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Monday, March 27, 2006

Four Star Brokers

A MERCEDES-S OR A BMW-7 SERIES MIGHT CLAIM to be the world’s best sedan, but a Toyota Camry or Honda Accord might better suit your needs. So, too, with online brokers: In our recent annual rating (March 6 entry), the largest group of brokers scored four out of a possible five stars. Most excel in a specialty or two, but fall short in other areas. Yet your ideal broker may well be in this group. Here’s a look at some four-star contenders.

Browser-Based Brokers

Ameritrade’s Apex ( offering continues to develop in depth and breadth. A few years back, Ameritrade typically was at the bottom of our rankings due to a narrow breadth of offerings and a clumsy Website, but the company has listened to criticism and worked hard to overcome it. One welcome update this year is the ability to link accounts for reporting and performance-evaluation purposes. You can link multiple accounts if there’s an overlap in Social Security numbers; in the near future, it will be possible to link any ‘permissioned’ accounts, such as trusts and corporate accounts, that aren’t tied by SSN. Ameritrade offers plentiful customization tools. The customization specifications are stored on an Ameritrade server, so even when you log in from a different computer, you’ll get the view you want. As TD Waterhouse research offerings are integrated into the Ameritrade platform with the merger of the firms later this year, the site is apt to improve again.

Although it won’t exist as a separate entity a year from now, TD Waterhouse’s TradeCentral( offering managed to earn four stars. TradeCentral has a variety of tools available that rival those of some of the software-based brokers—but it runs in a browser, so it’s more portable. To use the platform, TradeCentral customers must trade 30 or more times in a rolling 90-day period, or have $500,000 in assets. They pay a flat fee of $9.95 for stock trades, and $1.25 extra per contract for options.

Fidelity ( improved its options capabilities by adding an Options Research window. The Strategy Evaluator lets you compare different strategies by entering a few characteristics pertaining to what you believe will happen to the underlying stock. The site offers a variety of investment-research opportunities, with many enhancements made to stock, option, bond, mutual-fund and exchange-traded-funds research for retail investors.

Fidelity also got a big kick up in the rankings from a significant commissions cut. We assume a typical Barron’s reader would be in the Silver category, which saw stock commissions drop to $10.95 per trade, and options commissions drop about 50%. The firm also eliminated its $50 annual fee and lowered margin rates, which makes it a much better deal now. There are still some glitches in the reporting arena, however, especially since account history can be viewed only in 90-day increments.

E*Trade’s ( Serious Investor offering, for those who park more than $50,000 in assets with the firm, also earned four stars. Many of the pages on E*Trade’s site now include slider bars, which allow you to change various assumptions quickly, such as risk and interest rate. Commissions have been slashed; the Serious Investor tier pays $9.99 for stocks, or $9.99 plus 75 cents per contract for options. The firm is folding a variety of Harrisdirect tools, such as Risk Metrics, into the site over the next few months, when the site will undergo another update.

E*Trade has worked to address customer-support issues, and has committed to expanding its physical presence in major metropolitan areas. An area of focus is aimed at picking up additional wealth-management firms to cater to high-net-worth customers. Michael Curcio, E*Trade Executive Vice President in charge of retail trading, says, “We’re seeing the demand for complex trading instruments grow. We’ve devoted more development and services to this area.”

Privately held Scottrade ( is unlikely to be swallowed up in the merger wave that has rolled through the industry. But that’s not what earned it four stars. The site underwent a serious overhaul just after our 2004 broker survey and now is considerably easier to navigate. It sports just four tabs for the main functional areas, while the old site had nine. Every resource is at most two clicks away. The home page shows all your important information in one place. “Customers like it,” says president Rodger Riney. “They don’t have to go digging around to find something like funds available for trading.” This page provides a quick, elegant look at what’s happening in the account. Gainskeeper’s tax reporting is fully integrated into the site, at no additional cost. One drawback for options traders is the inability to enter complex options orders online.

