Investor Brain

Monday, February 12, 2007

Spambots Find InvestorBrain

One of life’s major annoyances has hit my little site with a vengeance.  Spammers promoting various drugs and x-rated websites have, for some reason, decided that InvestorBrain is a great place to promote their wares. 

So what they do is comment on my posts, and fill up the “Referrers” page.  I will have to go through a software upgrade to get rid of these guys, which I won’t have time to do until after the big Online Broker story is in print (on March 3, in case you’re wondering). 

I delete their comments, and close the posts to further comments, as soon as I find them.  I apologize if this has caused any inconvenience to my small cadre of faithful readers, and plan to clean it up as soon as I can. 

Sunday, January 07, 2007

Odd Lot Trades Generate Controversy

A couple of weeks ago, in response to a query I ran in my “Electronic Investor” column in Barron’s, a reader asked me what was going on with Interactive Brokers’ odd lot trading capabilities. 

On December 28 he told me, “Roughly a month ago, Interactive Brokers disabled all trading in odd lots - non 100 share multiples.  They did this suddenly and without any warning (that I was aware of).  Within a couple of days they re-enabled odd lot trading, again without explanation.

“Do you have any idea why they are wanting to do this or if it’s an industry trend?  My strategies happen to employ heavy odd lot trading.  Others might be interested in this topic.”

I contacted Steve Sanders at Interactive Brokers and asked him what was going on.  His response was interesting as it illustrated ways that savvy traders are using regulations to their benefit.  Sanders says that the odd lot trading issue is an exchange issue, not an IB issue, but because of the firm’s large proportion of extremely savvy traders, the exchanges tend to land hard on IB when they feel the firm is stretching the rules. 

Sanders says that the exchanges do not like odd lot orders because there is a rule that all odd lot orders on the books of an exchange must be filled at the next printed price, which is the price a regular lot order most recently received.  Odd lot orders are restricted from moving the market price.  A customer with a large block trade of 10,000 might split an order into small amounts of 90 shares, each of which would get filled at the next printed price.  What usually happens when a large block hits the market is that it moves the market price up (if the customer is buying) or down (if the customer is selling), just because of the volume.  So an order for 10,000 shares would, in all probability, be filled at a price which is worse than the next print.

Sanders goes on to say, “Because IB has very savvy traders that took advantage of the odd lot rule, the NYSE complained to us years ago about our customer’s odd lot trading habits, and we were asked to curtail odd lot trading on the NYSE for opening orders.  This has been in effect for years.  With Reg NMS on the horizon, the NASD sent us a memo saying that we had to comply with all NYSE rules including the odd lot rule.  Our plan was to implement the same logic as we have been using for the NYSE for years.  An overzealous programmer released the programming change before we had a chance to send notification to our customers.  When we started to get calls from customers complaining, we reversed the new logic.  We normally provide our customers with immediate communication on all changes and unfortunately this change slipped through the cracks.”

Sanders says that IB will try to remedy the problem with an alternative approach with the NASD, given the complaints we received from customers on the new logic.  He says, “If we suspect certain customers of breaking large trades into odd lots in order to receive superior price execution, we will contact the customer to stop, and suspend trading if our warnings do not work.” IB management is hoping this remedy will satisfy the NASD, but if not, the firm may have to do more. 

Further requirements will be determined by the NASD and Sanders plans to give IB customers advance warning if further changes need to be made.

Wednesday, September 27, 2006

Note to Zecco Founders

Hey guys.  You need to hire a copy editor for your site.  There are so many typos and grammatical problems that the site looks amateurish.  The buzz I see that you’re trying to spread is that you plan to “take on E*Trade.” Ummmm, good luck with that. 

According to Om Malik’s GigaOm in a posted dated last Thursday entitled, “Skype backer takes on ETrade with free trades,” Morten Lund, one of Skype’s early funders, is now backing Zecco, a site that will allow free stock trades. 

The site is festooned with blurbs such as this one, which comes from the “About Us” page: “And you can even share your own thoughts. By signing up as myZecco member and contribute your thoughts and ideas. Big or small. You are more than welcome.” The opening page asks the musical question, “Are you interested to join?”

I spent part of last week in Prague, and lived for several years in Japan.  I’m getting a definite “English as a second language” feel from the writing on Zecco.  So a note to the founders and site designers:  People might not trust their money to you if they feel the site looks cheap or quickly cobbled together.  Find someone to clean it up.

As for the ballyhoo about the trades being free, here is my comment posted on GigaOm: “This isn’t a new idea. It’s been done. One of the other pieces of revenue for E*Trade, and quite a few other online brokers, is payment for order flow.

“When you enter a stock or option order, some brokers employ technology that seeks out the best price. Say you entered an order when the markiet is at $10/share. A broker who offers price improvement might find you a trade at $9.98. If you were trading 1000 shares, you just saved $20.

“But other brokers route their orders to market makers who PAY THEM for your order. Why? Because they are either selling from their own inventory, or bumping the price a smidgen and taking it from you. So your order when the market is at $10 might get executed at $10.05.

“Now your “free” order just cost you $50.

“I will cover this topic in more depthy in my Barron’s column (”The Electronic Investor”) in the not-too-distant future.”

As for the community promised in Zecco’s marketing, that’s being done at TradeKing and other sites right now, so that’s not a brand-new idea either.

That said, there are people who look for only low cost when choosing a broker.  They may be attracted to Zecco based solely on the “Free Trades!” campaign.  But they may end up annoyed by the Google text ads sprinkled liberally all over the page.  Once the site is open for business in approximately 280 hours, I hope to take another look.