Saturday, July 25, 2009

Brokers Enjoy a Productive Summer

What’s new at TD Ameritrade, and Lightspeed. Plus, the SEC begins probing dark pools.

THOUGH IT’S SUMMER, THE MAGICAL ELVES WHO keep online broker sites up-to-date are hard at work. Here are a few of their new offerings.

TD Ameritrade ( wasted little time incorporating technology created by recently acquired thinkorswim ( into its platform. The purchase closed on June 11, and on June 27 a small group of TD Ameritrade customers was invited to try out the thinkorswim release for TD Ameritrade clients. The software will be offered to customers on a rolling basis over the summer.

I was concerned about the pace of innovation at thinkorswim once the firm, co-founded by Tom Sosnoff, now senior VP of TD Ameritrade’s Trader Group, was absorbed. The release notes, sent to thinkorswim customers, take a cheeky swipe at the doubters, saying: “And you thought we were done. Some of our developers were thinking that this little acquisition meant it was going to be a summer of mashing buttons playing World of Warcraft with a case of Red Bull and Domino’s Pizza on the speed dial. Sorry, kids. The game is still on, and the playing field just got bigger. Get your helmet on, because genius never sleeps. And it’s scalable!”

Thinkorswim spiffed up its charting application, adding features such as Fibonacci time ratios, Fibonacci time extensions and vertical time levels—graphical tools used to predict price changes. Keyboard shortcuts were added for Mac users. Those who want a sound to play when an alert is set off can now customize those noises. And you can now set up templates to allocate a trade across multiple accounts. All the details are listed at

The Vanguard Group, which allows retail investors to trade mutual funds, stocks and ETFs at, has integrated Scivantage Maxit to provide automated cost-basis reporting and tax-management capabilities. Maxit allows investors to track capital gains, generate an IRS Schedule D for tax filing and manage investment tax decisions.

Maxit is a terrific tool for creating customized tax reports for realized and unrealized gains and losses, not only for mutual funds and stocks but also options and bonds. The program makes automated basis adjustments for corporate actions, including complex voluntary actions, and can also identify and adjust for wash sales. TradeKing ( and OptionsHouse ( have offered Scivantage Maxit to their customers for several years.

Interactive Brokers ( recently launched stock trading on the National Stock Exchange of India. IB has had access to Indian futures and options since the spring. Commissions for Indian stocks are five basis points per transaction (with a minimum of 75 Indian rupees, or about US$1.55), plus securities-transactions costs, exchange charges, stamp duty and service tax. IB’s Trader Workstation allows investors to view, trade and manage risk for multiple global asset classes from a single screen.

Another IB announcement addresses a weakness we’ve noted in several annual reviews of online brokers—portfolio analysis. IB has rolled out a beta version of PortfolioAnalyst that lets customers slice and dice their portfolios and view performance over different time periods. For advisors, brokers, managed funds and proprietary trading, the tool has the ability to view combined or separate accounts.

Says spokesman Andrew Wilkinson: “Essentially our plan is to create and give away for free the same functionality that is provided by third-party portfolio-management systems at a hefty price.”

Lightspeed Trading ( launched Lightspeed Forex last week, using technology developed by GAIN Capital, a global provider of online foreign-exchange services. Said Stephen Ehrlich, chief executive officer of Lightspeed Financial: “As the dynamics of the U.S. capital markets have significantly changed over the past several months, traders have begun requesting alternatives, including a foreign exchange offer, to diversify their trading strategies… .”

The GAIN Capital platform is a downloadable trading interface that can be customized extensively. It includes an order-management system, fast market data, and advanced charting functionality. Lightspeed customers can analyze and trade 38 currency pairs including the U.S. dollar, Japanese yen, euro, British pound, Swiss franc, Canadian dollar and Australian dollar.

Lightspeed clients can download a free trial of Lightspeed Forex at the following site:, and participate in forex-focused discussion groups within Lightspeed Spotlight.