Software-Based Brokers

RushTrade (, a small firm that offers three variations on its trading platform, lets you create and execute trading strategies as well as basket orders. Direct Plus offers Level I quotes, a variety of charting functions, and real-time account management. The Direct Pro platform steps up to Level II quotes and additional charting functions, as well as the Market Matrix, which allows you to search the market for stocks to trade based on parameters you set. Although its routing algorithms give you terrific executions on stock transactions, the platforms don’t allow you to trade multileg options orders online.

ChoiceTrade ( also gives its customers the option to use the powerful BonTrade software platform, or a browser-based offering called ChoiceTrader Online. The browser version includes ChoiceStreamer, a relatively easy-to-use configurable interface. The ChoiceTrader Select platform, which links into an eSignal subscription with powerful charting and technical analysis capabilities, gives customers access to Credit Suisse’s algorithmic trading capabilities. Through the Select platform, customers can route orders to a new electronic communications network called BATS, ( Better Alternative Trading System).

A recently launched feature of the Select/BonTrade platform is the TradeScript Manager, an extremely flexible basket generator. A trader could have a long list of ideas queued up that are stored in the TradeScript window. Each order could be different: Some could be buys, some short sells, and some long sells to get out of previous positions. The TradeScript window will give the trader real-time data on each potential trade. You can launch orders simultaneously, or pick a few from the group and hit the Launch Selected button. It’s an intriguing feature for frequent traders, especially those who want to send a group of orders all at once.

Fidelity’s Active Trader also earns four stars. This platform has evolved in the last year with the introduction of OptionTrader Pro and the integration of Wealth-Lab Pro. The platform offers real-time streaming data, able to analyze and simulate potential orders, then route them to a variety of destinations. Fidelity pulled out the stops last year in an effort to appeal to frequent traders, and especially to options traders.

When viewing a quote window, if you right-click on a bid or ask, you can immediately execute an order, or choose to simulate the order. A simulated-trade ticket lets you experiment with a trade, mapping out the potential profit and loss in advance. If you set up a multileg position, the portfolio summary will show you all the possible effects on your current holdings. This can be used for any listed equity as well as indexes and the new CBOE (Chicago Board Options Exchange) weekly options. The Active Trader platform is developing into a terrific offering, backed by the rest of the Fidelity offerings. The setup is somewhat clumsy, however, and the pieces feel like they’re not yet fully integrated.

PreferredTrade ( was purchased by Fimat last July, which gave it access to worldwide stock, options and futures exchanges. We expect to see the company, now called Fimat Preferred, take advantage of international relationships now available. One update already in effect is an expansion of the futures-trading capability, including a cut in commissions.

The current version of the software is 6.2; Fimat Preferred expects to roll out version 7 later this year, which will include various Fimat Group futures, commodities and foreign-exchange products. The platform allows a trader to split up an option order and launch up to six options exchanges simultaneously, with the goal of extracting maximum liquidity from the market. It also provides streaming regional options quotes, allowing you to monitor all six options exchanges from a single window. Options commissions were cut recently, and those with over $5 million on account qualify for greater margin flexibility when trading U.S. equity-index options and exchange-traded funds.

Schwab’s CyberTrader ( rounds out our four-star list with a software platform tweaked to make it easier to use. You can now trade equities, options and futures from a single platform. The Options Wizard lets clients express in English what they’re interested in doing, such as generate income, hedge a position, or create a calendar spread or a debit spread. The Wizard spells out what the client has to do to place the appropriate trade.

The Strategy Center scans the entire market to find equities that meet criteria that you’ve laid out. This feature goes a few steps beyond backtesting to help you find equities to trade. Our biggest problem with CyberTrader is you have to trade at a very high rate to dodge the platform fees. CyberTrader offers either per-share or per-trade commission structures, but the monthly fee is much higher if you opt for the per-share structure.

WE’LL COVER ONLINE BROKERS that scored less than four stars in a future column.

