Saturday, June 30, 2007

Pick Your Own Online Stock Sherpa

Working Title:  Beat the Cheat

A FEW WEEKS AGO, a stock-market trading contest run by TheStreet.com was found to be compromised—i.e., some participants were cheating. So the game, called “Beat the Street,” was cancelled and the prize money withheld. The provider of market news and commentary then started up another round of the game on June 13 (beat.thestreet.com), throwing in the original $100,000 prize money to create a grand prize of $150,000 for the second tourney. TheStreet.com also said it had added new safeguards that would make it impossible to trick the results this time around.

Cheating in a trading game? It’s like finding out that the apple pie was made with crackers. Stock-picking tournaments, which Barron’s also runs, are great ways to learn about high-risk trading strategies without losing any of your own money. But they’re no fun when your rivals have found holes in the contest’s rules that give them an unfair advantage.

I came in second in an investing game a few years ago, and enjoyed the rush of competition immensely. It was also educational to see what other contestants were doing, and to learn from their successes and failures.

Several online-brokerage sites allow traders using real money to give others a peek at their strategies. TradeKing (http://www.tradeking.com) customers, for instance, can set themselves up as “Certified Traders” and the firm will publish their actual transactions on the site’s “Community” section. However, the certified trades include only those executed at TradeKing, so customers trading with other brokers can show only a portion of their activity.

ENTER COVESTOR (http://www.covestor.com), which opened its virtual doors on June 5. Covestor is designed to enable individual investors to view the portfolio allocations of others—and to follow in the path of those who enjoy successful outcomes.

Stock-picking games like those run by TheStreet.com display fantasy trades, but at Covestor you see real trades, documented by brokerage records. Members’ names don’t have to be displayed for all the world to see, but to sign up for an account, they must provide proof of identity and upload brokerage statements to verify their actual holdings.

Rikki Tahta, co-founder and chairman of Covestor, explains: “We all know people who are managing their own money, and doing a great job. Our research shows there are tens of thousands of unsung heroes and millions of others who would be keen to invest alongside them.”

After an account is created, Covestor logs that member’s trades and holdings—using a secure link into his or her brokerage account, or accounts. The link is provided by Yodlee, an account consolidator that we’ve written about many times. Those who don’t want to link their brokerage accounts can enter their transactions manually. Covestor checks these entries periodically against paper brokerage records to assure accuracy. Other members, or “followers,” can then track the real-time investments of those who share their investment goals.

All of the participants can opt to publish their real names or remain anonymous by selecting screen names. It might be hard to give much credence to the financial acumen of “bigdaddy69,” so it would be a good idea to pick a moniker that doesn’t scream goofiness. Actual trade sizes are not disclosed, merely the item purchased and the price.

Covestor could give a marketing push to some small investment managers by publicizing their picks, but it would be difficult to calculate an actual portfolio return without knowing the size of a particular investment.

Should you become a Covestor member, each time you execute a trade you will be invited to give the rationale for your move. Covestor will then build you an auditable, time-stamped record of your decision-making and will track your returns.

Within a year, says co-founder Perry Blacher, members will be able to sign up to follow the trades of their favorite Covestor Sherpas. That will entail a fee for what is now a free service. And here’s where it gets more interesting. Covestor plans to partner with several online brokers that eventually will allow members to sign on with high-performance money managers of their choosing. These guides will essentially run separately managed accounts for their followers. This service also will require a fee, most of which will flow to the adviser, thus rewarding those who have created the biggest online following.

Blacher says that a verified track record will start with the existing holdings in your account. Owing to the rollout of these additional services in a year or less, it pays to sign up relatively soon to start creating a successful track record, he notes. The firm is also still working out some regulatory issues.

We’ll check back on Covestor in a few months to see if it’s taken off.

ONLINE-BROKER NEWS: Advanced Chart Patterns are now available to all optionsXpress (http://www.optionsxpress.com) customers, allowing them to search for bullish, bearish and other trends among thousands of securities, using real-time data. Investors can access 36 technical trends from the familiar, such as Double Bottoms, Head and Shoulders, Moving Average Crossovers and Breakouts, to the more esoteric, such as Bearish Symmetrical, Continuation Triangle or Descending Continuation Triangle. The charting-pattern software is provided by Recognia.

