Saturday, February 28, 2009

New Moves for New Times

OUR 14TH ANNUAL REVIEW OF ONLINE BROKERS is under way, and one of the questions we are asking participating firms this year is: “What kinds of behavioral changes are you seeing on the part of your customers, given the current economic uncertainty?”

The answers varied depending on the type of customer each brokerage attracts.

ONE OVERALL TREND—less use of margin when trading. Those who trade on margin borrow money from their brokerage to buy stocks or options, and pay interest on that outstanding loan as long as they use it. Margin fees range from a low of less than 2% at Interactive Brokers ( to 8.5% at Schwab (, with most in the 7.5% to 8% range.

Peter Gschweng, vice president of Firstrade(, says, “Many investors have reduced their holdings altogether, but especially those holdings on margin.”

While several brokers reported their clients are becoming more cautious and holding more cash than normal, quite a few said their customers are taking advantage of the volatility in the markets and increasing their trading frequency while shortening the holding period.

ChoiceTrade’s ( chief executive, Neville Golvala, reports his firm’s active-trading clients are reaping the rewards of tumult, while the passive customers are trading and investing less.

At Just2Trade (, CEO Fuad Achmed sees a lot more trading. “Because of the market’s volatility, there is a movement toward short-term trading [holding a position for one to seven days]. ‘Buy-and-Hold’ is out,” he adds.

Dave Whitmore, president at SogoTrade ( notes that their DARTS, or daily average revenue trades, have climbed since Labor Day, but he also says that their firm has put a lot more into advertising since September.

Andrew Wilkinson, Interactive Brokers’ director of media communications and product education, says his firm didn’t see any unusual drop-off in volume in the fourth quarter of 2008, when the equity market declined. Wilkinson says, “One reason is that we offer a variety of exchange-traded instruments that more-educated clients can jump between to take advantage of moving markets.”

Customers of Lightspeed Trading (, according to CEO Stephen Ehrlich, are largely very strategic traders who employ technical analysis with their own specific trading strategies. Ehrlich says that while economic uncertainty and increased volatility have likely caused them to adjust their individual trading strategies and how they approach the markets, his customers are quite confident in their ability to adapt to, and trade in, all market conditions while continuing to use technical analysis and risk management when trading.

Ehrlich adds that what is particularly noteworthy is the increase his company has seen in the number of traders “utilizing the educational resources that we make available at Lightspeed.”

are a theme at quite a few brokers.

Michael Curcio of e*Trade ( says Web-seminar attendance was up by more than 50% in 2008 from 2007, and the number of Trading Education Days (live seminars) doubled, with attendance increasing 25% last year. Curcio also saw a sharp increase in enthusiasm for fixed-income investing, with trading volume in those products jumping 70% in the second half of 2008 when compared with the first.

Muriel Siebert, president and CEO of SiebertNet (, is another who has seen the current environment lead more customers to consider increasing their fixed-income investments. When discussing her customers’ behavior, Siebert says, “Some are standing pat, some are shopping for bargains, others have withdrawn or sought the greater security of money-market funds, Treasuries, fixed-income securities and/or cash. Some who have experienced deep losses are more focused on preservation of capital and income-generating investments.”

Fidelity Investments’ ( James Burton, president of Fidelity’s retail-brokerage business, says Fidelity’s customers are also taking advantage of expanded equity-research and back-testing tools for investors. Burton states, “Customers are actively using more advanced trade types, like trailing stops and conditional orders, to help lock in potential profits and assist with exit strategies as needed.”

Michael Raneri, chief information officer at Zecco (, says, “We are finding that our largest customer segments are still comfortable trading in a volatile market under the depressed economic conditions. Specifically, they use ETFs to trade broad market indices and commodities like gold and oil.”

He describes his firm’s customer base as “fiercely independent” and says they behave quite differently from the average investor, who may not get back into the market for another year.

SPEAKING OF BRANCHING OUT and adjusting trading strategies, CEO George Ruhana of OptionsHouse ( says, “Our customers have become far more concerned with market exposure and managing risk. They consider bearish spreads more than in the past.” He believes OptionsHouse’s customers take advantage of the firm’s risk-management tools and execution capabilities, which allow them to remain active traders.

At optionsXpress (, CEO David Fisher says his customers have turned to a more conservative investing style, including the increased use of hedging and the rotation to investing in multiple asset classes, like options and futures, from primarily being long equities. Fisher says, “They are using options and futures to execute well-thought-out, long-term strategies, and not simply speculating.”

So the picture, while grim, looks full of opportunity for online brokers who continue to polish up their online training and tools in order to keep customers engaged in the markets.

THE FULL RESULTS OF OUR SURVEY will be published in Barron’s and on on March 16, 2009.

Published in Barron’s, February 23, 2009. 

Posted by twcarey on 02/28 at 10:16 AM
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Saturday, February 14, 2009

What's the Best Tax-Prep Software?

