Saturday, January 20, 2007

Sign of a Bull Market: New Brokers

TWO ONLINE BROKERAGES OPENED their virtual trading rooms last week, aiming to provide a new home for experienced electronic traders and their assets.

Their arrival is notable not only for the new technology and competition they bring: Online brokerage has been in a steady decline since the Internet bubble popped so spectacularly back in early 2000.

For most of the intervening years, the brokers—conjuring images of day traders playing the momentum in tech shares—have been disappearing, usually into bigger entities like E*Trade or what’s now TD Ameritrade seeking scale.

But last year’s surge in the Dow, coupled with the business’ diminished ranks seems to have opened new opportunities.

Both entrants, OptionsHouse and Just2Trade, were created by established firms. Their resemblance ends there, however.

Market maker PEAK6, which provides liquidity for more than 2,000 U.S. and European-listed equity options, gave The Electronic Investor a tour of the new site just before it launched OptionsHouse ( on Jan. 8.

The technology is impressive, especially for those interested in trading options. OptionsHouse features real-time quotes and options-chain lookups, which one would expect, but also has a variety of options-specific tools. The quote view shows price and size data for every exchange,; and highlights the NBBO (National Best Bid/Offer).

Features known as the Call Spread Investigator and Put Spread Investigator scan U.S. listed equity options to point customers to spreads with high theoretical returns relative to their cost. A similar capability for covered calls finds those with high theoretical returns, or calculates the potential returns for covered-call strategies on stocks you like.

The order-entry screens are nicely laid out, displaying the real-time quote for every leg of an order, plus an estimated cost of the entire transaction before you hit the Trade button. Many brokers put you through two or three screens to get this information.

At OptionsHouse, a trade of up to four legs can be entered from a single screen. If you have a very large block to trade (more than 50 options contracts), you can request a quote directly from parent PEAK6 to ask for liquidity or price improvement.

Another cool tool shows how the value of your holdings would change if the market moved up or down. This page groups your stocks and options by ticker symbol—for instance, all of your Intel positions are subtotaled in one area of the screen—which is handy for those who trade a variety of strike prices and expiration dates for a single stock. This page shows what happens to your profit or loss, based on overall market moves, and helps you manage your portfolio risk.

Also of note is OptionsHouse’s commission structure. It levies a flat $9.95 per transaction fee, regardless of the number of contracts being traded. Most online brokers charge a base rate, plus an additional fee per contract. For example, TD Ameritrade’s options commissions are $9.99, plus 75 cents per contract, so trading 10 contracts costs $17.49.

Right now, you can only trade stocks and options online with OptionsHouse, but its offerings will expand over time.

JUST2TRADE (, which is a division of online-brokerage Success Trade (, went live on Jan. 9. It’s clearly designed for the niche that BrownCo filled before it was swallowed by E*Trade last year. [ST has low fees but offers only basic tools. They charge something like $7.95/trade - don’t have those notes handy. The offshoot offers a lower level of customer service and much lower fees. No toll-free number to call, for instance - they prefer to do customer service via email.]

The first thing you’ll notice about the site is that commissions are very low—$2.50 per stock trade of any size.

The second thing is that you can only trade stock at Just2Trade for now. CEO Fuad Ahmed says options trading will be rolled out by the end of the first quarter and mutual-fund trades will be available online later this year. For now, customers can buy and sell mutual funds through a live broker.

Client services are pretty bare-bones. For instance, there’s no toll-free number to call; Just2Trade would prefer to cope with questions or problems via e-mail.

Margin rates are very low at Just2Trade, which pledges to match the pricing of any other brokerage if a customer asks.

The current margin rate schedule runs from 7.75% for up to a $50,000 debit balance, down to 6% for a balance over $500,000. Customers who maintain more than $50,000 on margin qualify for $2 commissions in the following month. To top it off, money-market rates of 4.4% are on the generous side.

The Web-based interface is a little old-fashioned. You need to hit a button to get a current real-time quote on the item you want to trade. If you enter a market order, it can be executed within a second, which you can verify by looking at the execution report.

