Saturday, October 27, 2007

Price Volatility: Brokers Adjust Fees

WHILE MOST STOCK MARKET PARTICIPANTS WERE ENJOYING the recent resurgence in stock prices or reminiscing about their painful decline 20 years ago, several online brokers were busy tweaking their price lists. Some went up and others went down.

OPTIONSHOUSE (http://www.optionshouse.com), which opened its virtual doors 10 months ago, has announced that it’s cutting its commissions for stock traders from $9.95 to $4.95 per transaction. Options trades remain $9.95 per sale or purchase; both stock and option commissions are flat rate, regardless of the number of shares or contracts traded.

Says CEO John Hass: “As we build the business, our execution costs for stocks continue to fall” and the price cuts should allow the firm “to be more widely recognized for our ability to provide good value for stock executions.” At the same time, Hass says that his firm is offering improved stock-trading tools, and wants to broaden its perceived expertise for those traders. “Our greater value-added, of course, will always be on the options side due to our Peak6 heritage,” he concedes,"but we think we have some value for stock traders as well.” Parent company Peak6 is an options market maker.

The flat $9.95 for options transactions is a pretty good deal, especially for traders of large volumes. Trading 20 contracts at rival optionsXpress, for example, incurs a $30 fee ($25 for frequent traders) versus OptionsHouse’s $9.95.

Another incentive that OptionsHouse has launched to draw in fresh accounts is 50 free trades for new customers during their first 60 days. “Anybody who joins through the end of this year will automatically be enrolled for the first 50 free trades,” says Hass. In comparison, E*Trade’s 100 free trades offered to new clients is good for the first 30 days only. Hass says he thought 50 trades in 60 days made more sense because it gives the new customer about one trade a day as she checks out the site. Newcomers will be credited for the commissions incurred at the end of the 60-day period, so they should be sure to have enough cash on hand to cover their costs up to that point.

ZECCO (http://www.zecco.com), meanwhile, has limited the number of free trades that clients can execute per month. When Zecco launched, in July 2006, it offered 40 free trades per month and charged $3.50 per trade thereafter. The new commission structure cuts the free-trade deal to 10 per month, and customers pay $4.50 per transaction, starting with the 11th. In addition, customers qualify for free trades with a minimum balance of $2,500; previously, there was no minimum requirement.

Investing-related discussion boards erupted with dismay after Zecco announced the changes. Some frequent traders moaned that the commission would take away all their hard-won profits. I would suggest that if you are making less than $4.50 on a trade, then you probably need to consider alternative ways of making money anyway.

Zecco says that it plans to use the additional revenue to enhance its site and to improve customer service. Based on Zecco’s dismal ranking in our 2007 online broker survey ("Tools of the Trade,” March 5)—the firm earned just two stars (with five being the highest) and came in dead last among the 29 brokers evaluated—we’d say that there’s no shortage of projects that the firm should fund with the added money.

TRADEKING (http://www.tradeking.com) just added several advanced order types to its trading toolkit; Contingent, Trailing Stop, One-Triggers-Other (OTO) and One-Cancels-Other (OCO).

An OTO trade lets a client enter an initial order and place a second that relies on filling the first. So you could, say, place a limit order to sell at your target-profit price on a stock that you’d previously bought. Using OCO lets you enter two orders simultaneously; when one is filled, the other is automatically canceled. For instance, you might want to create a system in which you take profits if a portfolio holding rises to a certain level or sell at a particular stop-loss price if it’s falling. This feature also works for stock-to-stock or stock-to-option trades. TradeKing charges $4.95 for stock trades and $4.95, plus 65 cents per contract, on options transactions.

IF YOU’RE IN THE MOOD for a little options education, check out OptionsXpo, sponsored by optionsXpress, this week in Chicago (Oct. 25-27). The Xpo costs $150 a day, or $295 for all three days. See http://www.optionsxpress.com/xpo/index.aspx.

