Investor Brain

Saturday, May 11, 2013

A Boutique for Sophisticated Options Traders

An upstart brokerage recently launched some tools of interest to sophisticated options traders. TradingBlock Professional bills itself as the “ultimate boutique options and equity trading offering specifically designed for high frequency traders, proprietary trading firms, and active money managers.”

The Pro offering (tradingblockpro.com) is aimed at equity and options traders who execute 20-200 trades per month. “Our goal is to provide active traders with customizable tools so they can get an edge on the market,” says Tom Heffernan, who heads online broker TradingBlock, an affiliate run by the same team. TradingBlock also emphasizes education and tools, but for a broader group of traders.

TradingBlock Pro’s order-routing capabilities are unique: there are 11 standard routes, plus another 11 proprietary smart-routing algorithms that can help an options trader find opportunities across multiple exchanges as well as the so-called dark pools that operate outside the exchanges.

One of the routes is called TB Swipe, which is useful for traders going after large numbers of contracts in a single order. A similar routing algorithm, TB SmartSweep, routes orders only to exchanges that don’t tack on additional fees. (Most execution venues charge a small fee per contract or block of shares traded, which can add to the cost of a trade.) The TB SmartSweep algorithm will either fill the order immediately, or cancel it if there’s no quantity available at a no-charge exchange. Another routing engine, TB PIP, is designed to seek out and maximize price improvement.

TradingBlock Pro’s order routers now include the fully electronic Miami Options Exchange (MIAX), which launched in December. This new exchange’s technology center is located in Princeton, N.J., but there are training, meeting, and conference facilities in Miami. (I suppose the Princeton Options Exchange doesn’t sound as snappy.) According to TradingBlock executives, not many routing engines take advantage of this new exchange yet. Mark Patel, director of sales for Trading Block Pro, estimates that only 10% of brokers are routing orders there at this time, but he believes its technology and pricing make it a very attractive venue.

TradingBlock Pro also offers a customizable real-time scanner, Edge Finder, to its customers for $199 per month and up, depending on the number of bells and whistles you choose to attach. The new scanner’s filter operates in real-time across a wide variety of fields that include price, exchange, trading volume, open interest, and options greeks. There are over 30 different variables from which to choose, including a proprietary calculation called Edge, which calculates whether a particular contract is trading above or below the bid or offer. According to Patel, Edge tells you whether another trader is willing to give up some price advantage in order to get into or out of a particular position. “This can add up for helping professional traders find opportunities, and act on them,” says Patel.

You can also set up the scanner to find mispriced contracts, which can result in more profitable trades. Though $199 per month sounds pricey, during a demo session Patel was able to point out a roughly $9,000 trade that could generate an additional $4,000 in profits due to mispriced contracts. The scans are for options trading only, which is the core customer base that TradingBlock Pro is pursuing.

The brokerage doesn’t publish a commission schedule, as the rates are negotiated with each trader based on activity. One of the reports available to customers on the site’s statistics page shows how much the exchange fees are costing each month, which can help frequent traders manage their expenses. TradingBlock Pro customers can qualify for portfolio margining as well.

ANOTHER OPTION PLAY. tradeMonster customers with funded accounts can now access a daily Webinar called “Market Action” every day at 12:15 p.m. Central Time. Host David Russell will discuss the day’s winners and losers with Jon and Pete Najarian of optionMonster, plus a variety of regulars and guests. The aim is to give customers actionable ideas for trading stocks and options, with expert commentary and screens produced by tradeMonster’s researchLAB tool.

Customers with funded accounts will be alerted to the start of the daily Webinar after logging in. You can opt out of receiving the Webinar alerts if you so choose.

Published in Barron’s Online, 5/4/2013. 

Saturday, April 27, 2013

Success Trade Accused of Fraud

Regulator charges parent of Just2Trade with defrauding high-profile investors from the NBA and NFL.

The Financial Industry Regulatory Authority has filed a cease-and-desist order against Success Trade Securities, parent company of online broker Just2Trade, accusing the firm of defrauding 58 investors, including many professional basketball and football players.

