Saturday, May 28, 2011

Clearing Firm Rattles Investors

Penson, which clears trades for many online brokers, reveals it holds illiquid bonds tied to a former director. Investors needn’t panic, but they should closely monitor the company’s response.

A recent research note from Sandler O’Neill analyst Richard Repetto set traders’ and investors’ nerves on edge when he detailed clearing-outfit Penson Worldwide’s revelation that it held $42.6 million of possibly illiquid bonds issued by a horse-racing-track operator linked to a Penson director. Much ink and many pixels have been spilled discussing what the company’s extremely belated regulatory disclosure means. The immediate effect was clear: Within days, the company’s stock-market value was nearly halved, to about $3.12 a share. And the director resigned.

The news prompted us to look again at our annual review of online brokers ("Making the Right Connection,” March 14). Quite a few of them clear their trades through Penson (ticker: PNSN). The firm specializes in clearing derivatives transactions, so it was no surprise to see options heavy-hitters like eOption, OptionsHouse, thinkorswim, TradeKing and tradeMonster on its customer list. (Thinkorswim has not yet been completely folded into the TD Ameritrade clearing operation; its separate customer base still clears its transactions at Penson.) Also on the client list: A.B. Watley, ChoiceTrade, Cobra Trading, Lightspeed Trading, MB Trading, SogoTrade, SpeedTrader, TradingBlock and Zecco.

We also got lots of e-mails from readers asking, in essence, “What will happen to my money if Penson collapses?” One wrote that he was closing an account at a firm that cleared through Penson, and thanked me for the table in our annual review that gave him ideas on where to transfer assets (see “Barron’s 2011 Online Broker Review: How the Brokers Stack Up").

Penson has maintained that the bond position won’t have any meaningful effect. In an e-mail via Penson’s public-relations office, Vice Chairman Daniel P. Son explained that the “situation occurred as a result of an expansion of our disclosure in our most recent Form 10-Q about certain receivables where the collateral had reduced liquidity. Unfortunately, we believe, investors misunderstood some of the information.” Son said that Penson will recover those receivables without a loss, but even if a loss did happen, there would be no impact on the firm’s ability to clear trades, since the funds involved are separate from Penson’s regulatory capital. However, Penson CEO Phil Pendergraft said later at an investor conference that the company could have a “material” loss after writing down the loan. He said he still expects Penson to post a profit this year.

SHOULD YOU WORRY IF YOUR broker clears through Penson? You should watch how Penson responds to this mess, but there’s no need to move money based on its current financial position. It takes a near-perfect storm, including a major market drop and a lot of trading on margin, to force a clearing operation out of business. We witnessed a failure in mid-2008, when North American Clearing went under, tangling trades for its brokerage clients and their customers for a month. That doesn’t seem to be the case here.

Even if the illiquid investment bled into Penson’s regulatory capital, there is insurance through the Securities Investor Protection Corp. (SIPC), a federally mandated entity funded by broker-dealers, that covers up to $500,000 of stocks, options and bonds per account. Futures contracts, commodities and currencies are among the assets ineligible for coverage. Most brokers carry additional insurance, called excess SIPC coverage, that insures assets above the $500,000 ceiling. Check out the SIPC Website ( to learn more.

If you are not borrowing money from your broker by using margin, or shorting stock, your trades don’t make it onto the clearing firm’s books. If you are using margin, then the clearing firm has collateral from you on the other side of its balance sheet, in case there’s a problem. Penson’s role in a transaction is to process trades electronically for its broker clients, and to make sure that the appropriate funds are in the right place at the right time.

Several executives of online brokers who clear through Penson spoke with us on the condition that their names not be used. The general reaction was that the disclosure of the illiquid loan was a public-relations disaster rather than a sign of impending financial doom.

One said that Penson’s business will be fine, but that its management has a lot to answer for. “They should disclose every security on their books to regain confidence. They should fire everyone running it, and start over with new management,” fumes the brokerage official. (Penson director Thomas R. Johnson resigned his board post on May 12. Johnson is chief executive of Call Now, which manages the Texas race track for the company that issued the bonds. Call Now was also an early investor in Penson.)

