Sunday, January 31, 2010

Has a New Price War Broken Out in Online Trading?

Analysts argue that firms like Schwab are lowering commissions to remain competitive while building up assets.

WHEN CHARLES SCHWAB RECENTLY reduced its fees for online trading in stocks and non-Schwab exchange-traded funds to $8.95 per trade from $12.95 per trade, many wondered if this move signaled the start of another round of online-broker price wars.

Prior to the change, which was implemented on Jan. 19, Schwab had had a tiered pricing structure. Retail clients who were considered active traders, or who held more than $1 million in household assets, paid the $8.95 rate for several years.

According to William Blair & Co., a market maker in Schwab stock, the pricing change is targeted at a specific customer segment—retail clients with less than $1 million in household assets, bringing this segment in line with the company’s existing pricing scheme for more affluent clients and active traders.

Blair’s analysts, Mark Lane and Katherine McCauley, say that, “We view these actions as a refinement and not the start of more intense price competition. While we believe there will continue to be modest pressure on pricing over time and our models reflect this pressure, we view online equity trading commissions as largely at a point of indifference.”

However, Jason Raznick, who serves as a director at Benzinga.com and Investimonials.com, two Websites that offer stock trading ideas and financial product reviews, believes that price competition is becoming increasingly fierce between various firms. “The revenue model at these companies appears to be shifting from commissions to selling order flow to larger brokerage houses and amassing more assets,” he says.

Looking ahead, Raznick says that this trend is unlikely to abate in 2010 as firms find it necessary to lower prices in order to remain competitive. “Under such circumstances, the need to gather more and more assets and steal market share becomes more important than ever,” Raznick asserts. “Brokers that are losing this battle will likely need to pursue consolidation by selling themselves to another firm or attempting to acquire competitors in order to increase their asset base.”

Raznick notes that “bare bones” brokers such as SogoTrade (http://www.sogotrade.com) charge as little as $3 per transaction. Dave Whitmore, president of SogoTrade, sees the commission price cuts as beneficial to the industry as a whole.

Whitmore says that brokers like Schwab (SCHW), Fidelity, and E*Trade (EFTC) have had high commission structures, and points to TD Ameritrade’s price cut to $9.99 per trade a few years back as a turning point for the larger firms. He points out that SogoTrade’s fee of $3 per trade, while offering many of the same services and functionality of other brokers, should prompt consumers to step back and ask themselves what they are really paying for.

Wade Cooperman, CEO of tradeMonster (http://www.trademonster.com) says, “If it’s good for the investor—and low easy-to-understand commissions are—we welcome it.”

Stephen Ehrlich, CEO of Lightspeed Financial (http://www.lightspeed.com/) believes that today’s active and semi-active traders are sophisticated enough to know that there’s more to choosing a broker than simply which is offering the lowest commissions. “If your trading platform is subpar or educational resources have been pared back or eliminated then cheap trades suddenly don’t mean as much,” Ehrlich says.

Steve Sanders, a vice president at Interactive Brokers (http://www.interactivebrokers.com), believes that Schwab’s new fees still make no sense for active traders or institutions. IB moved to a transparent unbundled-pricing structure a number of years ago whereby the firm explicitly charges (or rebates) exchange and clearing fees, and charges an IB fee based on monthly volume. “The more you trade the less you pay under IB’s structure,” Sanders says.

He notes that IB’s pricing for 100 shares is $1 or lower, and that the average trade size these days is 200-400 shares, even for institutions, as nobody likes to expose their trading intentions. Sanders says, “200 shares still costs $8.95 at Schwab, which is OK for the occasional investor, but not for the active trader.”

Different brokers have different ideas about why investors and traders switch platforms. SogoTrade’s Whitmore says, “Value is becoming very important to active traders. In a recent survey, SogoTrade found that price was the most important reason among traders to switch to another brokerage.”

Lightspeed’s Ehrlich notes, “In the second half of 2009 alone, more than 30% of new accounts opened at Lightspeed where traders who had come from one of the traditional online brokers, this was up from the single digits for the entire year in 2008. Lightspeed attributes this uptick to its continued commitment to its trading technology, education, and client service.” Over at tradeMonster, Cooperman states, “In addition to low commissions, though, a proactive investor needs a potent mix of intuitive trading tools, embedded education and a customizable platform to succeed long term.”

The $8.95 rate puts Charles Schwab right in the middle of the pricing among the 30 or so brokers we follow regularly in The Electronic Investor. It’s not an earth-shaking price change, but it’s interesting to see one of the big players hit that level. E*Trade and Fidelity continue to have tiered pricing. To me, the big signal is that different prices for different types of customers might come to an end.

