Saturday, September 25, 2010
Futures Are the New Options
Online brokers are pushing further into futures trading—and taking retail investors with them.
JUST PAST THE TURN OF the millennium, retail investors began to trade options using tools and platforms from online brokers. It caught on. More recently, a few brokers introduced futures trading to the small investor. Now nearly half of the firms in Barron’s 2010 review of online brokers allow futures trading. There’s more to come.
TD Ameritrade (http://www.tdameritrade.com) last month launched futures and spot foreign-exchange trading through its thinkorswim platform. And trademonster (http://www.trademonster.com), the focus of our attention this week, has just joined the fray.
“Futures as an asset class is becoming more and more accepted and recognized, understood and used, particularly by active traders,” explains trademonster CEO Wade Cooperman. “People who understand options are looking for additional vehicles for their portfolios,” he says.
Futures, which allow traders to speculate on the prices of everything from pork bellies to orange juice to currencies as well as the level of housing starts, is a highly regulated business. Because they allow more liberal use of margin, and therefore more leverage, they can be more risky. In the past, investors who wanted to trade in futures either had to open an account with a specialized broker or have multiple accounts with a single broker that offered futures as well as other types of securities. The idea was to keep futures separate, as a precaution.
Since you can be more leveraged on margin, you can generate larger profits. Conversely, you can lose more, too; trading on margin also creates interest expense for you. As TD Ameritrade’s Website cautions, “This allows for strong potential returns, but can also result in significant losses.”
ANOTHER CONSIDERATION: Commodities are not covered by Securities Investor Protection Corp. insurance, the way stocks and bonds are, should a dealer go bankrupt. All funds have to be separated from the firm’s capital, which is why most brokers require customers to open separate accounts. Trademonster’s futures trading platform requires an account unconnected to your equity account. You must also log in to a different Website, though the firm plans to integrate the platforms in the near future.
When you sign up for a futures account at trademonster you’ll see three trading platforms: a Web-based browser version, a mobile app, and a downloadable desktop software application. The latter is the group’s Lamborghini, offering real-time quotes, profit and loss calculations, and a variety of advanced-order types. The mobile version runs on the iPhone, iPod Touch, TMobile G1, MyTouch, Verizon Droid and Palm Pre.
You can register for a two-week trial of a simulator version of any of these platforms. We glanced at the Web and mobile apps, but focused on the downloadable software version. Trademonster customers have access to all the electronically traded contracts at the Chicago Mercantile Exchange; a list can be found on the firm’s Website. Trademonster’s futures platform is called T4; it was written by a third party and has been adapted to look more like the firm’s stock and options trading platform.
Commissions run $1.50 per contract for either side of a transaction, plus exchange fees and a levy of 50 cents per contract for the platform. The platform itself requires a minimum charge of $25 per month; if you generate more commissions than that, the $25 is waived. Charting and news feeds increase the platform fee to $200 per month.
A new feature, liveAction, has also joined trademonster’s stock and option platform. It’s an interesting scanner that looks over real-time options activity, including volatility metrics. Most options-oriented scanners monitor measures such as unusual activity, trading volume, or changes in premium, and are often run on delayed or overnight data.
But liveAction’s calculations are based on a couple of databases that stream live data all day long, tick by tick. The database tracks whether contracts were traded on the bid, the ask, or in between. There are dozens of volatility scans. For instance they can compare this month’s volatility to the volatility of a contract that expires two or three months from now. You can also scan for changes in premium to see what options traders believe will happen to the stock price in the future.
At present, the scans are pre-set, and you can select the one you want from a drop-down menu. The top stocks that fit the scan, up to 50, are displayed sorted on key value, but you can click on another column and change the sort order. If you click on a particular symbol, you will see information specific to that particular contract, and you can also place a trade. This new tool has been nicely integrated into the workflow of the trademonster platform. There is no added charge for liveAction.
Published in Barron’s, September 20, 2010.
Saturday, September 11, 2010
Online brokers use the end-of-summer trading lull to release new investing and analysis tools for their customers. This year there’s lots to choose from, and some customer-friendly pricing to boot.
THE DOG DAYS OF SUMMER mean lower trading volumes on the exchanges, and new tools from online brokers.
FIDELITY (http://www.fidelity.com) recently relaunched its Exchange-Traded Funds research toolkit. And 25 ETFs sponsored by iShares, including iShares S&P 500 (ticker: IVV), iShares Russell 1000 Growth (IWF) and iShares MSCI Emerging Markets (EEM), can be traded for free.
Jim Burton, Fidelity’s president of retail brokerage, says that the firm updated its stock-research area earlier this year, then did the same in the ETF arena. We saw a late beta version of the new ETF tools a few weeks prior to their launch last month.