In its statement, FINRA alleges that Success Trade Securities, CEO Fuad Ahmed, and other registered representatives at the firm sold more than $18 million in Success Trade promissory notes to these investors, even though the firm’s original filing said it aimed to raise just $5 million. Most of the notes promised to pay annual interest rates of 12.5% on a monthly basis over three years and some offered as much as 26%. That is a very generous rate of return in a near zero-rate environment.

Ahmed conceded to Barron’s last week that his firm exceeded the $5 million goal, but said it was about to issue a new private-placement offering memo with the larger total when the complaint was filed. The money was intended, he says, to further develop the firm’s trading platform and to buy an online broker in Australia.

Just2Trade, based in Washington, was the subject of a recent Electronic Investor column ("Broker Drops Tax Aid,” April 8) about the firm’s puzzling decision to drop tax-record-keeping software, Maxit, from its Website at the height of tax season. The FINRA complaint was filed April 10.

The order says that Success Trade essentially engaged in a Ponzi scheme, using the funds from newer investors to pay interest to those who had invested earlier. FINRA, the self-regulatory group for broker-dealers, says funds were misused to make unsecured loans to several individuals, including Ahmed’s brother, and to pay some of Ahmed’s personal expenses, including clothes and transportation. FINRA didn’t name any of the investors, other than to say they were mostly former and current NBA and NFL players. FINRA’s press release can be found at finra.org, where the 17-page complaint also is available.

Ahmed denies the money went to anything other than the business and says he refused to agree to a settlement that would admit to any wrongdoing.

Success Trade and Ahmed have agreed to the cease-and-desist order and have frozen the fundraising, “based on the belief that ongoing customer harm and depletion of investor assets are likely to continue before a formal disciplinary proceeding against Success Trade Securities and Ahmed will be completed.” Agreeing to the order is not an admission of or denial of guilt. Just2Trade and LowTrades, says Ahmed, continue to operate and aren’t directly affected by the FINRA action.

Success Trade wasn’t generating enough revenue through Just2Trade and LowTrades to meet its costs in recent years, according to the complaint. As a result, it began to borrow. Unlike other brokers, Ahmed’s firm owns the entire process it uses, from what investors see on its Website to back-office servicing. Most brokers use third parties for portions of the process. “We have been going down the path of licensing our trading application, which would be another source of revenue,” he says. FINRA, he adds, didn’t value the operation with that possibility included. Just2Trade, launched in 2007, had fewer than 30,000 accounts at the end of 2012, with approximately $400 million worth of assets. Clients were placing approximately 12,000 stock and option trades per day earlier in the year.

While raising money, representatives of Success Trade apparently used Just2Trade’s appearance in Barron’s annual broker review ("Back Online!,” March 11) for marketing, stating that Just2Trade was one of Barron’s best online brokers. The Barron’s list ranks online brokers. The top brokers receive four or five stars; Just2Trade earned three stars, and appeared on a list of least-expensive brokers. Overall it tied for 16th out of the 24 brokers. LowTrades, the other Success Trades subsidiary, didn’t participate in our survey.

The pro athletes provided most of the money from the fundraising. Many were clients of a firm in McLean, Va., called Jade Private Wealth Management, the complaint said. The firm, which operates out of a location also used by Success Trade, hasn’t been charged. Three of the people employed by Success Trade, which is based in Washington, also work for Jade. Ahmed said he was not involved in raising the debt and would not disclose the names of investors. Jade officials did not respond to e-mails.

An executive at another online investing firm says the problems at Success Trade underscore the difficulty of launching new brokerages. “I really think that the low-commission model only works for firms which have already reached scale. The costs of running a successful online brokerage—technology, regulatory restrictions, good operational staff—are growing every year and, if your margins are slim, I don’t see how you can sustain a business unless you have scale,” he says.

He estimates it costs $25-30 million to get a new broker off the ground. Motif Investing, which just entered the business last year, already has raised more than $50 million in venture capital.

