Saturday, March 17, 2007
Online Brokers' Hidden Gems
LAST WEEK BARRON’S RAN its 12th annual ranking of the best online brokers. Although we offered complete rankings of 29 software- and Web-browser-based services and discussed the seven leading firms in some depth, we had no choice but to leave sketches of some other worthy brokers on the cutting-room floor. Below are profiles of several that garnered 3½ or more out of five possible stars, and that merit your consideration.
CHOICETRADE, one of the two four-star brokers here (CyberTrader is the other), is a small firm that offers traders three distinct platforms. The one with the most features is BonTrade, which is designed to comply with Regulation NMS, the rule intended to assure more transparent and better market pricing, that started to go into effect last week. This platform boasts a Web-based audit panel demonstrating that an order received best execution.
BonTrade’s OptionVision tool lets the user graph actual volatility of an underlying stock against the implied volatility defined by market makers. Time frames are customizable, and the user can include a variety of strike prices. As a result, you can see when options are cheap, or when it might be best to sell. The BonTrade platform is $60 a month; ChoiceTrade clients also can choose a less expensive software platform, or use its Web-based system and pay per-transaction commissions.
CYBERTRADER, Schwab’s software offering for hyperactive traders, relaunched last year with more emphasis on ease of use. The platform still has dynamic streaming charts and other tools, but they can now be accessed from a “floating” menu that lets you move windows and dock them where you want. Chart-building is faster. A welcome new item is the Balance Bar, which customers can put anywhere on the screen for viewing real-time information like a daily P&L and margin balance.
Schwab’s Website has added new tools providing nearly real-time reports of gains and losses for those with more than $100,000 in household accounts. (Investors with less get 20-minute-delayed quotes.) But some positions don’t show up on a P&L until the day after a trade. Frankly, this reporting tool, though improved, still asks too much of the user.
E*TRADE has been busy. After folding BrownCo and HarrisDirect customers into its platform, the acquisitive firm launched futures and global stock trading. Clients looking for advice about their investments can run the Intelligent Investing Optimizer, which makes recommendations based on responses to eight profile questions. Another new tool we like is the Risk Analyzer: It lets you weigh your investment choices’ possible risks and rewards against your objectives.
Research and reporting are very well done on all E*Trade platforms.
The broker’s active investor software program, E*Trade Pro, now has enhanced charting and new technical studies. The charting application also lets you enter an order by double-clicking on a price. Plans are in the works for technical screening and backtesting. By the end of March, Nasdaq TotalView, which offers detailed price and order information on the exchange’s stocks, will be included in the Pro platform.
OPTIONSHOUSE is shiny and new (see “Signs of a Bull Market: New Brokers"), and doing a lot of things right. The brokerage is built on data from its parent company, market maker Peak6. A new tool as of a couple of weeks ago is the Risk Viewer, which has three tabs (P&L, Greeks and Market Exposure) that show portfolio risk by industry, by expiration or by symbol. The firm added mutual funds just last week. From what we’ve seen, you can expect a lot of interesting technology from this site.
SCOTTRADE launched its new quote and research section, free to customers, in mid-February. These offerings doubled the amount of research available, including additional news feeds and an ETF center. No matter where you are in the Quotes and Research area, if you hover over a ticker symbol you get a small graph, a real-time quote, and links to trading. Customer service is good. This is a solid brokerage for the cost-conscious, long-term investor. It would jump in our ratings if it added some advanced order types, and more customizable features and tools for trading complex options.
For more active traders, the firm offers ScottradeELITE, its software platform. This is an easy-to-use streaming platform that’s not as daunting as others.
Another plus, amid all the annoying changes caused by consolidating brokers, Scottrade says it has no plans to go public or sell out. That alone makes it a good bet for electronic traders.
Published in Barron’s, March 12, 2007
Saturday, March 10, 2007
Online Stress Test
WHEN STOCK MARKETS everywhere took a big hit last Tuesday, volume on the New York Stock Exchange nearly doubled its typical level, topping 4 billion shares for the first time ever. We thought that offered the perfect opportunity to see how some of the online brokers reviewed here coped with extremely traffic.
In short, the bigger the broker, the slower the site.
Most large brokers’ infrastructure can only allow a small fraction of their customer base to log on at one time. I poked around Schwab.com, Etrade.com, TDAmeritrade, Fidelity, Scottrade, optionsXpress, OptionsHouse, TradeKing and thinkorswim’s Websites. I looked at quotes, searched for a covered call to trade, and tried to enter an order.
