Investor Brain

Saturday, May 13, 2006

Automated Forecasts

IF YOUR CRYSTAL BALL NEEDS some polishing, Greenlight Stocks (http://www.greenlightstocks.com) offers an algorithm that uses statistical and mathematical methods to forecast prices for North American stocks. The site lets you check a 12-, 24- or 48-day forecast for individual stocks or a portfolio and issues a recommendation.

This forecast is based on pattern recognition, which enables the model to identify stock-purchasing trends that might be hidden from the naked eye, and estimates the probability that such patterns will continue in the future.

If you set up a portfolio to track, recommendation changes—for example, from Hold to Sell or from Buy to Sell—will be sent to you via e-mail.

We found this site intriguing, although the layout needs some work. Once you type in a stock symbol, a densely packed page of data appears. Near the top is a recommendation for the stock that you’re examining—Buy, Sell, Overbought or Oversold. You’re shown forecast details, which describe how the model believes the stock will perform over the specified periods.

The model also lets you know how its forecasts have worked over the past month. By clicking on “Historical Prediction,” you can check its accuracy for the past year. The tables also display the average gains or losses the model is forecasting over the various periods. If you’re a swing trader, the data is interesting, although the presentation needs to be cleaned up.

You can try the site free for 30 days. If you sign up, you pay $9.95 per month to track up to 30 stocks. Use the trial period to see how well the predictions work.

LIKE TO CHANNEL Benjamin Graham and David Dodd? Checklist Investor, a program published by Sollee Solutions (http://www.checklistinvestor.com, $49.95) was created to help individuals make better investment decisions. It offers checklists, based on the book The Intelligent Investor, the value investor’s bible by Graham and Dodd. The lists guide you through an investing decision in a systematic way. We examined version 4.03.

The program ships with 14 checklists built in, plus a method for creating a checklist of your own. The lists also can be customized. Patrick Sollee, the program’s author, recommends creating a checklist based on any good book you may have read about investing.

Checklist Investor is easy to install and to begin using, but it requires quite a bit of manual data entry. Some of the items in the checklists, which query the user about the historical performance of a stock or mutual fund, could be automated via the Internet.

You can store all your favorite online investing sites in the “Internet Research” area of the program. The author recommends using Checklist Investor as a repository for all your investing decisions, as well as ideas and additional research. You can grab Web images, such as stock charts, and associate them with a particular stock or mutual fund. There’s even a way to enter your notes from company conference calls, which would be much more valuable if it also linked you to a list of coming calls.

Some of the checklists are extremely lengthy, though they’re full of good ideas for a long-term value investor. This program also is valuable for a novice or an intermediate-term investor, but won’t be much help for the short-term trader. It also needs more robust ties to online data to minimize manual-information entry and make it easier to use.

WHILE THE PACE OF DEALS among online brokers has slowed recently, the integration of last year’s combinations continues apace. We’re keeping an eye on the merger of Ameritrade and TD Waterhouse into TD Ameritrade (http://www.tdameritrade.com), which recently cut commissions to $9.99 per online trade for stock transactions, regardless of the number of shares.

Customers continue to log in through the same public sites as before—Ameritrade clients at http://www.ameritrade.com and TD Waterhouse clients at http://www.tdwaterhouse.com. The two sites still have separate clearing operations, so they aren’t yet integrated. “We’re starting to close product gaps now. Those pieces will keep rolling out over the next few months,” says Katrina Becker, TD Ameritrade’s director of corporate communications. The gaps in question are research offerings that are now available to both platforms. The pricing is the same, regardless of which site you use. The final integration is expected by the end of the year.

Meanwhile, BrownCo customers were to be integrated into E*Trade (http://www.etrade.com) following last year’s acquisition of the former by the latter. We’ll be curious to see how this goes, in view of the problems seen by former Harrisdirect customers when they were integrated into E*Trade a few months ago.

Published in Barron’s, May 8, 2006
Direct link:  http://online.barrons.com/article/SB114687153382445484.html?mod=Electronic+Investor

Saturday, April 29, 2006

Currencies, Anyone?

ONLINE TRADING ISN’T JUST FOR FOLKS WHO TRADE STOCKS and options. Some Web-based brokers appeal specifically to those with an interest in trading currencies, commodities and other instruments.