Just2Trade frequently has trumpeted its low-cost approach, but it’s apparent that price alone isn’t a sustainable strategy.

Published in Barron’s Online, April 20, 2013. 

Saturday, April 13, 2013

Broker Nixes Tax Help

With April 15 in sight, Just2Trade decided to get rid of a key tax-accounting feature. A number of customers aren’t pleased.

Talk about terrible timing. With April 15 in sight, online broker Just2Trade dropped a key tax-accounting feature from its Website, leaving some clients scrambling to fill out forms by hand.

Not only does tax day loom, but it’s an onerous one for investors. The Internal Revenue Service has asked brokers and investors to decide how they plan to calculate the cost basis of their investments and has begun phasing in the changes. So it was a surprising time to drop Maxit, a cost-basis management system developed by a company named Scivantage. Just2Trade CEO Fuad Ahmed confirmed that his firm has eliminated Maxit, as did Cameron Routh, an executive vice president at Scivantage.

“We are trying to work with Maxit and our customers to resolve the problem, and I hope we can get this issue resolved,” says Ahmed. Although neither company wanted to go into specifics, it seems they disagreed over who was responsible for cleaning up some data being fed into the Maxit system. Entering inaccurate data means turning out faulty reports.

That was little consolation to Just2Trade clients, who started to alert Electronic Investor about the problem in late March, near the height of the tax-preparation season. Maxit allows customers to generate a Schedule D quickly.

After discovering that the Maxit link was missing, a reader in Alabama says he contacted a Just2Trade representative, who said the firm had “recently severed its relationship with Maxit and cannot currently offer an alternative.” When he asked why customers were not notified, especially with tax time looming, he didn’t feel he got a clear response. So he called again, this time to a supervisor. He says he received an apology but no help in entering hundreds of transactions by hand. The supervisor, added our reader, said the firm didn’t believe that the outputs were accurate enough and that third-party services were subject to change at any time.

In light of the IRS changes, which started to be implemented as of Jan. 1, 2011, having a cost-basis system like Maxit, or its rival Gainskeeper, was seen as a big benefit for clients. Some brokers have written their own cost-basis systems, relying on trading data from their clearing firms. Companies have been hailing their abilities for weeks. Vanguard, for instance, highlights its “cost-basis resource center” on its Website, alerting customers to the new IRS rules as tax day approaches.

A firm like Maxit tracks the cost basis for all transactions, including the complicated adjustments that can occur because of stock splits, mergers, or spinoffs, among many other situations like wash sales. Other brokers offering Maxit to their customers include OptionsHouse, Scottrade, and TradeKing.

The changes at Just2Trade’s Website are very recent. As part of our recent online-broker review ("Back Online!” March 11), Ahmed mentioned Maxit as a key benefit of his low-cost service. Routh of Scivantage says Maxit would be happy to have Just2Trade back as a customer.

In the meantime, however, traders like our reader in Alabama, who says he’s looking for a new broker, are on their own for Schedule Ds this year.

WANT SOME TRADING IDEAS based on technical and fundamental analysis? Vlad Karpel, one of the first employees at optionsXpress, who served as its chief technology officer until 2007, has them.

After working with hedge funds, Karpel last July started TradeSpoon (tradespoon.com), sharing the buy and sell signals that his proprietary analysis generates. “We believe that individuals at the beginning of their trading experience need some help with entry points, managing their positions, and managing risk,” he says. “We’re using our own proprietary algorithms to manage our own money, and wanted to offer the signals to subscribers.”

TradeSpoon follows about 1,000 stocks, all of which have options available, and analyzes each daily. The system generates a trade of the day and recommends a long or short entry point. The firm sends subscribers an e-mail every trading day between 6 p.m. and 8 p.m. Central time, allowing some time to reflect on the idea.

You can follow a Twitter feed (@tradespoon) or check out the Website. Subscriptions are $20 monthly after a 30-day free trial. Karpel is extending that free trial for Barron’s readers to 60 days; use the promo code “barrons” to get the additional 30 days.

Published in Barron’s, April 8, 2013.