Schwab was running extremely slowly, and actually tossed me out when I attempted to enter an order. When I sought to enter a covered call order on E*Trade, the option quote wouldn’t come up. TD Ameritrade shifted to delayed quotes (instead of real-time), but I was able to enter an order. Fidelity was sluggish yet it too let me enter an order. Although they seemed a little slower than they did the previous week, OptionsHouse, TradeKing and optionsxpress weren’t running at glacially slow speeds All three let me enter an order. Thinkorswim was plugging along as though there was nothing extraordinary happening.
I brought up software from Schwab’s CyberTrader, MB Trading, Interactive Brokers and Terra Nova Trading. Cyber was OK even though the web-based Schwab offerings (including Street Smart Pro) were slow. The others looked fine, too. Quotes, especially from the NYSE, seemed to be loading more slowly than usual, but subsequent reports have said the exchanges were swamped, so the problem might not have been endemic to the brokers.
Keynote Systems, which tests sites for loading speed, observed significant performance slowdowns for some of the nation’s leading online stock trading sites. According to their tests, many of the most popular Web sites suffered speed and availability hits. Keynote’s stock trading performance tool measures the time it takes to conduct a stock transaction from 10 geographic locations across the U.S.
Sites included in the Keynote web performance index like Ameritrade, Fidelity, Firstrade, Muriel Siebert, Schwab, ShareBuilder, TD Waterhouse and Wells Fargo, began slowing down Tuesday at 10:30 a.m. Pacific. Many of the sites took up to two times the normal time to complete an online trade, which is a big deal during a huge selloff. On a typical day, Keynote takes an average of 10-15 seconds to log into a broker’s site, get a quote, execute a transaction, and log out. While the markets went haywire, these measurements increased to 20-25 seconds, and up to one minute in some cases.
Abelardo Gonzalez, web performance manager at Keynote, says, “Keynote has never seen such significant slowdowns and limited availability among online trading sites since the index began in 2000.” Gonzales says that there was a 25% drop in the overall number of successful trades his firm was able to undertake on the broker sites that make up the firm’s index. That means it’s possible that upwards of 25% of investors attempting online trades between 1:30 p.m. and 4:30 p.m EST may not have been successful.
“I would imagine that this time was frustrating for online brokerage users,” he says.
By Wednesday morning, all the sites were back to normal, says Gonzales.
Published in Barron’s, March 5, 2007.
Tools of the Trade
VOLATILE MARKETS AND THE ELECTRONIC TOOLS to exploit them: What more can an online trader ask for?
Today, it’s possible to buy Swiss stocks or sell Japanese shares from your desktop; you can also go long oil, short a silver contract, trade a butterfly option on the S&P 500 or employ computer-generated algorithms to jump from stock to stock—all with the assurance of credible market prices and the confidence bred by customized research and analysis. And you can do it at a fraction of what it cost a few years ago.
In recent months, banking behemoths like Bank of America and Wells Fargo have offered free online trading to any customer who meets their balance threshold, while newcomers like OptionsHouse and TradeKing continue to chip away at commissions.
Deep, diverse product lines and declining prices highlight Barron’s 12th annual survey of the Best Online Brokers. New services and tools catering to futures, options and international investors are proliferating. Meanwhile, the average commission on a 500-share stock trade at the 29 brokerage firms we reviewed this year was $6.35, down more than 29% from the average of $8.25 a year ago. Costs for trading options have declined similarly.
With so many interesting alternatives, how did Barron’s choose? We divvied up our brokers into two camps—14 firms that are accessible through their own proprietary software and another 15 that you reach through Web browsers akin to those used for online banking.
Software-based systems traditionally have aimed at attracting more frequent traders seeking speed and an information edge, while the Web has a more mainstream appeal for the sometime trader.
Thinkorswim tops Barron’s 2007 list of software-based brokers for the second year in a row, earning 4 1/2 out of a possible five stars. And by the thinnest of margins, a new winner emerged in the Web-based broker category. TD Ameritrade (http://www.tdameritrade.com) nudged aside longtime champ optionsXpress (http://www.optionsXpress.com). Both won four stars, but TD Ameritrade had slightly higher points behind those stars.
Click here to see how the brokers stack up.
What does it take to make it to the top? Eight-year-old thinkorswim launched 12 software revisions in the past year, adding new tools and making its platform stabler. “It’s as close to bug-free as a program can be,” says the firm’s president Tom Sosnoff.
Much larger, publicly-held TD Ameritrade (ticker: AMTD) has risen via a very different business model. The firm is the result of a merger between Ameritrade and TD Waterhouse. A frequent acquirer since the Internet bust decimated the electronic-trading business, Ameritrade wisely adopted the best parts of its purchased platforms. Its newest hybrid utilizes the terrific research capabilities of TD Waterhouse and improves upon Ameritrade’s previous platform.
