Saturday, November 24, 2007

Empowering Foreign-Exchange Traders

THE WEAK DOLLAR HAS SAPPED THE STRENGTH from many U.S.-based currency traders and investors. No software package we know of is going to change that. But the developers at FX Solutions (http://www.fxsolutions.com) are at least giving frustrated retail clients more control over their online systems and some advantages that only banks have had up to now.

The new FX Solutions platform turns a lot of the management of content, look and feel over to the customer. Older versions of this platform, and some of its rivals’, required the user to ask the firm’s technicians to make changes like page layout or background colors. Now “we let our customers customize everything,” says Bill Lawless, manager of the company’s foreign-exchange sales. That’s “very important,” he adds, to “a global-customer base.”

The upgrade also enables one-click trading on the currency pairs you trade most often, which means you can preset the size of a trade. The designated pairs are highlighted with a user-specified icon such as a lightning bolt. One-click trading removes the “are you sure you want to submit this trade?” query that also permits the client to change the lot amount.

There are obvious dangers to one-click trading. Lawless says, “I caution people to stay near their computers if they have pets or children once they’ve enabled one-click trading. You might come back to your screen and find out you’ve got a few tickets open you don’t know about.”

We have noted previously that most forex brokers can’t generate custom-performance reports. FX Solutions has dodged this bullet by allowing clients to export reports created by the platform to Excel, which can then be customized.

Among its other enhancements: improved news feeds and graphing capabilities, as well as a trading-premium calculator that totes up the cost of a trade and the effect of a one-pip (usually one one-hundredth of a percent) price move. The calculator shows the interest rate you’re paying on margin based on your account’s leverage setting and the margin requirement for the trade you’re considering.

The firm does not charge explicit commissions; like most forex brokers, it makes money on the spread between the bid and asked price. But unlike most forex brokers, FX Solution’s spreads are fixed for each pair. Lawless says some brokers widen the spread when a trader is closing a position, especially if the transaction has gone against the broker. “The only reason brokers will widen the spread is to protect themselves,” he says. “When you’re dealing in retail FX, fixed spreads keep people more honest.”

A sizable download is required before installing the program on a computer. But afterward, a helpful feature allows you to check out the health of your Internet connection to FX Solutions’ server. If the connection breaks during the trading day, the health meter pops up automatically.

Lawless says the firm’s goal is to provide the fairest game in town—even if the dollar isn’t helping much.

COMING SOON TO FIDELITY’S SITE: a way to backtest a stock-trading strategy free of charge—even for non-customers. This perk will be available after the first of the year, in conjunction with the release of Fidelity’s super-charged testing program, Wealth-Lab Pro, aimed at frequent traders. We’ll be reporting on both tools later.

E*TRADE MELTDOWN: Following a warning about larger-than-expected mortgage-related securities write-downs, a Securities and Exchange inquiry and an analyst downgrade that mentioned a run on its deposits, E*Trade Financial lost half its market value early last week before recovering a bit of it. Still, the big drop prompted some E*Trade customers to wonder whether they should jump ship.

E*Trade says the discount broker and banking operation is in no danger of insolvency. Corporate Communications Vice President Pam Erickson said in an e-mail: “We take exception to the sensationalism based on unfounded speculation,” referring to the Citigroup report that shook investors. She added: “Customers’ money is safe.”

Sandler O’Neill principal Richard Repetto says customers should “generally remain calm. The broker is insured by SIPC customer insurance and the bank by the FDIC. Customers with balances above the levels covered by the insurance should not panic as [E*Trade] has alternatives to fund and support their bank and broker.”

SIPC insurance covers up to $500,000 in securities in each customer account (the firm also has insurance beyond that), while FDIC insurance covers up to $100,000 in cash and up to $500,000 for Extended Insurance Sweep Deposit Accounts. Though the immediate threat may have passed, clients with large sums at risk should always review their potential exposure in a crisis—at E*Trade or elsewhere.

Published in Barron’s, November 18, 2007.

Posted by twcarey on 11/24 at 12:26 AM
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Wednesday, November 14, 2007

E*Trade's Mortgage Losses Lead to Customer Exodus

A few days ago, a Citibank analyst put E*Trade’s stock (ticker: ETFC) on their “Sell” list, and went so far as to declare the firm a candidate for bankruptcy.  The stock price fell off a cliff on Monday, though it has recovered some of the ground lost in the last few days, and fired up takeover chatter once again.

The other activity fired up was the flight of customer assets.  Several competitors have been in touch with me this week to report a huge uptick in new accounts, primarily attributable to E*Trade customers getting their assets out.

I dropped into the local Fidelity office today, where a manager said that they have had over $150 million moved from E*Trade to Fidelity (http://www.fidelity.com) since Monday in the San Francisco Bay Area alone.  Nationally, he says the total is close to $1 billion.  ONE BILLION!  I was amazed by that figure. 

Don Montanaro at TradeKing (http://www.tradeking.com) says TradeKing is averaging 10 calls per hour since Monday morning from people identifying themselves as E*Trade account holders with concerns about their assets and who are looking for a safe place to put their money.  Nearly one-third of TradeKing’s online customer service chat sessions have been taken up by E*Trade customers looking for more information.  Callers specifically seem to be hunting for brokerages outside the sub-prime arena that will not cost them a large increase in trading fees.  And some clients holding both E*Trade and TradeKing accounts have already begun the process of transferring assets from E*Trade into TradeKing accounts.