You can also use Just2Trade’s Trading Desk, which is a Java applet offering streaming real-time quotes and up to five watchlists with 15 symbols each. The last eight ticks are displayed; red for downticks and green for up. To modify an order you’ve entered, you have to cancel it and then re-enter.

Customers who sign on with Just2Trade must certify that they have at least two years of online trading experience. You can’t yet trade international equities, but CEO Ahmed says that will come by the end of the year.

WE’RE CONTINUING to gather data for our 12th annual review of online brokers. What is more important to you—cheap trades or good customer service? Write us at

Published in Barron’s, January 15, 2007

Posted by twcarey on 01/20 at 10:00 AM
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Sunday, January 07, 2007

Odd Lot Trades Generate Controversy

A couple of weeks ago, in response to a query I ran in my “Electronic Investor” column in Barron’s, a reader asked me what was going on with Interactive Brokers’ odd lot trading capabilities. 

On December 28 he told me, “Roughly a month ago, Interactive Brokers disabled all trading in odd lots - non 100 share multiples.  They did this suddenly and without any warning (that I was aware of).  Within a couple of days they re-enabled odd lot trading, again without explanation.

“Do you have any idea why they are wanting to do this or if it’s an industry trend?  My strategies happen to employ heavy odd lot trading.  Others might be interested in this topic.”

I contacted Steve Sanders at Interactive Brokers and asked him what was going on.  His response was interesting as it illustrated ways that savvy traders are using regulations to their benefit.  Sanders says that the odd lot trading issue is an exchange issue, not an IB issue, but because of the firm’s large proportion of extremely savvy traders, the exchanges tend to land hard on IB when they feel the firm is stretching the rules. 

Sanders says that the exchanges do not like odd lot orders because there is a rule that all odd lot orders on the books of an exchange must be filled at the next printed price, which is the price a regular lot order most recently received.  Odd lot orders are restricted from moving the market price.  A customer with a large block trade of 10,000 might split an order into small amounts of 90 shares, each of which would get filled at the next printed price.  What usually happens when a large block hits the market is that it moves the market price up (if the customer is buying) or down (if the customer is selling), just because of the volume.  So an order for 10,000 shares would, in all probability, be filled at a price which is worse than the next print.

Sanders goes on to say, “Because IB has very savvy traders that took advantage of the odd lot rule, the NYSE complained to us years ago about our customer’s odd lot trading habits, and we were asked to curtail odd lot trading on the NYSE for opening orders.  This has been in effect for years.  With Reg NMS on the horizon, the NASD sent us a memo saying that we had to comply with all NYSE rules including the odd lot rule.  Our plan was to implement the same logic as we have been using for the NYSE for years.  An overzealous programmer released the programming change before we had a chance to send notification to our customers.  When we started to get calls from customers complaining, we reversed the new logic.  We normally provide our customers with immediate communication on all changes and unfortunately this change slipped through the cracks.”

Sanders says that IB will try to remedy the problem with an alternative approach with the NASD, given the complaints we received from customers on the new logic.  He says, “If we suspect certain customers of breaking large trades into odd lots in order to receive superior price execution, we will contact the customer to stop, and suspend trading if our warnings do not work.” IB management is hoping this remedy will satisfy the NASD, but if not, the firm may have to do more. 

Further requirements will be determined by the NASD and Sanders plans to give IB customers advance warning if further changes need to be made.

Posted by twcarey on 01/07 at 09:47 AM
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Saturday, January 06, 2007

Making a New Year's Vow

IT’S OUT WITH THE OLD AND IN with the new at TD Ameritrade ( The firm’s Active Trader site has already undergone a serious refurbishment, and the integration of former TD Waterhouse services into the one-time Ameritrade site will enter its hoped-for final stages in the first half of the year.

One obvious change: The color scheme now employs TD Waterhouse’s trademark shades of green more than Ameritrade’s blue. The horizontal menus also reflect TD Waterhouse’s approach.

More substantively, customers will now find Thomson, Vickers and Weiss research in addition to Ameritrade’s previous tools like S&P fundamentals and MarketEdge reports. Charting has been upgraded, as well, with more obvious indications of the current share price and more flexibility to customize reports. Fundamental research has been augmented by Wall Street on Demand’s easily individualized reports.