Published in Barron’s, March 27, 2006

Posted by twcarey on 03/27 at 12:39 PM
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Monday, March 13, 2006

Your Personal Best Broker

LOTS OF FACTORS GO INTO CHOOSING which online broker is best for you. As noted in our annual roundup ("Different Strokes for...” March 6), you should look beyond simplistic considerations, such as commissions.

Indeed, as prices drop to a point where they’re no longer much of a factor, customers need to look more deeply at a broker’s offerings and find those that suit their needs or are developing features to meet them. Customer service becomes the differentiating factor once fees of $10 per trade are ubiquitous.

A few of the brokers have actual bricks-and-mortar offices you can visit. Scottrade continues to open new offices, while E*Trade is installing financial centers in key urban areas. Schwab has a significant physical presence. And you can still find TD Waterhouse offices, although, as that firm is being absorbed fully into Ameritrade, their future is uncertain. Fidelity also has been adding offices for its brokerage and mutual-fund customers. For the most part, however, you have to be comfortable online to be a truly satisfied electronic investor.

One consideration is the size of the broker. Some readers say they shy away from smaller firms because they’re uncertain about whether the companies will be around tomorrow. But some prefer smaller firms because of the service they offer, which can be superior to that of the behemoths. Others find that a mid-sized firm is “just right.”

The table here classifies the brokers in our survey according to three measures of size: number of accounts, average assets per account and the number of trades per year per account. If you’re a frequent trader with a lot of assets, you may be happiest at a broker that caters to high account balances and peripatetic trading. If you’re planning to open an account with less than $25,000 and don’t plan to trade very often, check out the brokers who have attracted similar investors.

Looking ahead, we expect continuing consolidation, not only among existing brokerages but also among exchanges and liquidity providers. During the preparation for the annual broker survey, one reader quipped, “Maybe I should just move my accounts to E*Trade or Ameritrade now, so I don’t have to go through another takeover.” Those two major firms have been the main acquirers, and while both want to be king of the online-broker hill, never say never when it comes to future combinations.

“There is no question the active-trader market is consolidating,” says Vincent Phillips, chief executive of Schwab’s CyberTrader unit. “Lately, it seems, most brokers’ primary concern is mergers and acquisitions.” Not all, however. Says the eponymous Charles Schwab, “We have no interest in selling the company. We remain firmly committed to our independence, and believe we serve stockholders best by continuing Schwab’s strategy as an independent company, focused on providing clients with great service at great value.”

Muriel Siebert ( thinks the consolidation in trading venues, such as exchanges and ECNs (electronic communications networks), could extend the low price trend. “With advances in electronic trading—and the New York Stock Exchange and Archipelago merger, and spreads continuing to narrow—there may exist the opportunity for more price cuts.”

Most brokerage executives aver that commissions have gone about as low as they can go—not surprising, given that you can pay as little as $1 a trade. Neville Golvala, CEO at ChoiceTrade, states, “I believe we have reached the saturation point and do not expect any further decreases in rates.” Rich Hagen, COO of newcomer TradeKing, says, “It would be hard, we think, for one of the huge publicly traded firms to move down much in price, as the public markets have become used to the inflated profit margins their higher commissions deliver.”

“Pricing is still important, and we’re continually looking for areas to reduce cost for our customers,” says E*Trade’s Michael Curcio. He sees E*Trade’s 2006 focus as “ cementing the relationship with our customers—truly completing our focus on product, price and service.”

Both Curcio and Jeff Carney, president of Fidelity Personal Investments, point to the coming baby-boomer retirement wave as a focus for the next few years. “Nothing will be a larger part of the brokerage business—and financial services in general—than finding new and better ways to service the huge wave of Americans born during the baby boom, many of whom need help saving for and making the transition into retirement,” says Carney.

We’ll see continuing activity in the realm of online security this year as well. E*Trade launched its Total Protection Guarantee in January, which will restore any cash or shares that are removed fraudulently from a customer’s account. Schwab responded by announcing its Security Guarantee in February, which covers 100% of losses due to unauthorized activity.