At optionsXpress (http://www.optionsxpress.com), the new accounts desk is also extremely busy helping E*Trade customers move their accounts. 

So, hould E*Trade customers jump ship?

E*Trade officials say the discount broker and banking operation is in no danger of going bankrupt. Corporate Communications Vice President Pam Erickson said via e-mail: “We take exception to the sensationalism based on unfounded speculation,” referring to the Citigroup report that spooked the market.

Sandler O’Neill principal Richard Repetto said, “Customers should generally remain calm. The broker is insured by SIPC customer insurance and the bank by FDIC. I think the customers with balances above the levels covered by the insurance should not panic as [E*Trade] has alternatives to fund and support their bank and broker.” Repetto is saying that customers don’t have to worry about losing their assets above the SIPC/FDIC coverage level because ETFC will cover it and won’t go bankrupt.

SIPC insurance covers up to $500,000 in securities in each customer account, while FDIC insurance covers up to $100,000 in cash.

Posted by twcarey on 11/14 at 03:17 PM
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Saturday, November 10, 2007

Latest Research Class: Social Studies

IN THE EARLY 1990s, WHEN INVESTORS WANTED to gather online, they headed to discussion sites like Investor’s Forum on CompuServe or Motley Fool on AOL. My recollection of these venues is a lot of bragging and flame wars, with an occasional helpful tidbit thrown in.

Nowadays, there are dozens of online places to talk about trading and investments, ranging from old-fashioned misc.invest.stocks to broker-sponsored sites TradeKing and Zecco and on to social networking sites, such as two that Electronic Investor wrote about: Cake Financial (http://www.cakefinancial.com), in “A Mixer for Online Investors,” Oct. 8; and Covestor (http://www.covestor.com), in “Pick Your Own Online Stock Sherpa,” June, 25.

OR YOU CAN JOIN San Francisco’s Wikinvest (http://www.wikinvest.com), founded in 2006 by a couple of (what else?) Harvard roommates with the goal of creating the world’s largest investment research wiki. A wiki is a repository of community-generated information; the best-known example, of course, is the online encyclopedia Wikipedia (http://www.wikipedia.com), which has spawned its own language and social mores.

Wikinvest has about 250 articles with fairly in-depth information about companies, plus another 100 or so that detail various investing concepts. And there are hundreds of other articles, called “stubs,” that community members are working to flesh out. The site is free, and if you join, your literary contributions will net you community recognition, but no financial reward.

Company articles are divided into four sections—Neutral, Bulls, Bears and WikiChart—accessible by clicking on a tab near the top of the screen. The Neutral tab displays a corporate description, including an industry overview and the sectors in which the company competes. While viewing the report for Agilent Technologies, I noticed it was shown as a Nasdaq stock, although, in fact, it’s listed on the NYSE—so I hit the Edit button and quickly fixed the error.

The Bulls and Bears tabs offer arguments for positive and negative sentiment about the stock price, while the WikiChart tab takes you to a graph that can be annotated by the user to reflect news, earnings and other factors that the community believes might influence trading.

You earn points for every change you make on the site, such as editing personal information, contributing to articles or adding stock-chart annotations. The more changes, the more points you generate—if the changes endure, that is. Other Wikiinvest members can either allow them to remain or revise them if they see errors or shortcomings. If the additions stay, your reputation—as measured by increasingly august titles and more featured spots on the pages—grows; if not, your reputation suffers. The most accomplished Wiki writers become Senior Directors. Of course, the warm, fuzzy feelings generated by all this recognition—and $4—will get you a cup of coffee.

If you’d like to generate some income from your analytical prowess, check out TheUpDown (http://www.theupdown.com), a relatively new site that combines social networking with a stock-picking competition. Once you’ve set up an account at TheUpDown—a process that takes about 20 seconds—you have $1 million in fake money to play with. If your portfolio’s monthly performance beats the S&P 500’s, you win real money. Each transaction you make in your portfolio ends up costing you $100 in fake commissions, which should discourage frivolous trading. You can also get paid by supplying the site with an insightful stock analysis (tip to Barron’s columnists: perhaps you can make a little mad money on the side here) or by referring new users. The site itself is free, and is supported by advertising.

IF YOU’RE A FREQUENT OPTIONS trader interested in lowering your commissions, pay heed. Interactive Brokers recently moved to an “unbundled” options-pricing model, which charges 15 to 70 cents per contract, plus exchange fees. Says Managing Director Steve Sander: “The options exchanges are experimenting with different pricing structures, and we want to pass through the costs, as well as the rebates, that are now being passed back to brokers.”

Sanders says that most exchanges still don’t charge extra for stock-option trades, though there is a surcharge for index options. As a result, he argues, the fairest pricing model is “cost-plus,” which reflects the varying underlying costs, rather than a flat rate system that doesn’t.

Published in Barron’s, November 4, 2007

Posted by twcarey on 11/10 at 03:15 PM
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