AN OFFICIAL AT ANOTHER BROKER says that regulators at the Securities and Exchange Commission and the Financial Industry Regulatory Authority “are all over this.” If Penson were to try to hide something from the regulators, “they’ll get a nice orange jumpsuit to wear for a few years.” Although he’s disappointed with the firm, the executive notes that Penson easily meets all regulatory standards. At a firm geared to active options traders, a senior manager compares clearing firms to waiters: “If they do a good job, you never think of them.” Penson has more than $100 million in excess regulatory capital, according to Vice Chairman Son.

This same official points out Penson’s technology for clearing derivative and futures trades is “way ahead of everyone else.” The company, he notes, serves not just brokerage firms but hedge funds and proprietary trading firms.

Most important for Penson, none of these executives were about to pull the plug on their clearing relationship with the firm, and few of their customers have made any noises about moving their accounts. One brokerage official said that if his firm saw customers leaving due to their clearing operation, then it would have to reassess the relationship. Changing clearing firms is a huge, time-consuming undertaking.

It appears to me that moving an account away from a brokerage that clears through Penson just because of this disclosure would be a major time-sink, without much return. However, I do believe that some house-cleaning is needed—quickly—at Penson, and that it should discuss its practices and its services with brokerage customers. No doubt, Penson’s rivals already are reaching out to many of these brokers. 

Published in Barron’s, May 23, 2011. 

Posted by twcarey on 05/28 at 02:21 PM
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Saturday, May 14, 2011

Day Trade and Keep Your Day Job

A new online brokerage firm, DittoTrade, lets you mimic the trades of professionals—and get the same prices they do.

A new online broker is opening with an interesting twist. Aside from the usual online features, DittoTrade lets you buy and sell right alongside an experienced trader.

DittoTrade’s CEO, Joseph Fox, has prior experience operating an online brokerage firm—he was a founder of Web Street Securities, which was a top-rated broker in Barron’s annual ranking back in the late 1990s and was acquired by E*Trade (ticker: ETFC) in 2001. Fox decided during 2008’s financial meltdown that he wanted to go back into the business, mainly because he believed individual traders were getting clobbered by institutional traders using algorithms and high-frequency techniques.

His fledgling firm ( opened its virtual doors in a beta test last October, but will soon be more visible, thanks to a new marketing campaign (and, no doubt, articles like this one). Fox says the idea is to let average investors, who usually have better things to do than stare at a computer screen, benefit from the skills of people who are in the market every day.

Upon logging in, you are presented with a standard-looking account balance page with streaming quotes. The “Trading Pit” is where customers can place orders on their own; like tradeMonster, when you enter a position on DittoTrade, you are encouraged to set a stop-loss and a profit target. Things start to differ, however, if you connect to a Master Trader.

THE MASTER TRADER LINK takes you to a dashboard that shows the stocks your chosen trader is monitoring. Most of the master traders attach notes to each symbol on this watch list, which often includes their thinking about a particular stock, along with an explanation of price entry and exit points. There are two ways to join into a master trader’s transactions: Full Throttle, which means you take part in every transaction entered by the master trader, or Participation Mode, which means you pick which stocks you want to trade from the master trader’s watch list.

You can also define in advance how you want to take part. You can choose from Share for Share (trade the same number of shares as your master trader), Percent for Percent (trade the same percentage of your total account as your master) or Max Loss Per Trade (set an amount you’re willing to lose should the stock price hit its stop-loss). The DittoTrade engine calculates these measures for you, and bundles your transactions together with those of the master and all of his other minions. Everyone gets the same price at the time of execution, which distinguishes DittoTrade not only from traditional online sites but from those offering other trade-mirroring technologies.

Once you’ve opened a position, you can either follow the master trader to close the position, or close it on your own. You can also detach the position from the master trader’s dashboard and hold it separately.

