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 (http://www.interactivebrokers.com) to 8.5% at Schwab (http://www.schwab.com), with most in the 7.5% to 8% range.
Peter Gschweng, vice president of Firstrade(http://www.firstrade.com), 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 (http://www.choicetrade.com) 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 (http://www.just2trade.com), 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 (http://www.sogotrade.com) 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 (http://www.lightspeed.com), 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.”
ADDITIONAL EDUCATIONAL RESOURCES are a theme at quite a few brokers.
Michael Curcio of e*Trade (http://www.etrade.com) 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 (http://www.siebertnet.com), 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’ (http://www.fidelity.com) 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 (http://www.zecco.com), 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 (http://www.optionshouse.com) 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 (http://www.optionsxpress.com), 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 http://www.barrons.com on March 16, 2009.
Published in Barron’s, February 23, 2009.