Customers still have to take reasonable precautions to protect themselves, too. But if you are among the unlucky few who needs to take advantage of these security guarantees, please tell us about your experience.

Published in Barron’s, March 13, 2006. 

Posted by twcarey on 03/13 at 03:50 PM
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Monday, March 06, 2006

11th Annual Review of Online Brokers

Different Strokes For ...

IT’S JUST ABOUT THE BEST OF TIMES for online brokers. As Barron’s prepared its 11th annual review, their assets and trading volume are up, and shares of major publicly held ones, such as Ameritrade (ticker: AMTD), E*Trade (ET) and Charles Schwab (SCHW), dot the new-high list.

But for clients of online brokers, there have been pluses and minuses. To be sure, they’ve enjoyed feature upgrades and continuing cuts in trading costs. But they’ve also had to endure occasional service glitches, especially as the industry continues its consolidation.

We examined 27 online brokers, which we split into two cohorts: 14 that use Web browsers and 13 that are accessed directly through their own proprietary software. Browser-based brokers work like familiar online retail or banking sites and appeal to the mainstream investor. Software-based brokers are aimed more at the serious, semi-pro trader willing to invest the time and effort needed to get a performance edge.

Based on input from more than 400 Barron’s readers, we tweaked many of the rating criteria, adjusting the weightings used in past years and varying them for browser- and software-based offerings according to their targeted users’ preferences. We assumed the customer had an online portfolio of about $100,000 and trades at least 36 times per year.

Two browser-based and four software-based firms earned 4½ stars out of a possible 5. In a remarkable display of consistency, optionsXpress (OXPS) tops the browser field with the highest point score for the fourth straight year. Next up is a newcomer, the Web version of thinkorswim’s offering. Six brokers earned four stars: Siebertnet, Ameritrade’s Apex offering, Fidelity Investments, E*Trade’s Serious Investor, TD Waterhouse Trade Central, and Scottrade.

Tied at the top of the software-based broker standings are two very different offerings from MB Trading and thinkorswim. TradeStation and Interactive Brokers also earned 4½ stars, while six firms garnered four: Terra Nova Trading, RushTrade, ChoiceTrade, Fidelity’s Active Trader offering, Fimat’s Preferred Trade and Schwab’s CyberTrader.

We rated all the brokers on such factors as the types of investments that can be traded through them online; the quality of screeners they offer to help pick stocks, options or funds; the usability of their trading screens; their sites’ ease of use and the reports they send to users, including printed monthly statements. We took a hard look at the types of orders that can be entered. For the software-based brokers, we delved deeper into trade automation, the ability to create a trading strategy and how commissions are calculated.

Not all these things might be important to you. Indeed, we’ve also tallied the best online brokers for two disparate groups—options traders and buy-and-hold investors. You may find your own 5-star broker, based on scores in your key criteria.

THE TOP DOGS: We can’t directly compare the top browser- and software-based brokers. We use different measurements for each group and rate some elements for each differently, too. But here’s a rundown on the brokers that earned 4½ stars.

On the browser side, optionsXpress again tops the list by providing a solid trading platform, opportunities for price improvement, a myriad of research tools and reports that let the client understand portfolio performance, as well as the tax implications of a trade. The only downside: The firm accepts payment for order flow for a large percentage of its options orders; critics say this raises questions about whether a broker will always send a trade to the site where it will be executed most favorably for a customer.

The designers at optionsXpress have a saying that guides their work: “A lot of littles equal a lot.” For instance, on a customer’s Positions screen, in-the-money options are highlighted in yellow, mirroring how options quotes are presented. In the quote box at the bottom of the screen, there’s a “More” link that lets you pop up a streaming quote, or click on charts. The site uses real estate wisely.

optionsXpress also offers ways to find additional trading opportunities. A new feature is Charting Patterns. It lets you examine both certain technical aspects of a stock’s price moves, plus fundamentals. Then, it displays charts of stocks that fit your criteria. To track taxes linked to your trades, optionsXpress customers now have access to GainsKeeper at a reduced price.