Published in Barron’s, October 22, 2007

Posted by twcarey on 10/27 at 09:20 AM
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Saturday, October 13, 2007

A Mixer for Online Investors

THE IDEA OF AGGREGATING ALL OF AN INVESTOR’S accounts in a single spot isn’t new.

We’ve seen various aggregation products over the years and had reactions ranging from “That’s interesting” to “Well, hmm—not sure that’s gonna work.” These services let you enter your user IDs and passwords from different financial services such as investment and bank accounts and then review the complete spectrum of your financial holdings. You can also aggregate your accounts in a personal-finance program, such as Intuit’s Quicken or Microsoft Money.

But a newly launched Website, Cake Financial (http://www.cakefinancial.com) has taken the aggregation concept and leavened it with social networking. It’s currently in alpha test mode, which means it’s encouraging people to sign up and taste the batter, so to speak, prior to more formal testing. The idea is to allow investors to track the wisdom of crowds, which Cake’s founders believe will outdo many well-paid professional money managers.

Once you’ve signed up and linked in your accounts, a personal page offers an intriguing picture of your consolidated performance, which you can graph against various indexes—and other Cake members’ returns—over different time periods. Your actual dollar holdings are not publicly displayed, just the percentage each holding occupies in your portfolio.

For now, the service is free, and if your brokerage is among those supported by the site, it’s worth checking out. San Francisco-based Cake currently lets you import your portfolio history from Charles Schwab, E*trade, Fidelity, Merrill Lynch Online, SchwabPlan, Scottrade, Sharebuilder, Smith Barney, TD Ameritrade and Vanguard.

The downside? Right now, you can only import stock and mutual-fund transactions, and not all online brokers are included. Cake’s president, Steven Carpenter, hopes to add more, but if you’re a heavy options or fixed-income trader, Cake won’t cut it quite yet.

Getting started is simple: You create a username and password, and enter an e-mail account to verify your existence. Once you’ve got your account, you log on to Cake and tell it where your online brokerage accounts reside. I linked in several test accounts and found that it takes a minute to import the data from an account with few holdings and transactions, and about four minutes to bring in positions and transactions from more a complicated account.

Cake lets you find others with similar investing experience and styles, and allows you to add them to your network. You also can set up a group to discuss ideas. Comparing your portfolio’s performance to others’ can be fun—or depressing.

Members are ranked Gold, Silver or Bronze—depending on their returns; the superstars end up categorized as Elite or Platinum. If there’s a particular stock or mutual fund you’re considering, you can put it on your watch list and not only gauge its performance, but also learn how other Cake members who’ve owned it have fared.

Each member controls the amount of information others can view, choosing to display all or to restrict certain kinds. For example, you might choose to display your first and last name, holdings and trading activity to your chosen contacts, but bar members not on your list.

Carpenter says that Cake eventually will have some fee-based services, but that’s a ways off. For now, if your brokerage is supported, it’s a free way to gather more information and to generate more investing ideas. Can’t beat that.

PEER-TO-PEER LENDING: TWO WEEKS AGO, I discussed online affinity and lending ("Banking in the Age of Facebook,” Sept. 24), which generated quite a bit of feedback. Many readers pointed out that I neglected to mention a service that has been around since early 2006, Prosper (http://www.prosper.com).

Prosper has more than 430,000 members and $90 million in loans funded. It’s an open marketplace; borrowers and lenders set the interest rates in an online auction environment much like eBay’s.

Prosper’s president, Chris Larsen, noted in his commentary on August 2007 trends: “Lenders on Prosper are exhibiting rational behavior by steering their bids toward borrowers in the higher credit [-quality] categories and being far more cautious about chasing higher rates offered by subprime borrowers.” Sub-prime lending accounted for just 9% of overall volume this past August, down from the 25% in August 2006 and the year-to-date average of 14% for 2007. That just confirms the “wisdom of crowds.”