It appears to me that Schwab’s peers and competitors have interpreted their pricing change as a positive move overall, putting their fees more in line with the rest of the world rather than marking a new low. Will it spur Schwab’s customers to place more trades? Or entice customers of Schwab’s competitors to switch over? We’ll check back and find out.

Published on Barron’s Online, January 28, 2010. 

Posted by twcarey on 01/31 at 04:58 AM
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Saturday, January 16, 2010

New Investor Tax Rules on the Way

Adapting to new rules for cost-basis tax reporting.

THE INTERNAL REVENUE SERVICE IN mid-December issued proposed regulations on cost-basis tax reporting. Under the measure, brokers would be required to report to the government the cost of equities sold by their customers in 2011. For 2012, they’ll have to report similar information about mutual-fund sales and, in 2013, options and fixed-income cost bases. At present, the cost basis of transactions is communicated only to clients, who are responsible for reporting it to the IRS. The comment period on the proposal ends on Feb. 8.

Investors who use online brokers have long complained to us that they have trouble getting accurate cost-basis information from the firms. So will the industry be ready in time to comply with the measure?

Even though the deadline for options is a little further off, figuring transaction costs there will be a particular challenge.

The new IRS rules will change the dynamics between investor and financial institution, says Cameron Routh, senior vice president of strategic products at Scivantage (http://www.scivantage.com). His company’s Maxit enterprise application provides real-time cost-basis and tax-based investment decision support to help financial advisors and individual investors minimize tax liabilities and increase after-tax performance. Several online brokers we cover have installed Maxit in their back offices, including TradeKing, Options- House and Just2Trade.com.

“Not only is the firm going to be reporting your cost basis to you, but they’ll also be reporting it to the IRS,” says Routh. “Some [investors] might blame the broker for reporting private info; firms are going to have to educate their customers.”

Every firm eventually will introduce its own solution. Scivantage, obviously, is encouraging its online brokerage customers to get an early jump by installing the technology that would let them meet the IRS requirements now. Routh believes that getting on top of cost-basis reporting will help retail investors, and improve the investment experience by offering pre-trade tax analysis, portfolio analysis, tax tools and other applications, to leverage cost-basis tracking.

Scivantage’s Maxit competes with Gainskeeper (http://www.gainskeeper.com), which is offered to investors through online brokers including Firstrade, Zecco and optionsXpress. Gainskeeper is also available directly to investors, who can import their transactions and run the necessary reports. Maxit doesn’t have a retail version for traders, but we wouldn’t be surprised to see one in the next year.

Frequent traders already have to report wash sales themselves. These transactions are triggered when one sells a holding at a loss, and purchases it (or something that is substantially the same, like a similar ETF) again within 30 days. The loss on the sale is disallowed, though you can add it to the cost basis of the new purchase. The changes in the IRS rules place a new burden on online brokers to track and report wash sales, including a detailed list showing each sale on a single line. Some active traders generate thousands of wash sales per year.

The complications of wash sales can lead to accounting nightmares if you have to make all the calculations on your own. Some online brokers report wash sales if you make the transactions on their Website, but the wash-sale rules apply even if, for example, you sell a stock at E*Trade and then buy one that is considered substantially the same at Charles Schwab.

Traders who opt to change their accounting method from cash basis to mark-to-market aren’t subject to wash-sale rules. But they open themselves up to a great deal of additional scrutiny. Mark-to-market traders are few in number and require heavy-duty tax software that can’t be found in the usual mass-market products. We recommend Armencomp’s TradeLog MTM (http://www.armencomp.com/gtttradelog/) for these hyperactive traders.

WE’VE GOTTEN A STEADY STREAM of reader e-mails responding to our recent plea for input about online brokers for our coming annual review. We’re still open to any thoughts you can offer.

If you’ve been using an online brokerage account over the past year, please drop us a line at electronicinvestor@yahoo.com . Thanks.

Published in Barron’s, January 11, 2010. 

Posted by twcarey on 01/16 at 12:12 PM
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Saturday, January 02, 2010

E*Trade Powers Up

E*TRADE LAST WEEK UNVEILED the most extensive overhaul of its downloadable trading platform, Power E*Trade Pro, since its launch in 2000.

Chris Larkin, the firm’s senior vice president of the U.S. retail brokerage, says the older version will be phased out around the middle of January. Until then, E*Trade (http://www.etrade.com) customers have the option of using either system.