Some Barron’s readers may be wondering how they can become master traders. Fox says his brokerage is actively seeking more masters, and also is looking for those with international trading expertise. You can reach him at . Master traders typically charge a subscription fee to their followers, and they control which DittoTrade customers are allowed to “ditto” their transactions. You can also develop a “friends and family” following. That means you aren’t publicly visible like a master trader, but your nephew or mother-in-law can trade with you.

San Diego-based Andy Lindloff of is one of the existing master traders. DittoTrade clients can follow Lindloff for $99 per month for Full Throttle access, or they can sign up to be alerted when he makes a trade, for $49 per month. If you choose the alert system, you can make the trade on your own, but it won’t go through in a bundle with Lindloff’s orders.

Last year, the New York Times featured Lindloff in a story about the death of day trading, which brought him to Fox’s attention. Now Lindloff and his partner, Steve Gomez, are on board with DittoTrade. They generate approximately 30 transactions per month with their trading system, and customers can also watch Lindloff trade in real time using GoToMeeting, the screen-sharing program for conferencing.

Lindloff, a discretionary trader eschewing algorithms, and Gomez have posted a 28.5% gain over the past six months on DittoTrade, at He says he enjoys working as a DittoTrade Master Trader: “I think it’s a great idea if you find someone—maybe me, maybe your cousin—who is keeping an eye on your stocks and protecting you in the market. If you don’t have time, find somebody who is watching the market full-time.”

DittoTrade has a logo that Fox calls “the molecule,” which he would eventually like to see festooned on many financial Websites. It would let individuals just click on the molecule and start trading alongside their favorite bloggers and professional traders on DittoTrade. Each transaction is $4.95 for stocks and an additional 50 cents per contract for options. Margin fees are a relatively low 4.95%.

Though this site is still a little wet behind its virtual ears, it looks like a good idea worth further exploration and development. It would be worth considering if you’re a portfolio manager placing trades for your customers, or if you’re managing family accounts. Right now, all you can trade on the site are stocks and options—no mutual funds, penny stocks or foreign ordinaries.

FIDELITY OPENS UP ACTIVE TRADER: Last month, Fidelity ( announced it would allow free access for 90 days to its advanced trading platforms to new customers opening an account with $50,000 or more, or to existing clients transferring at least $50,000 into an account. This campaign is called “Go PRO,” and the details can be found at

Historically, these are services only available to those who trade more than 120 times per year.

FREE ETFS AT FIRSTRADE: Ten exchange-traded funds (ETFs) can be traded commission-free at Firstrade ( Firstrade President and CEO John Liu says, “The 10 ETFs we selected for commission-free trading are designed to allow clients to quickly and easily build a strong foundation for a diversified portfolio.”

The list includes three bond funds, several blend funds, a commodity fund and a diversified emerging-markets fund. If you’re trading off the free list, commissions are $6.95 per transaction.

Published in Barron’s, May 9, 2011

Posted by twcarey on 05/14 at 02:19 PM
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Saturday, May 07, 2011

Hot Tools for TD Clients

TD Ameritrade creates a “bridge” between the sophisticated trading site it acquired and its own, more mainstream site. Barron’s sneak peek.

When TD Ameritrade bought innovative, tool-laden thinkorswim two years ago, we wondered how its technology would find its way into the big broker’s traditional site. The initial link-up was straightforward: TD Ameritrade clients could just plug into the entire thinkorswim platform, lock, stock and barrel.

But many mainstream TD Ameritrade customers were overwhelmed by the intense experience offered by the sophisticated thinkorswim platform ( Just getting started on the site, which won Barron’s annual ranking of online brokers a number of times, can be intimidating for a newcomer. (For more on corporate acquisitions of our perennial favorites, you’ll have to read to the bottom of this column). We were given a preview of a “bridge” application, Trade Architect, during our most recent review ("Making the Right Connection,” March 14), and, last week, we were given a more in-depth look at TD Ameritrade’s attempt to bring together the two sites. Trade Architect will have its official launch this week, after recently giving select customers a chance to try out the application.

TD Ameritrade Vice President Steve Quirk explains that the firm is trying to meet clients’ interest in “boiling down” the “wealth of information” that was being provided to make a trading decision.