COMING SOON: A series of regulatory initiatives designed to modernize and strengthen the National Market System for equity securities, brought to you by the Securities and Exchange Commission, is due to be implemented for 250 stocks (100 NYSE, 100 Nasdaq, 50 Amex) on July 9. Full compliance with the Regulation National Market System (Reg NMS) is scheduled for Aug. 20.

Most of the changes won’t be visible to the retail trader’s eye, but trading centers have been extremely busy getting ready over the past couple of years. They are required to make a serious effort to avoid executing trades at prices inferior to protected quotes displayed by other trading centers, which means trades ought to execute at the best price available when your order was entered.

Quite a few market centers are setting up “dark pools,” or inventories of stock to be sold outside the NMS. How will this affect you? It should not be of much significance to the smaller retail trader, but we’ll let you know if that changes.

Published in Barron’s, June 25, 2007. 

Posted by twcarey on 06/30 at 04:57 PM
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Sunday, June 17, 2007

A Shiny, Trendy Tool Kit

VANTAGEPOINT’S INTERMARKET ANALYSIS Software brings an intriguing, albeit somewhat pricey, tool kit to the short- and intermediate-term trader.

The package analyzes individual markets both individually and in relationship to 25 related markets. Its goal: provide trend forecasts, based on the relationships between these markets.

According to the publisher, Market Technologies (http://www.tradertech.com), VantagePoint predicts short-, medium- and long-term moving averages for up to four days in the future, using the pattern-recognition capabilities of neural networks.

Then, VantagePoint computes a crossover leading indicator, based on the difference between the predicted moving average and today’s actual moving average. Changes in the value of the crossover indicator from one day to the next can help you determine if the market will be choppy, maintain its trend or change direction.

THE DATA IS PURCHASED from third parties. During our test, we used the Commodity Research Bureau (CRB), which provides end-of-day quotes on commodities, stocks, mutual funds, financial indexes, futures, options on futures, major markets, commitments of traders and fundamental data. The CRB charges $25 per month, plus a $60 setup fee, or $300 for a full year, with no setup fee. Other data providers are Commodity Systems and Genesis Financial Technologies.

What I found intriguing comes from my background in econometrics and my joy in solving simultaneous systems of equations. VantagePoint crunches stock, commodity and currency information to generate intermarket analysis, analyzing the relationships between markets and how one might impact the other. If you’re studying one particular market, say heating oil, you can look at reports that are based on the 25 markets that affect it.

THAT SAID, VantagePoint isn’t touted as a trading system. Instead, it shows what the various indicators are predicting the market will do over the next few days. Each user must decide how to apply this knowledge; the program’s goal is to complement one’s strategy, not replace it.

Founder Louis Mendelsohn released the original version of VantagePoint in 1991, so this isn’t a new product by any means. I saw an early version in the mid-1990s, but didn’t review it because the data integration was both difficult and expensive. That’s changed, thanks to high-bandwidth Internet connections.

To allow intra-day forecasts, VantagePoint aims to incorporate real-time data into the program by the end of the year. The current version, 7.09, was released in January 2007. Version 8 is expected during the fourth quarter.

The program is offered in categories, such as health care, financials, technology and basic materials. The Foundation Package will set you back $3,900 for one category; additional categories can be added for $2,500 each. Fees are charged once and include a year of support. Additional support is $249 a year.

CONTINUING OUR COVERAGE of the very quiet conversion of accounts from TD Waterhouse to TD Ameritrade (http://www.tdameritrade.com), we found that the main complaint lodged was the sudden disappearance of Goldman Sachs research. TD Ameritrade spokesman Jim Frowley said that the Goldman contract went through a re-evaluation, and that it will go live again for retail customers on June 12.

According to Frowley, the research was brought back to TD Ameritrade’s institutional customers fairly quickly. He adds that TD Ameritrade will be able to keep the research at least until the end of the year.

E*Trade (http://www.etrade.com) is giving its Power E*Trade Pro users a new quoting tool called Market Depth. This tool includes free access to Nasdaq TotalView and Nasdaq OpenView, which replace Level II quotes. TotalView provides access to every quote and order at every price level in the Nasdaq Market Center. OpenView offers full order-book depth for NYSE and Amex market makers.

