Investor Brain

Saturday, November 08, 2008

New Broker Dives Into Rough Waters

IT MAY SEEM LIKE A STRANGE TIME TO OPEN an online brokerage, but record volatility also offers trading opportunities. So maybe it’s not so crazy after all.

TradeMonster (http://www.trademonster.com), like several other new brokerages, is a subsidiary of an options-oriented trading firm, OptionMonster. Co-founders (and brothers) Jon and Pete Najarian, the latter a frequent contributor to CNBC’s “Fast Money,” had their own idea of what an online brokerage should look like, and in 2007 put together a team to build a platform that they believe is simple, intuitive and fun.

For the most part it is flexible and easy to use and customize. Because it’s a baby brokerage, there are a couple of holes—there is no easy way to trade mutual funds and bonds online—but for those interested in trading mostly equities and options, it’s a good choice.

“THE TYPICAL INVESTOR DOESN’T want to be tied to a single computer but wants ...the power of a downloadable application, with the ease of a browser,” says TradeMonster CEO Wade Cooperman.

The platform follows a cockpit model. There’s real-time streaming data everywhere you look, and the set-up allows you to create an order from every view. One especially nice touch is that education is thoroughly integrated: You don’t have to exit the screen you’re looking at—say, an options-order entry—to learn more about the order you’re about to place.

“We put all the education one click away,” says Cooperman. “Most brokers’ education takes you far away from the trading and data. That’s not the way it works in our platform; it’s all part of that cockpit.”

The layout is easily customized. The basic cockpit setup is divided into thirds, with two narrow columns on either side of the bigger center section, which is where you’ll find order entry, charting, and account information.

The two narrower columns allow you to display “mini-apps,” such as live data about your account, open orders, trading messages (like when a trade has executed or an alert has been triggered), a watch list, financial news, and an overview of the market. You can drag and drop these mini-apps from one side to the other; the mini-app remembers where you put it and will stay there.

News feeds come from Yahoo! Finance in a separate browser window, which brings you stories from AP, Thomson Reuters, Business Wire and PR Newswire. Currently there are no premium newsfeeds.

TradeMonster’s developers have strived to make the application conducive to trading. It allows you to multi-task, using the mini-apps and tabs on the main trading screen, so you’re not locked into the one-page-at-a-time setup of most browser-based applications.

A lot of thought went into helping customers develop good trading habits. You’ll find answers to many fundamental questions about a stock before buying it, and will be reminded to have an exit plan, either a target gain or stop loss, at the time you place an order.

As you might imagine in a platform created by options traders, there’s a lot of options data, mostly about volatility. You can specify the number of strikes to view, as well as expiration dates, and type of spread. When you click on a plus sign next to a quote, you’ll get more details, including risk metrics. There are 15 spread types to view, from simple calls and puts to multi-leg spreads like collars and butterflies.

THE CHARTING PORTION of TradeMonster lets you view four different styles: line, candlestick, area and bar. The account-management screen lets you view your positions, and aggregates performance metrics and risk metrics by strategy.

Mutual-fund traders can find Lipper data to help make trading decisions, while bond traders will have to call customer service to get quotes and place trades. Trading mutual funds is a little clumsy; you have to type the five-letter ticker into a trade ticket yourself.

All stock and ETF trades are $7.50 for up to 5,000 shares (add 1 cent per share for larger transactions), while options trades are 50 cents per contract with a $12.50 minimum. Mutual-fund and bond transactions are $15 per trade. Trades are cleared through Penson.

All the tools on the platform are available to every account holder, and the pricing is the same no matter how many trades you place.

So if you’re frustrated with your browser-based broker, take a look at TradeMonster. Its features have some similarity with those you’ll find in thinkorswim or OptionsHouse, but they have their own flair, and I believe they’ll be a force to contend with in the not-too-distant future.

Published in Barron’s, November 3, 2008.

Saturday, October 25, 2008

VectorVest: A Triumph of Function Over Form

VECTORVEST, WHICH PROVIDES A VARIETY OF RESEARCH and portfolio-management tools for traders interested in market timing, has launched a real-time suite of wares, appropriately called VectorVest Real Time. This is an online-subscription product, which will set you back $129 per month, or a discounted $1,395 a year, but it’s something serious market timers ought to look at.