Barron’s doesn’t think commissions are the only measure of a broker’s worth, even if we’re not ready to agree with Sosnoff, who says of pricing, “We don’t care about that any more.”
We rated thinkorswim, TD Ameritrade and their brethren in eight categories, including the types of investments that can be traded online, the quality of screeners provided to help sort through stocks, options or funds, the consumer-friendliness of trading screens, overall ease-of-use and ability to be customized.
Table: How the Brokers Stack UpWe then took a hard look at the types of orders a trader can enter, and, for software-based brokers, delved further into trade automation, strategy creation, and formulations for commissions. We also compared the rates brokers pay for customers’ idle cash—an important consideration, now that short-term rates have risen. We assigned a point value ranging from zero to five for the eight criteria.
We then toted up the points for each of the browser-supported brokers.
Barron’s treated the software-based firms a little differently. For them, we created a weighted total by assigning varying degrees of importance to each measure, based on suggestions from more than 400 readers. For full details of our criteria (click here).
IN THE CASE OF THINKORSWIM, MANY OF the dozen upgrades were designed to allow its relatively sophisticated clientele to wring more out of their systems. “Our commitment [is] to apply cutting-edge technology to our trading platform and to raise our customers’ understanding of complex strategies with strong customer support and educational services,” says Sosnoff. In part, this has meant better order routing to market centers offering speedier execution and more price improvement. Thinkorswim has several ways to place trades. If you click on the offer in any quote display, an order-entry ticket pops up that will let you place a Buy order, while a Sell order comes up if you click on the bid. Either way, the ticket is filled in automatically with the stock symbol and your default transaction size.
For tech support, thinkorswim customers can use a built-in screen-capture program that takes a picture of the part of the program causing a problem, and sends it to the customer-support staff via live chat.
The software program also offers tax-accounting tools that match trades and send the output to any file format, and its platform is flexible enough to allow easy customization. What’s more, the broker has joined some of its competitors in offering a Web-based platform, with almost all of the bells and whistles of the software offering.
Despite Sosnoff’s comments about pricing, thinkorswim’s commission schedule is reasonable—an order for 500 shares of stock is $7.50, and 10 options contracts are $12.95. Clients can also make three free mutual-fund trades per month—including those that other brokers charge for. Thinkorswim’s interest rates on cash are on the high side, and its margin fees are on the low side. Customer service is excellent.
Repeat-winner thinkorswim continued to reign supreme. However, Interactive Brokers and MB Trading both earned the same number of stars—4.5—from Barron’s this year. And there are lots of other candidates worthy of your consideration.
AMERITRADE’S WEB-BROWSER system is tackling some of the same issues. Its proprietary order-routing technology can discern whether you’re entering a Buy or Sell, the size, and whether it’s a limit or market order, among other things—and compares the order to the prevailing market price. If the order is marketable, it goes through a host of market centers to fine-tune how the trade will be executed. This super-smart router tries to get the best available price in the market. A few bucks on 1,000 shares might not sound like much, but the savings add up quickly if you trade frequently.
For more active traders, TD Ameritrade’s Streamer Suite Console offers numerous customizable real-time data and charts. You can set up 50 watch lists, with as many as 35 symbols per list, and switch between them quickly using a drop-down menu. You can add technical studies to charts, and even trade from the quote or chart pages. The site offers excellent screeners, and recently added contingent orders (allowing you to make multiple automatic moves, based on various price changes or relationships) to its entry screens. We were impressed by the ETF [exchange-traded fund] center, powered by Wall Street on Demand.
TD Ameritrade’s commissions and other costs are middle-of-the-pack, but easy to understand. The firm charges $9.99 for any stock order, and its options commissions are $17.49 for 10 contracts. Margin rates are on the high side, but it’s possible to move cash into a sweep account that pays close to 4.5%.
AMONG THE SOFTWARE-BASED systems, Interactive Brokers and MB Trading trail thinkorswim on points but still merit 4 1/2 stars. Four-star software brokers include TradeStation, Fidelity’s Active Trader, ChoiceTrade, Schwab’s CyberTrader and E*Trade Pro. All deserve serious consideration.
Interactive Brokers, for example, has the best international offerings, many futures choices and low fees. This last year, it added access to Swedish, Japanese, and Hong Kong stocks, along with floor-traded CME and CBOT futures, NYMEX physical energy futures and soft commodity futures, and CBOT electronic agricultural futures. Penny-priced options are available not only for 13 underlying symbols being tested, but for all equity options using the firm’s well-regarded proprietary technology.
Pricing is low, and extends to margin fees, which are the lowest among the brokers surveyed this year. Interactive’s rates on cash are among the highest, making it an obvious choice for the cost-conscious. It, too, has a new Web-based platform.
