to find out what had happened.

E*Trade had doubled its support staff for the week, but the series of problems generated seven times the usual number of calls. That created a huge backlog and a lot of unhappy new customers. Says Lilien: “We’re secure, the money is still there, but we didn’t handle the conversion right.”

On Jan. 15, the customers transferred from Harris received an e-mail from E*Trade that said: “Although the majority of Harrisdirect customers have migrated to E*Trade smoothly, there were customers who experienced significant frustration. To those customers, we apologize sincerely.” The e-mail said the problems that erupted during the conversion have been addressed and corrected, with the exception of the long hold times on the phone.

To make up for the inconveniences, former Harrisdirect customers will be given credit for up to five stock or option transactions that they execute between Jan. 17 and Feb. 16. We shall see whether a $65 discount in commission costs will keep these customers on board.

E*Trade’s intention in acquiring Harrisdirect, as well as BrownCo, is to be viewed as a financial partner for those with high-account balances. The firm has added Credit Suisse First Boston research for those with over $100,000 in assets, and is building out an advanced aggregator for research for those customers.

On Jan. 17, E*Trade announced that customers would be protected from online fraud via the firm’s Complete Protection Guarantee, which provides fraud coverage, bill-payment protection and privacy protection. Surveys show that customers believe that their home PCs are safe, when in fact they may be lacking some key protection.

E*Trade has enabled two-factor authentication for those who want it, which means requesting a key fob that generates a random number that the user types in to log into an account—an approach that’s used with many corporate networks. The Complete Protection Guarantee is an extension of banking protections, already in place, to the brokerage side of the business.

If you have a Brown account, should you worry about the conversion? E*Trade’s Lilien says that the Brown conversion should go considerably more smoothly because both brokerage firms already run the same computer systems. We’ll see. The switchover is scheduled for some time in the first quarter.

Posted by twcarey on 01/23 at 05:43 PM
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Monday, January 09, 2006

Not-so-Foreign Exchange

EVEN IF YOU’RE FAMILIAR with trading equities and options online, venturing into the wide world of currencies can be daunting. After all , you’re suddenly trading against professionals with your (relatively small) retail account. No less an investor than Warren Buffett, who famously bet against the dollar, can wind up on the losing end of currencies.

Into this void steps COESfx (, which has created an electronic-communication network for currency trading that’s patterned after the more familiar equity ECNs, such as Archipelago or Island. COESfx’s book looks like a Level II ECN, where the best bid and offer float to the top.

Mike Weiner, COESfx’s co-founder and managing partner says, “All customers—from mom-and-pop to large hedge funds and institutions—trade on the same platform. There’s no separation between platforms.”

The system takes quotes from multiple dealers and sifts through them to present the customer with the best bid and best offer. Weiner’s background is in equities, which is why the firm built its model this way.

On the main page, COESfx displays four currency pairs with real-time pricing. The firm offers 22 currency pairs, plus spot gold and spot silver. Weiner says that a key difference between COESfx and other online currency-trading firms is that his firm doesn’t have the ability to manipulate the spread; the platform can only display what the banks are passing through.

COESfx charges a transaction fee, rather than taking the spread, as most platforms do. The fees charged vary, based on volume. In 2005, customers were charged, at most, $10 per $100,000 traded—but Weiner says the firm plans to cut that to $7.50 early this year.

New customers can open an account with $5,000, then use leverage, comparable to trading on margin, to trade 50 times that amount. Weiner says that 50-to-1 leveraging is relatively low in the currency-trading industry. He has seen 400-to-1 leveraging (investing with borrowed money), but believes that can kill the beginning trader. “We recommend that when you start out, you use at most 5- or 10-to-1 leverage. The less leverage you use, the less exposure you have.” There are no additional fees for using leverage.

COESfx has set up risk-management tools so that nobody will have a margin call where they have to come up with additional funds. Weiner says that when a customer has a loss of 80% of their starting daily volume, they get stopped out. With $10,000 they can buy $500,000 of currency but their exposure is only $8,000.

You can sign up for a demo account, which displays trading through just one of the banks available. But depending on the currency pair, you’ll still see a good depth of market with the one bank. The platform is Java-based and, similar to direct-access brokers, must be downloaded and installed on your computer. A high-speed Internet connection is most helpful both with the download and with running the platform once it’s installed. (But if you’re still using dial-up, you probably shouldn’t be trading online.)

There are other ways to get in touch with your inner Warren Buffett. The first currency exchange-traded fund—the Euro Currency Trust (ticker: FXE), which tracks the euro’s exchange rate against the dollar—began trading last month. In addition, EverBank ( offers money-market accounts and certificates of deposit denominated in an array of currencies (including the Icelandic krona, which yields over 8%) and gold.

FIDELITY ( has updated its Wealth-Lab Pro tool, which is available to customers who qualify for Active Trader services (120 trades per year). Wealth-Lab allows traders to design, build, back-test, and execute customized-trading strategies.

The main pieces of this upgrade are a new user interface and a “wizard” that helps the user build a trading system. Also new is the ability to plug both fundamental corporate data and technical indicators into a model, which is unique as of this writing. (TradeStation plans to add fundamental data to its trading systems in its next release, due out in the spring.)

There are several steps to building a trading model. First, you define the stocks you will be examining by setting up a watch list. You can create numerous lists, and mix and match them as necessary. Then, you define the specifics of the model, which can include both fundamental and technical data, plus your entry and exit points. The wizard then generates the code to run the model; if you want, you can manually modify the code.

Once the model is built, you run it on historical data to see how it works. Wealth-Lab Pro builds tables of results, letting you compare the model’s performance to a simple buy-and-hold strategy, as well as utilizing margin. One key enhancement to this version is that you can tell the model to only buy and sell in round lots—the prior version might have told you to buy 362 shares of a stock at one entry, then sell 278 at the next exit.

If you qualify for active-trader status at Fidelity, Wealth-Lab Pro is a terrific tool to use to build and test trading strategies. The truly brave can let it automatically execute trades as well.

Posted by twcarey on 01/09 at 05:52 PM
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