Short-term traders will be interested in the Market Motion Detector, which was introduced last spring. This gives customers a view of price movements, illustrating the volume behind the fluctuations. The detector also can be used as a screener, offering trading ideas, displaying shares that are under buying or selling pressure and highlighting those with price changes accompanied by significant shifts in volume.

More enhancements are on tap. In mid-January, the new Command Center, which is a Java applet designed to close the gap between the old Ameritrade site and TD Waterhouse’s TradeCentral, arrives. “We wanted to make sure that the TradeCentral users feel welcome when they transition to the integrated platform,” says Jay Pestrichelli, senior vice president of the firm’s active-trader group. Those using TradeCentral will be able to import their current settings to the new environment, including their favored layout and placement of modules.

The first time a customer launches the Command Center, there’s a prompt to go through a tutorial. “We want to avoid confusion when a new tool is introduced, and make it easier to adopt new tools,” says Pestrichelli.

For options traders, TD Ameritrade has created Options Exposure. By listing all the relevant factors, this feature will show a summary of a client’s risk if he or she holds several options positions in a single underlying stock. The “Help” button links to an annotated page that explains all the calculations. “Customers with multiple options positions with a single underlying [stock] like this,” Pestrichelli notes. TD Ameritrade will also launch options trade triggers—similar to automated equity trades already available—in January.

Integration of the 2.5 million TD Waterhouse customers into the same platform used by 3.5 Ameritrade clients is expected to wrap up during the spring quarter. Petrichelli estimates this effort is roughly five times the size of the assimilation of Datek customers following its acquisition in 2001. The goal is a seamless integration experience for the former TD Waterhouse customers, while making the site’s tools more readily accessible to everyone.

FUTURES, OPTIONS AND commodities traders should look at the recent upgrades at Xpresstrade (, an electronic broker that allows customers to trade futures and options from 25 exchanges in the U.S., Europe, Asia and Australia. They can buy or sell commodities such as grains, precious metals, base metals, energy products, currencies and indexes. Xpresstrade was launched in 1997. As of December, it had more than 14,000 retail accounts.

The new tools include the Trade Strategizer, which presents ideas and strategies based on individual expectations, preferences and risk tolerance. Once users enter their market opinion (bullish or bearish), time frame, complexity of strategy and desired products (futures, options or both), this feature produces several possible strategies and specific opportunities, with the profit/loss potential for each. Clicking the “Trade” button takes clients to a filled-out order ticket.

The Market Screener filters the futures universe according to customizable criteria and identifies opportunities. Users can sort by relative strength, momentum, historical volatility, overbought/oversold, most active and percentage gain/loss, among other measures. The site also features a wide range of specialty and contingent orders.

Futures traders usually seek leverage, so the site includes margin calculators that let them plug in any combination of trading possibilities. The calculator reports how much money must be in an account to make a particular trade.

Xpresstrade is one of the few online brokerages that offer both electronic and pit-traded futures. Some of the most talked-about commodities—including crude oil and gold—continue to trade either exclusively or predominantly in the traditional, open-outcry trading pits. This system isn’t as efficient as an electronic market, so Xpresstrade’s per-contract pricing on certain products is higher than it might otherwise be.

The futures markets are gradually adopting electronic trading, according to Dan O’Neil, a principal at Xpresstrade. “People love the speed and transparency. There were a lot of challenges giving our customers the ability to route orders and process orders in open-outcry pits,” he says.

In 2006, commodities started to shed their image as dangerous, aggressive gambling products, says O’Neil. “I’ve heard a lot of people...say, ‘I’m trading commodities because it’s a great way to speculate but also to manage risk and diversify my portfolio,’ “ he says. “That’s been a cool thing to see, it’s been a long time coming.”

QUITE A FEW of you responded to my question about online brokers a couple of weeks ago. Keep those e-mails coming to and tell me what services you’d like your online broker to provide.

Published in Barron’s, January 1, 2007

Posted by twcarey on 01/06 at 09:46 AM
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