Next on the browser-based side is, which also topped our software-based list. In both forms, thinkorswim presents what its chief executive, Tom Sosnoff, calls a “sweet suite” of services. The browser product has almost all the bells and whistles of the software versioln. A client can use either version with the same login.

This platform edges out optionsXpress as our choice for high-volume options traders, and it has much to offer for stock and fund investors, too. Thinkorswim allows three free no-load mutual-fund trades each month; some other brokers charge $10 to $50 for the same number of transactions.

Thinkorswim excels in routing orders. From the trading page in both the browser and software versions, you can perform detailed pricing studies that show the risks and potential rewards of a particular trade. We like thinkorswim’s innovations, such as detachable and exportable windows, and data grids of charts or Level II data. Thinkorswim continues to overhaul its charting, and provides the ability to enter a trade from a chart. Its “Paper Trading” program lets users execute mock trades and see how they fare. Want to do multi-leg options trades? This is a great learning tool.

Both the browser- and software-based offerings are highly graphical and customizable, so this site might not be for someone who’s most comfortable with a text-based browser. But for sheer intellectual achievement, thinkorswim is a winner.

Tying with thinkorswim at the top of the software-based broker list is MB Trading, which excels in trade execution. Says executive vice president David Lipsett: “We consider this to be the most critical part of the trading process. The best research and information is pointless without superior execution.”

Table: Browser-Based Brokers and Software-Based Brokers

Table: Switch-Hitters

MB Trading has built a trading platform with fewer bells and whistles than thinkorswim’s, but which gives customers access to its smart router, MBTX, whose proprietary order-routing algorithms have been enhanced.

Though MB Trading is designed to appeal primarily to frequent traders, Lipsett says that it will produce offerings for less active investors. The firm prides itself on the level of customer help; phones are answered quickly by human beings, rather than computer-generated menus, and you’ll get help online within 15 seconds of logging into the chat area.

Also earning 4½ stars on the software side are TradeStation and Interactive Brokers, which reach out to very different varieties of traders. features an extensive suite of strategy-testing and implementation tools. It appeals to those who want to streamline and automate their trading. You can backtest a strategy using up to 25 years of minute-level data, which can offer a clearer picture than mere opening and closing prices.

Though you can enter orders manually, the TradeStation platform is geared for those who want to get deeper into the data and set up automatic trading. The Trade Execution Matrix, which displays a terrific market-depth graph, lets you enter orders quickly, and adjust them easily.

The strength of the platform is apparent in the Strategy Trading area. You can develop your own trading system, or use one that’s been developed by a third party (usually for a fee). Given the cost of using the platform, if you’re not going to utilize the trade-automation capability, TradeStation probably isn’t for you.

Last year’s software-based winner, Interactive Brokers, still garners 4½ stars, thanks primarily to the long list of trading possibilities and its rock-bottom pricing. IB targets sophisticated traders and investors who migrate after gaining experience at other brokers.

All trading takes place in a single window, the Traders Workstation, regardless of what is being traded. For options, any type of spread order with two or more legs can be created. Each leg of the spread is smart-routed to the market destination with the best price at the time of the execution decision.

Interested in trading international stocks and currencies? IB has a huge number of partnerships with exchanges outside the U.S. And its fees are extremely low.

THE BEST OF THE REST: The largest group of brokers we reviewed didn’t make the top tier. Most excel in a particular area or two, but fall short in others. Still, depending on your needs, your ideal broker could well be in this group.

Muriel Siebert’s Siebertnet’s major flaw: high pricing for options transactions. However, Siebertnet customers get free access to quite a few third-party research offerings for which other brokers would charge a fee.