The initial incarnation of VectorVest provided end-of-day data only, with buy and sell recommendations intended to help you figure out what to do the following day. David Thornton, VectorVest’s manager of sales and marketing, believes the real-time version will enhance a trader’s ability to spot entry and exit points. “We’re not trying to make our subscribers day traders, though it will greatly enhance your ability to be successful if you are,” Thornton says.

One of our initial criticisms of the site when we looked at it more than year ago ("TD Ameritrade’s Quiet Consolidation,” May 28, 2007) was its resemblance to a direct-marketing piece of junk mail than a place for serious investors, and that, unfortunately, is still true. The product itself, however, is a slick collection of analytical tools displayed graphically that gives you a very quick read on the market’s direction. You can also use it to filter through and analyze potential movements of 8,396 U.S. stocks.

The tools, called “gadgets” in VectorVest’s lexicon, can be moved around and customized to your specifications. The most basic indicator is the Color Guard, which is a dial showing the current state of the market. If the needle points to red, customers are advised to get into cash. If it’s tilting to green, VectorVest says it’s time to get into the market, while yellow suggests caution when buying or selling stocks. The Color Guard twitches around a bit in the Real Time version, as the market changes.

Of interest to those trading in recent turbulent markets are the graphs that appear on the VectorVest home page. One of them, VV at a Glance, displays the market’s buy to sell ratio. On Oct. 9, with the stock market down 7.33%, the ratio matched its lowest level since the firm started tracking it in 1996: 0.02. The last time it dipped that low was in 2002.

THE SITE CALCULATES the VectorVest Composite (VVC), which tracks the 8,396 stocks; the firm believes it’s a better index than the Dow or NASDAQ because it represents more of the market. There’s also a relative-timing indicator, called VVC RT, that tracks the short-term price momentum of the composite in four different time dimensions: daily, weekly, monthly and yearly. This indicator is displayed in a range between 0 and 2; the closer to 2 the more upward price momentum.

Using tabs at the top of the screen, you can arrange all the gadgets you’d like into different views, and then move from one to another by clicking on a tab. I like the ability to pick three favorite gadgets and put them on the Dashboard, which can be seen at the bottom of your screen. For example, you could put a short list of the stocks you want to keep an eye on all day in a gadget called QuickList and also have a news page open, dropping both into your Dashboard. No matter what view you’re looking at, those items will be available. Clicking on a news item displays an article from Yahoo! Finance.

The program is focused on finding momentum shifts. The firm’s goal is to provide a lot of information to help make profitable trading decisions. The UniSearch tool can give you an idea of which strategies are working by scanning technical indicators. You can run these scans on intra-day data for the previous five trading days; if you want to go further back in time, you’ll search through end-of-day data. The program ships with 230 canned searches; you can also write your own.

VectorVest doesn’t integrate directly with online brokers; you’ll have to place trades manually.

VectorVest RealTime runs under Windows (XP or Vista), and is a downloadable program. The installation process checks to see whether you’ve got Microsoft.NET Framework 3.5; if not, it will take additional time downloading that software and installing it. There’s an introductory price of $29 if you want to try the program for 30 days. We think it’s worth a shot.

THERE ARE FREE ONLINE SCREENERS, such as those recently launched by low-cost online broker SogoTrade (http://www.sogotrade.com). Its Website also appears to follow the direct-mail-piece school of design program that VectorVest subscribes to, but allows access to these analytical tools without having to log in. You can just click on the Research tab on Sogo’s home page. You can find the screeners either by choosing Intra-Day Screeners from the drop-down menu under Research, or by scrolling to the bottom of the main Research page.

In all there are nine screeners, including High Dividend Yield, Small Cap Value and Growth at a Reasonable Price. Getting it all for free is a pretty reasonable price.

Published in Barron’s, October 20, 2008. 