Published in Barron ‘s, October 8, 2007

Posted by twcarey on 10/13 at 07:21 PM
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Monday, October 01, 2007

Banking in the Age of Facebook

"Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry..."

IF YOU BUY AGED POLONIUS’ ADVICE to his hotheaded son Laertes, turn the page. This column isn’t for you.

But if you’re either a borrower or a lender, read on. We’re going to check out a new phenomenon known as peer-to-peer lending and look at the effects of some new rules for portfolio margining.

Combining elements of online affinity groups and investing sites, the Lending Club (http://www.lendingclub.com) recently progressed beyond its initial test phase. The venture-capital-backed startup is an online community that connects lenders and borrowers based on shared interests that can include geographic location, workplace or university. The idea is that this community allows borrowers to get better rates on loans than they’d receive from a traditional bank while giving lenders better returns than CDs or money-market funds offer.

Lending Club was launched privately as a Facebook application in May, signing up 15,000 members. About 1,000 loans were financed from a pool generated by 700 individual lenders during the test. CEO and founder Renaud Laplanche says, “It’s an investment class that has very interesting characteristics in terms of both risk and return, plus it gives lenders the feeling of doing something useful.”

Becoming a lending or borrowing member of the club requires filling out an online form that verifies your identity. As a lender you must link your Lending Club account to a bank account so you can transfer funds online. After your bank account is verified, which takes a day or two, and you’ve transferred money in, which takes up to four business days, you can lend.

Lending Club identifies its members only by a screen name. It runs a credit report on borrowers, checking income when necessary, and will approve only those with credit scores over 640.

An algorithm called Lending Match, which lets lenders come into the site and set their risk, geography and connectivity preferences helps structure the loan. Based on the algorithm, a list of 20 recommended borrowers—with loan limits running from $500 to $25,000, is generated. If you have, say, $10,000 to invest, you can spread it over 20 different borrowers in $500 parcels, creating a diversified portfolio that lowers your overall default risk.

Lending Club’s portfolio recommendations are based on credit score and certain category memberships (e.g., military personnel, MIT alumni, Florida residents). You can take the recommendation as is, or remove some borrowers, allocate amounts differently, or add other borrowers.

If borrowers miss a payment, Lending Club will contact them and assess a late fee payable to the lender. Those going into arrears are put into collection and barred from the site. There is no Federal Deposit Insurance Corp. backing for funds that have been lent out.

How much can you make as a lender? Laplanche says that the average annualized portfolio return would be about 11.5%—much better than most CDs or bonds offer. And having some funds allocated to consumer lending is a good way to diversify your portfolio beyond stocks and bonds, he says.

Lenders pay a 1% service fee, based on their monthly take, while borrowers pay a 0.75%-2% loan-origination fee plus the rate Lending Club calculates; it currently ranges from 7.12% (grade A1 creditworthiness) to 17.86% (grade G5).

The one limitation at present: You can’t be both a lender and a borrower simultaneously. But they’re working on it.

PROFESSIONAL TRADERS HAVE been taking advantage of updated margin requirements that went into effect in April, allowing more portfolio leverage. The new margins account for the effects of options in hedging a stock holding, which the old rules didn’t. As a result, the new rules permit brokers to be more generous in extending credit to traders in many cases.

Think of this as portfolio margining—reflecting all of a trader’s positions including options that offset the risk in a particular stock—rather than margining for individual trades. ("New Options for Traders,” Barron’s, Oct. 30, 2006). A less risky portfolio can be leveraged further.

So far, professionals, who have bigger portfolios and more expertise, are being extended most of the credit from brokers. “While I do have selected retail clients taking advantage of additional leverage, our standards are aiming more for the institutional clients” like hedge funds, says Douglas Engman, managing director for equities at Fimat Preferred, who’s pleased with the initial results.

Published in Barron’s, September 24, 2007.

Posted by twcarey on 10/01 at 12:46 PM
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