The Bottom Line

The features offered by online brokers continue to proliferate, even as the industry consolidates. The best of the best boast ease of use, and a broad menu of services.
Muriel Siebert believes that price tiering creates inflexibility and doesn’t serve customers well. But her firm will negotiate rates with clients.

On the software side, Terra Nova Trading lets customers enter orders from within its customizable charts. Prices are updated, tick by tick, in real time. Users can change a limit order’s price simply by moving an indicator on a chart. Says Chris Doubek, Terra Nova’s president: “The ability to trade, change and view orders and positions within a chart is paramount, as they can quickly route orders, based on charting trends.”

That’s all we have room for now.

In coming Electronic Investor columns, we’ll look at some of the brokers who got less than four stars and at the trends that we believe will shape the industry’s future.

How We Ranked Them

WE RANKED ONLINE BROKERS’ SERVICES on the following measures:

Trade Execution: Working with a live account, we looked for smart-order routing technology, which finds the best bid or offer, and price improvement on limit orders—purchases or sales at specified prices. We executed equity trades during market hours, making market buys and limit sales of a stock or exchange-traded fund. We also placed options orders, using options- order entry screens when available. An overall score of 5 means the order entry-and-execution process flowed easily from one step to the next, with real-time information available when needed. For software-based brokers, a 50% extra weighting was added, reflecting the need for well-designed order-entry screens when trading quickly.

Trading Technology: The availability of price-improvement strategies and smart-order routing, and the absence of internalized orders and a reliance on payment for order flow were necessary to earn a 5 in this new category. Brokers offering price improvement—a sale above the bid price, a buy below the offer—received a fraction of a point, depending on how many transactions benefited. The overall technology category got an additional 50% weighting for software-based brokers.

Usability: A 5 here means the site was easy to use, well-designed and could be tailored to suit the user. The weighting was reduced by 50% for software-based brokers, as their users are likely to invest the time it takes to climb the learning curve.

Range of Offerings: We’ve changed the calculations in this category. Because all the brokers let you trade stocks, long and short, and enter single-leg options orders online, we asked brokers how many stocks, on average, their customers can sell short, and awarded up to a half-point, based on the answer. Complex options trading, the availability of mutual funds, bonds, futures, commodities, international equities and currencies were also considered. A 5 means you can trade all of these online. We cut this category’s weighting by half for software-based brokers, because their frequent traders usually focus on stocks and options.

Research Amenities: This measures the quality and accessibility of research, quotes and charting. We looked for research, news and charting linked to the customer’s portfolio and watch lists; the availability of third-party research and its integration with the rest of the site; and the availability of screeners, with special emphasis on options-strategy screeners. Brokers won points for offering real-time streaming quotes at no added cost, powerful charting capabilities and Level II Nasdaq quote accessibility.

Portfolio Analysis and Reports: The emphasis here is on clearly-laid-out reports, updated in real time, showing current balances, positions and margin status. The weighting was trimmed by 50% for software-based brokers, as many frequent traders use other applications to analyze portfolio performance.

Help and Customer Access: We sized up online help such as live-chat capability, educational features, user guides and frequently-asked-question files. Offline help was assessed by calling customer service and weighing the brokers’ reports of the average time a customer spends on hold. The ability to reach a live broker, to place touch-tone trades, or to buy or sell over the phone also was considered. The weighting here was reduced by 50% for software-based brokers, since our active-trading readers emphasize costs and technology over hand-holding.

Costs: We looked at margin rates and commissions for stock and options trades, awarding more points for low costs. A 5 could be earned by a broker with stock commissions under $40 for three roundtrips; under $17.50 for 10 options contracts; margin rates below 7.5% and no account-maintenance fee. Costs are particularly crucial for frequent traders who use software-based brokers, so we doubled the weighting in that category.

Published in Barron’s, March 6, 2006.

Posted by twcarey on 03/06 at 02:00 PM
Published in Barron'sAnnual Broker Review • (0) CommentsPermalink
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