Dark Pools Redux: Our column on dark pools ("Shedding New Light on Dark Pools,” June 29) generated quite a bit of reader feedback. So it is with great interest that we noted Securities and Exchange Commission Chairman Mary Schapiro’s testimony before the House Committee on Financial Services’ Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises. Dark pools, you’ll remember, are private institutional markets that trade large numbers of shares outside of normal stock exchanges. Anonymous participants can enter orders that, if matched by others in the pool, get executed.

Last Tuesday, she testified that the SEC staff has begun exploring transparency issues related to dark pools. Said Schapiro: “We have heard concerns that dark pools may lead to a lack of transparency, may result in the development of significant private markets that exclude public investors (through the use of ‘indications-of-interest’ that function similar to public quotes except with implicit pricing), and may potentially impair the public price discovery function if they divert a significant amount of marketable order flow away from the more traditional and transparent markets.”

I’m pleased to see that the SEC will be checking out dark pools with a focus on transparency. My main concern is that their existence removes a great deal of liquidity from public venues and may result in incorrect pricing. Good luck, SEC and Chairman Schapiro.

Published in Barron’s, July 20, 2009. 

Posted by twcarey on 07/25 at 03:19 AM
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Tuesday, July 14, 2009

SEC Chair says staff will "explore transparency issues" regarding Dark Pools

An excerpt from SEC Chair Mary Schapiro’s testimony before the United States House of Representatives Committee on Financial Services
Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises.  Her remarks are entitled, “SEC Oversight: Current State and Agenda,” and were delivered Tuesday, July 14, 2009. 

"In addition, our staff has begun exploring transparency issues related to markets known as dark pools. Dark pools are defined in various ways, but generally refer to automated trading systems that do not display quotes in the public quote stream. We have heard concerns that dark pools may lead to a lack of transparency, may result in the development of significant private markets that exclude public investors (through the use of “indications-of-interest” that function similar to public quotes except with implicit pricing), and may potentially impair the public price discovery function if they divert a significant amount of marketable order flow away from the more traditional and transparent markets. Given the potential risks posed by dark pools, the Commission will take a serious look at what regulatory actions may be warranted to respond to the potential investor protection and market integrity concerns that dark pools may raise.”

I’m pleased to see that the SEC will be checking out dark pools with a focus on transparency.  My main concern about these pools is that their existence removes a great deal of liquidity from publicly displayed venues, which may be resulting in incorrect pricing. 

Good luck, SEC and Chairman Schapiro. 

Full testimony at

Posted by twcarey on 07/14 at 11:39 AM
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Saturday, July 04, 2009

Shedding New Light on Dark Pools

Do dark pools pose a danger for retail investors?

JUST THE NAME SEEMS SINISTER. DARK POOLS of liquidity sound as though they belong in a Gothic novel, not on Wall Street. And indeed, many individual investors view them with apprehension.

What is a dark pool? It is a fluid, private institutional stock market that trades large amounts of shares outside of normal stock exchanges. Anonymous participants can enter orders that, if matched by others in the pool, get executed. The price of the trade has to be at or between what’s known as the national best bid or offer (NBBO).The total size is never disclosed. Although no one is quite sure, it is believed as many as 40 or 50 dark pools exist at any given time, run by big brokerages, major stock exchanges and independent outfits, among other sponsors.

Such pools allow big investors to move large amounts of stock without affecting pricing in the general public marketplace. Were they to sell the shares on an exchange, they would either have to accept lower bids from investors who can see they are selling, or break the transaction into tiny pieces, thus accepting lots of different prices and taking up a lot of time.

Dark pools negate transparency; they also provide pricing and other benefits to the biggest institutions that the small investor can never hope to see. As such, the Securities and Exchange Commission, under new commissioner Mary Schapiro, is considering forcing a little more light into this marketplace through regulation—if it doesn’t ban dark pools completely.