FREQUENT TRADERS OF OPTIONS, COMMODITIES AND currencies who don’t have an accountant might want to start shopping for one in the next few weeks. They aren’t going to get much help from electronic tax preparers. “We figure those people are getting their taxes done professionally,” is the way one software maker’s representative explains the lack of advances aimed at derivatives traders.

That notable oversight notwithstanding, a lot has changed in tax-prep software in the past year. Publishers are trying to keep pace with the many changes in the tax code affecting first-time homeowners, investors and those who use their vehicles for deductible activities. All the programs we inspected contain tools to help these groups prepare their taxes electronically.

We put TurboTax Premier (, TaxCut Premium Federal+State+Efile ( and the budget-priced TaxACT Ultimate ( through their paces. All three give you the option of downloading the software to your computer or preparing your returns on their secure Websites; TaxACT’s downloadable version runs only on Windows PCs.

ROBERT GREEN, A CPA and tax guru to frequent traders, says that the IRS is working to close the “tax gap” by finding more unreported income, thereby boosting revenue without having to rely on Congress to raise tax rates or shrink deductions. A law passed in 2008 will require additional reporting of your average-cost basis and short-term versus long-term treatment on securities, so it will then be easier for the Internal Revenue Service to double-check net trading gain or loss reporting. This law, which affects the 1099-B forms that you receive from your broker, will be mandatory in 2011.

“This 1099-B rule change may actually help traders, because when there is noncompliance, the IRS mails jeopardy tax bills to traders, discounting all missing cost-basis information on 1099-Bs,” says Green. To check out his Website, Green Trader Tax, for advice and tips for frequent traders, go to

In the past three years, one of the main changes we have seen in the tax-preparation-software market is the massive push for e-filing, or electronic transmission of tax forms to the IRS. I am all in favor of filing pixels rather than paper, as it saves untold numbers of trees, plus it avoids a step that often introduces errors when a paper return is converted to electronic form for processing. E-filing can speed your refund, if you’re getting one. So I am pleased to see e-filing bundled with tax-prep software; that just makes sense.

TurboTax walked into a pricing pot-hole late last year when its initial product announcement said that e-filing would carry an added charge (Electronic Investor, Dec. 8, 2008). That set off a chat-room furor. TaxCut’s downloadable and CD versions for 2008 include five free federal e-files, so TurboTax ultimately followed suit. When you prepare your return online with any of these packages, you pay for a single return at a time, including e-filing.

TaxACT has a few interesting features, including its price—the Online Ultimate Bundle, which includes a state return and one free e-file, is only $16.95. For those with kids in college, TaxACT fills out the FAFSA (Federal Student Aid) form, which can save a lot of time.

This year, the publisher 2nd Story Software added a Donation Assistant to the program, which helps you track cash and other donations to charity; both TurboTax and TaxCut have had similar features for several years. The video assistance added to the program also is a big help, but it is still light on features for the frequent trader. If you are watching expenses and don’t mind forgoing a few creature comforts, TaxACT is a terrific deal.

of flavors, but the one of interest to investors is the Premier package ($49.95 online, $89.95 CD or download). The Schedule D preparation section covers stocks, bonds, mutual funds and employee-stock plans, but isn’t much help for currency traders. It treats options contracts as though they were stocks, and did a good job of dealing with several dozen options transactions that we imported. If you use TurboTax for a lot of options trades, make sure you go over the resulting form to see that the purchases and sales match up correctly.

We also like TurboTax’s ability to import data from a variety of financial institutions. If you can avoid data entry by importing transactions, that helps avoid errors. The streamlined interview and user interface are also pleasing to use, and we like the monitors that show your tax due or your potential refund for both federal and state on every page. The Mac download/CD version has some interesting features that can send reminders to your iPhone if you have to look up some data—say your offspring’s Social Security number—for later entry. Alas, TurboTax won’t work on any pre-Leopard Apple operating systems.

TaxCut Premium ($39.95 online and $49.95 for PC/Mac download) tosses in an estate-planning program, WILLPower, for Windows users, as well as free e-filing for up to five returns. The great thing about TaxCut is the support offered. You get one free conversation with a tax adviser during the tax-prep process, and help from H&R Block if you are audited.

Like TurboTax, the investing section copes well with stocks, bonds, mutual funds and employee-stock purchases. You can import transactions that include options, but TaxCut has difficulty making sense of large numbers of options trades.

Using a tax-prep program, even if you consult with a professional, is a great way to organize your paperwork. For frequent traders, the combination of TradeLog (, which is supported by Robert Green, plus TurboTax, should do the job. If you aren’t a frequent trader and stick mostly to stocks and mutual funds, any of these programs will do the job. The nice thing about the online versions is that you can get started for free and see how you like the interface. You pay only when you file.

Published in Barron’s, February 9, 2009. 

Posted by twcarey on 02/14 at 10:14 AM
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