Says Burton: “We are recognizing our clients’ interest in ETFs, so our strategy is to provide a full range of third-party offerings, plus offering certain trades at no commission. With this update, we’re giving them more research so they can screen and compare.”
One welcome change: the screening tool for ETFs is now identical to Fidelity’s stock-screening tool, with more than 100 criteria from which to choose. These include basic facts, such as geography, sector, market capitalization and sponsor. When you select a screening criterion, a list of the ETFs that fulfill it is displayed at the bottom of the window. ETFs that trade for free have a green check mark. If you know what criteria you’re looking for, typing in a few characters gets you a list to choose from—a real time-saver.
Another very helpful update is the ability to customize the results page and save it for future use. There are Quick Screens already set up, such as Fixed Income and Top Rated, and Fidelity has added Expert Screens, such as Dividend Generating ETFs and Large International or Global Equity ETFs. Most of the screening tools can be used even if you’re not a Fidelity customer. From Fidelity’s home page, click on ETFs on the left-hand side of the screen, then the ETF screener., but Expert Screens are available to customers only.
CHOICETRADE (http://www.choicetrade.com), a low-commission online broker, recently updated its Web-based trading application so it can run in any browser, without the need to load additional plug-ins. “Early on, we made a decision to create our new site without plug-ins,” says CEO Neville Golvala. “While there are many upsides associated with Flash applications, they do not work well with certain machines, mainly Apple products. We wanted to give online traders an alternative to Flash applications, while still offering them state-of-the-art utility, whether it be on an iPad, iPhone or standard PC.”
We struggled a bit to log into the Virtual Trading area of the ChoiceTrade Website, but finally got to the demo. One major improvement from ChoiceTrade’s old Web-based platform is a complete redesign of options research and trading. You can build a complex strategy from the options chain, and the new “Strategy Identifier” checks the trade legs you’ve chosen and identifies your strategy as you add them. This is a bit of a reversal from the way many other options-trading applications work—those have you choose a strategy and then add the appropriate legs.
Quotes are displayed in a streaming real-time format, and you can trade an unlimited number of shares of a stock for $5 per transaction. Options transactions will set you back $5, plus 55 cents per contract.
The firm has made it fairly simple to set up an account online. With a minimum of $2,000 in your account, you can use the new trading platform for free for four months. After that, you will be billed $14.95 per month for basic data, and $23.95 per month for the Pro data feed. The latter includes advanced charting and streaming data on the mobile platform.
The new platform is a big step up from ChoiceTrade’s previous, and very basic, Web-based toolkit. ChoiceTrade also offers a software-based trading platform for $29 to $79 per month.
TEXAS-BASED TRANSCEND CAPITAL recently launched an online brokerage, JunoTrade (http://www.junotrade.com). It offers $4.95 commissions per stock transaction, and $4.95, plus 95-cents-per-contract options trading. JunoTrade CEO John McMorris formerly served as chief technology officer and chief information officer of CyberTrader and ShareBuilder, respectively.
JunoTrade has two Web-based platform, JWeb and JWebPro, as well as a software-based platform called JunoTrade Pro. JWebPro is a streaming platform that offers most of the features of the downloadable platform; it’s built on Microsoft’s Silverlight technology, so it can run on Windows, Macintosh and Linux operating systems. All the trading tools focus on stock and options transactions.
There is back-testing capability built into the Pro platforms. It includes a fairly basic scripting language, allowing you to write your own trading strategy and test it. JunoTrade also has an API (applications programming interface) for those who want to write their own front-ends. JunoTrade also has an iPhone app, which you can download from the iTunes store for 99 cents. This is the first mobile app we’ve seen that incurs a charge.
The firm’s Website is a bit light on information that most investors need when deciding whether to open an account, however. Though you can locate basic stock and options commissions (click on the “Compare Pricing” tab on the main page), other fees are impossible to find.
Dan Micovic, JunoTrade’s vice president of marketing, says, “The active traders and groups like to call in and negotiate their per-share rate based on their trading volume. We can be quite accommodating.”
TRADEKING (http://www.tradeking.com), one of the first brokers to tie social networking into its trading platform, has expanded its “Trade Notes” functionality by tying it to Twitter. As of late July, TradeKing customers who generate a Trade Note and choose to connect to Twitter automatically will tweet their confirmed trades.
If you follow @TradeKing on Twitter, you can see what the firm’s customers are trading, and learn the rationale behind particular trades. Says TradeKing’s CEO, Don Montanaro: “Twitter Trade Notes only showcases clients’ actual trades that have been verified by TradeKing. This functionality underscores our commitment to providing innovative educational tools and resources to help clients expand their trading knowledge by learning from their peers’ trading successes and miscues, and the strategies behind those trades.”
Published in Barron’s, September 6, 2010.