Among the changes: Instead of the column of icons down the left side of the screen, the various major functions are displayed in a horizontal line across the top. You can alter the size of the icons, switch the order in which they appear, and delete the ones you don’t use.

Larsen says that the developers were very mindful of the use of real estate on customers’ screens, and added tools for those with multiple monitors. Like many other downloadable platforms, Power E*Trade Pro is made up of a montage of windows that you can arrange to your liking on your screen. With the update, you can “tear off” any window—for example, the charting application—and move it to a second monitor. Many frequent traders these days use multiple monitors to track quotes and technical charts, or to view stock data on one screen and options data on another. This capability is simpler in the new version.

Once you you start up Power E*Trade Pro, you will see the default display on the top right. Then you can add or delete indexes and set the scroll rate so that it changes at a pace that’s comfortable for you. A new feature called the Ticker shows your trades in the symbols you want to see, either from a watch list or your current portfolio (or both). The Ticker can be set up to display real-time quotes or streaming news headlines; when you click on a headline, a box opens containing the complete story.

The Options functionality has also been updated so that the new options symbols, which will be introduced in February 2010, are fully supported.

“We’re doing a lot to get our customers prepared for the new options symbology,” Larsen says.

Starting Jan. 1, the platform will include a video player showing CNBC Plus over a live feed. This feature will be free to all customers, and will include archived videos. Larsen says the firm plans to grow the video player within the platform, and that E*Trade will add educational programs to the playlist over the next year.

“As traders are taking a break throughout the day they can watch a video. We plan to add a lot of educational videos with this new player,” he says.

Larsen explains that the platform also attempts to embrace the outside world. In the past, he notes, “The question was, ‘How do we get them to come to E*Trade and stay on our site and not leave?’ The world is changing, so we’re adding the outside world to our platform.” If you find an RSS news feed that you want to follow, you can drag and drop it onto the news page in Power E*Trade Pro.

I found the changes make the platform much easier to navigate and customize. The new version is even a smaller download—14.5MB instead of the 19MB of the older version. Also, Mac users will be pleased to hear that the new version runs on their systems; many downloadable trading applications do not.

THE E*TRADE UPDATE
is just one of many innovations we expect to see at online brokers’ Websites and in software downloads in the next couple of months, as Barron’s gears up for its March 2010 ranking of online offerings for retail traders and investors.

Your comments help us adjust our ratings system from year to year and are extremely helpful. Has your trading behavior changed in 2009? What tools would you like to see your broker offer? What do you like and dislike about your current online broker? What key functionality or service could a different broker offer to entice you to open another account—or switch brokers completely?

If you’ve been using an online brokerage account over the last year, please drop us a line at electronicinvestor@yahoo.com with your comments.

TRADEKING’S (http://www.tradeking.com) Chairman and CEO Don Montanaro last week issued a strong statement against a new Congressional bill, H.R. 4191, which goes by the title “Let Wall Street Pay for the Restoration of Main Street Act of 2009”.

Under the proposed bill, a new fee would add 3[frac12] cents per share to the cost of placing a trade, and Montanaro thinks it’s unlikely that the brokers will just eat the cost and lower their own profits. The bill amends the Internal Revenue Code of 1986 to impose a tax on stock, futures, options and credit-default-swap transactions, and is intended to fund job creation and deficit reduction following the recent financial crisis.

“It is understandable that American taxpayers and their representatives are angry and distrustful of our financial institutions, given the economic struggles of the past year, high unemployment rates, and the taxpayers footing the bill for the bailout,” says Montanaro. “But we believe this proposed transaction tax will end up doing more harm than good to more of our citizens than is purported by the bill’s supporters.”

OPTIONS FEES HAVE NOWHERE to go but up. U.S. options trades take place on seven major exchanges. Three of them—The Chicago Board Options Exchange (CBOE.org, CBOE.com), International Securities Exchange (http://www.ise.com) and Boston Options Exchange (http://www.bostonoptions.com)—have recently filed for fee increases that will kick in during 2010. These fee structures are quite complex, but will result in higher fees paid by brokerages to conduct trades.

Firms that have had relatively low fees for options trading will most likely have to raise their rates just to maintain some kind of profit margin. I imagine the firms that have charged higher commissions will just go ahead and absorb the increased exchange fees.

Wade Cooperman, CEO of tradeMonster (http://www.trademonster.com), says, “We are increasingly concerned the rising exchange fees will lead to retail investors seeing their cost of trading increase.”

Published in Barron’s, December 28, 2009. 

Posted by twcarey on 01/02 at 02:29 AM
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