Says E*Trade spokeswoman Tina Martineau: “For customers, the value of Market Depth is that they will be able to see every market maker involved in a stock. Also, the Market Depth graph and the momentum bar provide customers with visualization of what they previously had to conceptualize with the data on Level II.”

Published in Barron’s, June 11, 2007.

Posted by twcarey on 06/17 at 02:09 PM
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Saturday, June 02, 2007

TD Ameritrade's Quiet Consolidation

A SURPRISING THING HAPPENED OVER THE WEEKEND of May 12 when 2.7 million one-time TD Waterhouse accounts were converted to the TD Ameritrade (http://www.tdameritrade.com) platform.

Virtually nothing.

That’s news because the Electronic Investor’s experience with account changeovers has shown them to be filled with pain and misery. Our e-mail inbox has at times been stuffed to overflowing with investor complaints as online brokers muddled through the process. But this is TD Ameritrade’s eighth consolidation of another firm’s customers, and it seems to have gotten the job done right.

We did hear a few murmurs, mainly about the processing of dividends that were paid within a day or so of the conversion. The dividends were sent to TD Waterhouse’s previous clearing firm, ADP, so they didn’t show up immediately in the newly converted accounts.

Kim Hillyer, TD Ameritrade’s manager of communications and public affairs, says that all those dividends were in the correct place by May 21. “We allocated 18 months for the conversion, and it only took 15 months,” she adds.

There was a notice on TD Ameritrade’s Website for a few days after May 12, indicating that call volume to its phone support lines was way up, and letting potential callers know that they might have to hold for a while. Hillyer says that most calls were queries about navigating the site, and a few involved a minor glitch in processing online cash transfers. “This was a new site for legacy Waterhouse customers who hadn’t seen it yet,” she notes.

A couple of clients were upset about changes in service. Former TD Waterhouse customers who don’t qualify for TD Ameritrade’s Apex service level (over $100,000 in assets in all accounts) must pay $2 per month if they want their statements sent via snail mail. In addition, TD Ameritrade doesn’t generally give its clients access to initial public offerings; that was a major draw for many TD Waterhouse customers. Hillyer says that the firm is evaluating the possibility of offering access to IPOs.

With the biggest conversion in online broker history now complete, what’s next for TD Ameritrade? The firm is getting ready to launch some new tools over the summer, aimed at both long-term investors and frequent traders.

“We’re really pleased by how it’s turned out,” said Hillyer. “It’s done and now we move on.”

Tool for Trend Trackers

Interested in market timing? VectorVest (http://www.vectorvest.com) offers an interesting package of analysis, graphing and sorting that can help you pick stocks on the move. To be honest, the firm’s Website looks like a direct-mail piece and is therefore off-putting. But if you can get past that, you’ll find a suite of stock-picking and back-testing tools that can help you develop your own trading system.

We looked at VectorVest Online, which lets you analyze the U.S. markets. There are also versions focused on Canada, the U.K. and 10 European markets; an Australian version will launch over the summer. The product uses end-of-day trading data, but the firm plans to offer real-time processing during the third quarter.

The opening page shows the prevailing market trend and is designed to read like the front page of a newspaper—albeit one where the big story is timing the market. The first thing you see is Color Guard, which is a dial showing the current state of the market. If the needle points to red, customers are advised to get into cash. If it’s tilting to green, VectorVest says it’s time to get into the market, while yellow suggests caution when buying or selling stocks.

The site calculates various market timing indicators, assessing a stock’s value, safety and whether it’s time to buy or sell. VectorVest tracks 8,000 U.S. stocks, and its UniSearch tool lets you dig through the information and locate stocks that fit certain technical criteria.

VectorVest issues a Buy, Sell or Hold rating on each stock in the database every day, based on a combination of fundamental and technical studies. A graph of a particular stock shows the price and a recommended stop price; at the bottom, timing indicators are displayed. Sell signals are typically generated when the stock-price line drops below the stop level. Buy signals integrate fundamental data and, as a result, are more complicated.

You can test the program yourself for $9.95; a subscription costs $59 per month or $645 per year for each product. You can add products—say, Canadian equities—to a U.S. subscription for another $20 a month.

Posted by twcarey on 06/02 at 03:51 AM
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