“Large institutional investors, on a pre-trade basis, don’t want to tell everyone what they’re doing,” says Tim Mahoney, chief executive of BIDS Trading, an industry-sponsored service for block traders. He adds: “Before you place a trade, the fewer people who know your intentions, the better price you’re likely to get.” Once a trade occurs, it is reported within 90 seconds, but it is hard to tell from reports where the trade was executed.

Taking the little guy’s side, Chris Nagy, managing director of order routing, sales and strategy for TD Ameritrade (, says, “I think dark pools are an excellent example of a market structure that gives institutions a way to prey on unsuspecting retail clients,” because they have more access to liquidity.

Not too long ago, almost all trading was dark, since there was no public listing of transactions. William O’Brien, CEO of DirectEdge, a market center based on automated-order matching technology, (, says the ability to trade a stock off an exchange has been around since 1979. “It used to be a cigar-chomping sales trader who would take calls from a select few clients and play golf with cronies a few times a month,” O’Brien says. He observes that during the last few years, off-exchange trading has become a lot more automated: “It has gone from a cigar-chomper to a server with a snazzy name.”

, no one disputes retail traders have come a long way in recent years. Today, they have access to price data and trading capabilities that only professionals had a few years ago, and much of that information is free.

Several online brokers, including Interactive Brokers ( and ChoiceTrade (, allow retail clients to enter orders in ways that mask their true order size. And online retail-broker Sogotrade ( routes customer orders to a variety of dark pools, including Credit Suisse’s version, Crossfinder. Sogotrade CEO Dave Whitmore says, “Our experience has been fantastic. We’re executing cheaper, my customers are getting good trades, and we’re able to keep our commissions low, at $3 per stock trade.”

Retail investors benefit in other ways, too. BIDS’ Mahoney notes mutual funds use dark pools, thus helping their individual-investor customers keep costs down.

Regulation NMS required brokers to route their orders so that trades are executed at the NBBO. Exceptions to the display’s provisions led to the creation of what we now call dark pools. The measure was passed in 2005, and implemented in 2007. It has had some important effects. One is that most NBBO prices visible on screens are for very small order sizes, like 100 to 500 shares. With large blocks of stock trading away from the visible markets—estimates range from 10% to 25% of total volume in heavily traded stocks—it is difficult to tell what the actual market price should be.

Although it is too early to say for sure, one worry is that, with large chunks of stock-trading occurring in dark pools, the spreads—the difference in price between the bid and the offer—will widen.

now are so many electronic bourses that the overall market is becoming very fragmented.

Adam Sussman, director of research at the TABB Group (, doesn’t think fragmentation affects retail players who are executing relatively small orders, say a few hundred shares at NBBO, and says retail clients are likely to get price improvement on their smaller orders: “Fragmentation is probably a positive, because there is bidding going on for liquidity providers, to get that retail flow.” As long as online brokers are doing what they should—negotiating terms to receive better executions in exchange for their order flow—retail traders should benefit. “Fragmentation is just another way of saying ‘competitive market,’ “ opines Sussman.

TD Ameritrade’s Nagy counters that there are a lot of transactions in dark pools that retail can’t interact with. “As you take volume out of the marketplace, of course you’re not giving that little guy any sort of transparency,” he says.

DirectEdge has applied to the SEC to become an exchange. Its Enhanced Liquidity Provider (ELP) offers access to non-displayed liquidity pools right in its smart-order router. So an order that utilizes ELP can access dark pools, while maintaining the possibility of getting filled on the exchanges as well, says O’Brien.

Providing complete information about orders routed to dark pools would require a great deal of regulatory oversight—which institutions and retail clients would probably rather avoid. Should it happen, my guess is that the institutional traders will find another way to keep their order information from being publicly displayed. ELPs, which sweep orders through both displayed and nondisplayed markets, appear to be the best solution for all players, given the current state of technology and regulation.

Published in Barron’s, June 29, 2009. 

Posted by twcarey on 07/04 at 11:24 AM
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