MB Trading recently started offering direct access to foreign-exchange and electronic communication network technology, making it a good choice for currencies. David Lipsett, executive VP, says, “We have leveled the playing field in a previously inefficient marketplace.” MB’s forex platform has 28 currency pairs.
Options traders can create just about any multileg strategy they want at MB. The quote screen displays the option chain, showing all calls and puts for the expiration dates desired. The order action section can then be adjusted to allow an initial stock or option leg, plus up to five more legs. A smart order router gets price improvement on nearly half of all options orders, a very high rate.
Fees are low, and customer service is great.
TD Ameritrade took top honors this year in a very tight race with longtime champ optionsXpress. Barron’s evaluated the brokers on eight criteria, taking into account everything from trading processes to ease-of-use to costs to research.
LONG-TIME WEB-BASED favorite optionsXpress (http://www.optionsXpress.com) may have fallen back a fraction in this year’s ranking, but it merits four stars, as do three other Web-based brokers: Fidelity Investments, SiebertNet, and fledgling TradeKing. Wells Fargo’s online brokerage, with three stars, beats out Bank of America’s, which merited 2 1/2, in a battle of big banks promoting free trading.
As its name suggests, optionsXpress offers tools focused on options, but it also aids other sorts of trading opportunities. Screeners, strategizers and pricing calculators all help sort through options and excellent educational information is available.
There weren’t a lot of obvious changes to the site last year because the firm was focused on converting to self-clearing, which gives it more flexibility in routing orders, can help keep costs down and facilitates customized reporting. President David Kalt says self-clearing will be the firm’s engine for future improvements.
Still, the firm did introduce a universal account, allowing clients to trade all their asset classes under one umbrella and integrate a futures-trading platform into its site It also added a feature called Chart Patterns, permitting clients to find stocks that fit the technical trends they’ve specified.
Fidelity, which supports both a Web browser and a software system, has tools for customers who don’t venture into the stock market very often, as well as souped-up goodies for frequent traders.
Both the Website and the software have pre-condition features to let investors set conditions for buying or selling. One welcome enhancement is real-time balance and margin information. Fidelity’s Open Bond Market site was also enhanced, giving customers access to an expanded fixed-income inventory.
Muriel Siebert & Co.’s SiebertNet is in the midst of an overhaul. We were given access to the platform that will be introduced this month, and our rankings are based on this updated offering. The site has all the tax-reporting tools we’ve rated highly in the past, plus added trading functionality and options analytics. The options Strategy Builder automatically calculates debit/credit amounts, maximum gain, loss and breakeven points.
Multileg options strategies can be selected; a click on the Trade button leads you to a prepopulated order ticket. Siebert continues to offer a high level of account protection, a choice of high-yield money funds, and personalized service.
TradeKing says that it made 52 site enhancements in its first 52 weeks in business, and hasn’t stopped. You can’t trade anything exotic here, beyond the usual stocks, options, mutual funds and bonds, but rates are low and there are a lot of great tools.
We like the Profit + Loss Calculator, which enables members to chart the profit and loss potential of trades, and the check-box format for building multileg options strategies. The enhancements made to the technical-analysis offerings, and the wealth of educational material available are also key.
AS IMPRESSIVE AS MANY ONLINE-BROKERAGE products are today, the business still has its flaws, as was evident in last Tuesday’s major market meltdown. Some investors found their broker sites at best slow and at worst completely unable to handle trades amid record volume (see Barron’s Online for more). And no matter how great the tools, online trading isn’t worth the expense if the broker—and the trader—don’t bother with education. The “trade-now” mentality that many brokers encourage should be resisted.
And there’s one caveat about Barron’s rankings: The brokers with the highest-point totals aren’t always the best choices for you.
If, for instance, you don’t care so much about availability of mutual funds or bonds, but are keen to know about the best execution at the cheapest price, consult the scores for those categories and find your own personal five-star broker.
Whether you’re choosing a new broker or evaluating your current one, there are more changes coming this year. Prices, say most execs, can come down a bit further even if they don’t drop as steeply as in recent years. And the kind of consolidation that brought TD Waterhouse and Ameritrade together is likely to continue, with the possibility of at least one more big deal in 2007.
Everyone should expect to be asked for more information when requesting a cash transfer or to place an order that’s outside their usual pattern: Security on financial transactions is going to tighten further. E*Trade has already added a cash-transfer security measure that requires a customer to wait for an e-mail with a unique confirmation number.
Over time, software- and Web-based brokers may start to look more alike. Brokers of both types need to grow and, increasingly, they’re stepping onto one another’s turf. Because all of these platforms are improving so rapidly, individual traders have one sure bet: It won’t be long until they have access to tools that only professionals use today.
Published in Barron’s, March 5, 2007