Saturday, October 11, 2008

TradeStation's Latest, and What's Up With Shorts

THE SKY MIGHT BE FALLING, BUT TRADESTATION Securities’ latest release will help you figure out whether any stocks, options, forex trades or futures fit into your strategy.

TradeStation, the 2008 winner of the Barron’s Online Broker ranking, is rolling out version 8.4. “Our goal with this update was to give our active traders tools for disciplined trading and to get through these tough times,” says Janette Perez, the company’s vice president of strategic relations. The key tool introduced in this version is the Global Scanner. It taps into TradeStation’s deep historical database to help narrow the list of items suitable to trade, and to manage the scans that you develop.

The first time you start the scanner, you encounter the Launchpad; it walks you through a wizard for generating a new scan. After you name the scan (so that you can edit it or run it again in the future), you select from TradeStation’s symbol database, which you can narrow by industry, exchange or type of security. Then you start filtering by price, volume, performance, technical indicators, options-related fields and fundamentals.

All the scannable fields can include a logical operator, such as less than, greater than, equal to, between and more. The scans are displayed in a bar at the left of the Launchpad; you can run them again with a click. If you edit the criteria and rerun the scan, the new symbols are displayed in yellow. This is especially helpful for scans that are run multiple times during the trading day; it lets you immediately see the added securities that now fit your criteria.

The initial winnowing of the symbol list is done on TradeStation’s servers, then the applicable data is loaded on your system to complete the calculations. This speeds the scanning and keeps your system from bogging down with superfluous information.

If a stock is optionable, TradeStation tracks its daily implied volatility and put/call ratio automatically, which allows traders to find stocks with extremely high or low volatility. Some of the options-related criteria that the scanner can look for include implied volatility percentile over a variety of periods (such as three, six or 12 months). To keep up with a scan in real time, users can copy the results into another TradeStation tool called RadarScreen.

Capitalizing on the scanning technology, version 8.4 also includes an expanded number of Hot Lists, which are intended to identify trading opportunities for equities and options based on price and volume, as well as options data such as implied volatility, put/call volume and put/call open interest. There are more than 70 stock-related and 30 options-related Hot Lists. Currently you can’t take a Hot List scan and drop it into your Launchpad, but that feature may be available in the next version.

Also added in version 8.4: new order-staging capabilities and an expanded Learning Center.

CAUGHT BY THE SHORTS: Frequent traders have been hobbled by the Securities and Exchange Commission’s short-sale ban. The order, put in place on Sept. 19 and set to expire on Oct. 2, was extended last week until Oct. 17, or until after enactment of bailout legislation. To “protect the integrity and quality of the securities market and strengthen investor confidence,” according to the SEC, traders were prohibited from selling financial stocks short while the exchanges considered new rules. This put nearly 800 financial-sector stocks out of the game for short sellers. An additional 30 companies, including GM and GE, were added on Sept. 26.

At E*Trade, Chris Larkin, vice president for active trading, notes that the real-time evolving nature of the SEC’s temporary ban on short-selling financials has proved challenging to exchanges, broker dealers and institutional and individual investors. “We are making every effort to ensure we and our customers are complying with the emergency regulatory guidance being issued during these unprecedented times in the market,” Larkin says. “In addition, we are working collaboratively with our industry peers to ensure we are representing these changes consistently with our customers and the industry at large.”

Interactive Brokers has taken an active role in helping their customers continue to sell short. According to spokesman Andrew Wilkinson, Interactive Brokers will “buy in” stock to cover customers’ deficient account positions, for whatever reason, as soon as the firm expects to be unable to make good delivery of stock sold short by any of its clients.

IB’s customers who trade in United Kingdom markets will be affected by an additional ban. The U.K. Financial Services Authority prohibited short sales or equivalent trading strategies in approximately 40 U.K.-listed financial stocks until January 2009.

Wilkinson says that the key initiative within the order affecting option traders is a restriction on exercising put positions that would lead to a short stock position. Interactive Brokers posted a page on its Website at http://individuals.interactivebrokers.com/en/trading/shortSaleMechanics.php illustrating the administrative complexity of these short-sale trades.

Published in Barron’s, October 6, 2008.