The combination offers a terrific mix of the fundamental analysis that’s a staple of the TD Ameritrade platform, as well as the vast array of technical tools thinkorswim has featured. Trade Architect can be customized to client needs pretty easily, and should go a long way toward introducing less-experienced electronic investors to more dazzling analytical techniques.

Trade Architect is a Flash-based application, so it will run on any computer (including Macs). The application won’t yet run on an iPad, thanks to Apple’s long tiff with Flash publisher Adobe, but Quirk assures us that it looks great on a Motorola Xoom. You can trade stocks, options, exchange-traded funds and mutual funds on Trade Architect.

There is nothing to download as long as you have the latest Flash plug-in on your computer, and best of all, unlike Schwab and Fidelity’s frequent-trader applications, no hoops to jump through to qualify to use Trade Architect. Anyone with a TD Ameritrade account will be able to use the platform as soon as it’s enabled for their account, at no additional fee. What’s more, all of your watch lists and positions are consistent among the various Websites and applications, so if you create one on any of the various TD Ameritrade platforms, including mobile, it will be there when you use Trade Architect, too.

The default opening screen—to which you can return at any time by clicking on the “Today” box on the menu bar—brings you real-time video from CNBC, a snapshot of your account balances, your watch lists, the “Heat Map” (a graphical representation of market moves and volumes), quote detail and real-time news. You can scroll through additional layouts or create your own by clicking on the “Setup” tab. When you set up your own, you are prompted to name it, and that name then displays on the menu bar, making it easy to find.

Fundamental data, such as earnings and various key financial ratios, are integrated throughout, so you don’t have to switch back to TD Ameritrade’s familiar green-border site to find something. If a symbol on your watch list has a number in parentheses next to it, then you know that there is current news pending for that company.

Any layout with quote detail is also festooned with relatively large “Buy” and “Sell” buttons that are impossible to miss. Clicking on the “Buy” opens an order-entry ticket at the bottom of the screen, which is prefilled with the ticker symbol, your default order size, and the asking price entered as a limit order; clicking on “Sell” enters the bid price. The trade ticket’s design is consistent across platforms, so there’s no shock when placing your first order on Trade Architect.

If you enter an options order, a chart displaying the last six months’ price movement appears. The historical area of the price chart that would have proved profitable for this order over time is shaded in green, which gives you a quick view of the strategy you’re considering. There are many more in-depth options-trading tools on the thinkorswim platform, of course, but Trade Architect contains some good basics that should get you comfortable with the more complex capabilities of the thinkorswim package, should you decide to use it someday.

As in most 1.0 versions of trading platforms, there are some missing pieces. PaperMoney, thinkorswim’s trading simulator, is not yet available in Trade Architect, but it should be soon. The charting application, while easy to use, only has about 10% of the 350-plus technical indicators found on the thinkorswim platform. In addition, futures- and foreign-exchange-trading integration will not happen until the firm completes a conversion of its securities clearing operation over the summer. More research tools will be added to the platform as it matures.

AS WE NOTED AT THE OUTSET, the purchase of an innovative company like thinkorswim by a big, established online broker is more the rule than the exception these days.

In late March, Schwab picked up optionsxpress (, which had gotten multiple awards from us in its specialty, dating back to the early part of the last decade. Although we’ve been assured that optionsXpress will continue to operate as a separate broker-dealer, we expect to see much of its technology find its way onto the Schwab platform.

And just a couple of weeks ago, Tokyo’s Monex Group announced that it will buy this year’s Barron’s victor, TradeStation (

Monex’s CEO, Oki Matsumoto, noted in the firm’s news release that the Japanese online broker was buying “an award-winning platform” in TradeStation. The deal is expected to close in the third quarter. In this case, we expect to see the U.S. firm continue to operate independently, but anticipate more international trading opportunities will arise on its site before long.

In the meantime, you might want to pay attention to Barron’s list of 2011 online-brokerage winners, coming out next March. They will not only offer excellent trading platforms, but possibly a good pre-acquisition trade as well. 

Published in Barron’s, May 2, 2011

Posted by twcarey on 05/07 at 02:16 PM
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