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Saturday, August 04, 2007

For Once, a Favorable Exchange Rate

DIRECT-ACCESS ONLINE BROKER TradeStation Securities recently added foreign-exchange trading to its platform’s capabilities. It’s a nice complement to what already was a very powerful program for creating and testing strategies: The upgrade means customers can now develop and execute their own strategies for trading equities, options, futures and forex pairs on the TradeStation site, with access to up to 34 years of historical data.

In the past, some institutional investors would use TradeStation’s (http://www.tradestation.com) technical analysis to develop their own trading strategies and then back-test them using its historical data before executing their actual buy and sell orders elsewhere. But, with the release of version 8.3, they don’t have to leave: The capacity for anyone to trade—at what seem like decent prices—is built right into the software.

One of the key components in testing is an accurate strategy-performance report. That aspect of the program has been overhauled, with more information specific to foreign exchange, such as the computation of a rollover credit for currencies held overnight.

You can create a strategy that will enter a trade based on events, either in the foreign-exchange market or in other markets.

For example, the system allows you to execute a trade automatically when the price of the Nasdaq 100 tracking-stock QQQQ hits a predetermined level. Then you can define your exit point based on a specific profit target. The trades will occur whether you’re online or putting your exchange-challenged dollars to work in a pricey Paris boutique. Don’t worry: You also can set your account up so that you manually approve each trade before it’s executed.

Data is provided in real time at no additional charge, and the base currency for the display is set by the customer. For example, if your account is funded in dollars, the calculations are in dollars even if you’re trading other currencies. If you open an account in euros, it will be set up for euros. Your stop losses and profit targets are also defined in your base currency.

Extremely active traders have long favored the forex markets for, among other things, their liquidity and round-the-clock opportunities. TradeStation President Salomon Sredni says, “Forex is the most liquid market in the world, and one that appears to be growing for individual traders in the U.S. and abroad.”

Typically, forex brokers don’t charge an explicit commission, but they are effectively trading against their own customers. That’s because they’re displaying a much larger spread between the bid and ask prices than the actual market spread quoted by banks. The broker will absorb the smaller market spread but then base the customer’s order on the wider one. This levy can lop off as much $30 to $100 per trade.

TradeStation’s new platform takes a different approach. Its pricing plan offers tighter spreads, which appear to run $10 to $15 per 100,000 units for the most liquid currency pairs (the actual unit, or deal lot, size will vary with the currencies being traded). The firm also charges an up-front commission that ranges between $5 and $8.14 per 100,000-deal lot.

As a result, the customers get to trade forex pairs at lower cost, while automating their exit strategies.

Trades are executed through an independent foreign-exchange-services company, GAIN Capital Group (http://www.gaincapital.com), which acts as the counterparty for each transaction and as a liquidity provider to clients using its access to the interbank market.

You can also place orders manually, rather than relying on an automated strategy. This process can be streamlined by using hot keys, such as pressing F9 to enter a market buy or F10 to enter a market sell. The functionality is the same as for the stock, options and futures platforms, says product manager Aaron Walters. “It’s the same product across the board, no matter what asset class you’re trading.”

TradeStation’s software runs on Windows or Intel-based Macs with cross-platform systems such as BootCamp.

The platform costs $99.95 per month, plus real-time exchange fees that depend on the data you choose to access. (Forex data is free, however.) The platform fee is waived for traders who place orders for 10 or more round-turn lots or 100 round-turn mini-lots. Other fee waivers exist for active stock, options and futures traders as well.

The platform fee includes access to all of the TradeStation analytics and data feeds, plus access to OptionStation, which is an extremely powerful options-analysis program. TradeStation’s fees were much higher a year ago; even if your trading activity doesn’t get you the platform for free, the analytical power and data feeds are reasonably priced—a bargain if your trading is profitable.

PENNY PRICING of options update: The Securities and Exchange Commission announced in June that early results from its Penny Quoting Pilot program, which launched at the end of January, suggest that the new system will lower trading costs for retail trades. (See “The New Penny Options,” Barron’s Dec. 4, 2006.)

We expected that result for the limited number of options included in the pilot—but several online brokers have told us informally that they’re seeing drops in trading volume for those options’ underlying shares. The smaller spreads may mean market makers are avoiding those options.

Traditionally, options are priced in increments of a nickel, which means that a one-tick shift in price changes the overall cost of a single contract by $5. (Each contract gives the holder the right to buy or sell 100 shares of underlying stock.) Cutting the increment to a penny is intended to make a one-tick change alter the price by $1. The net result should be a cost savings to investors, as well as an opportunity to turn a profit on smaller price moves.

The pilot program was originally intended to last for a year or so. The SEC is now considering expanding the trial to include additional options while it decides whether to make penny pricing the standard.

So we thought we’d ask you, Barron’s readers, whether the availability of penny options has made a difference in your trading habits. Have you been trading penny-priced options over the last six months? Let us know about your experience via e-mail at electronicinvestor@yahoo.com
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Published in Barron’s, July 30, 2007.

Posted by twcarey on 08/04 at 08:00 AM
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