OANDA (http://fxtrade.oanda.com), which was launched as a Website that provided exchange-rate quotes in the late 1990s, morphed into a foreign-exchange platform called FXTrade in 2001. Based in New York City, it has about 15,000 customers, but more than 100,000 have “demo” accounts that allow them to trade currencies with model portfolios, not real money. The platform makes extensive use of price/time graphs.

Late last year, OANDA introduced an options contract called FXBoxOption, which allows a customer viewing a price chart of a particular currency pair, such as the U.S. dollar and euro, to indicate via a box on the chart where the price, or exchange rate, is likely to be at a subsequent time, be it five minutes or six months later. The system then calculates the payout that would accrue if the price of the currency pair in question reaches the level stipulated. Lower-probability price targets have higher payouts, and vice versa.

Once the payout is calculated, the customer can decide whether to purchase the option and, if so, how much to invest. If the price hits its target by the prescribed time, the customer receives the payout. If it misses, there is no payout.

This option is intriguing, though risky, because it is priced in real time after the customer defines it. As noted, it can be held for minutes or months. BoxOptions aren’t traded on any exchange; they are a contract made between the customer and OANDA. You can learn more about BoxOptions at http://fxtrade.oanda.com/boxoption/.

Like most forex-trading firms, OANDA doesn’t charge commissions. Instead, it collects the spread between bid and ask. Spreads are relatively tight; the U.S. dollar (USD)/euro spread is 11/2 pips, though some pairs have much higher spreads. (A pip is 1/100th of a cent.) The pound/yen spread, for instance is 6-to-6 1/2 pips. The spread is the same whether you’re trading a lot of $1,000 or $1,000,000, which is somewhat unusual. Many other forex firms tighten the spread as the size of the transaction increases.

Another key component of forex trading is utilizing leverage. Stock and option traders know this practice as trading on margin, but their use of margin is significantly less than that employed in foreign-exchange trades. OANDA lets customers enter a trade with 50-to-1 leverage, and lever up to 100-to-1 to maintain the position. If the price moves against them, they either have to liquidate the position or put up more money to maintain it.

OANDA has no minimum for opening an account, and you can trade lots as small as $1. Interest accrues by the second, rather than on a daily basis, which is customary.

SOME BROKERS LET YOU TRADE COMMODITIES ONLINE, though most restrict you to electronically-traded contracts such as S&P 500 futures. Xpresstrade (http://www.xpresstrade.com) offers 24-hour trading of electronic and open-outcry futures products, including crude oil and gold, around the world. Customers also can trade 20 currency pairs on the same platform. The firm provides access to more than 25 exchanges and more than 300 products. Based in Chicago, it has customers in more than 100 countries.

The Xpresstrade platform, developed in-house, runs from a browser using Java. Dan O’Neill, Xpresstrade’s principal, says the site aims to offer a full suite of trading tools and resources, including conditional and trigger-type orders. Many electronic-futures platforms operated by the exchanges don’t accept GTC (good until cancelled) orders, so the platform simulates one by maintaining it on the broker’s computer and on the exchanges for you. You can also place time-directed orders, which might, for example, work for 20 minutes and then be canceled, or activated, two hours after the order is placed.

All the quotes on the Website are real-time, offered at no additional charge. O’Neill says, “It’s a huge expense for us, especially the overseas exchanges, but our customers can’t afford to trade off delayed quotes.” The platform allows customers to trade futures/options combinations, such as butterflies, condors and spreads.

If you’re wondering how the commodities and futures markets work, Xpresstrade offers 11 self-study courses on its site that can be accessed at any time. Topics include Oil Market Basics and How to Trade Futures.

Commissions depend on what you’re trading. Futures commissions range from $5 to $11 per contract. Options on futures are $10 per contract. Currency trades don’t carry a commission. Like OANDA, Xpresstrade makes its money on the bid/ask spread, which ranges from 3 pips (USD/euro) to 15 pips (euro/Australian dollar).

Published in Barron’s, April 24, 2006

Monday, April 10, 2006

In the Bargain Bin

IN OUR ANNUAL RANKING of online brokers ("Different Strokes for...,” March 6), six browser-based sites and three software-based sites earned less than four stars because of significant shortcomings, which include trade-execution problems, below-average design, loosely integrated research amenities, weak reporting or above-average costs. Even so, one of them may suit your needs, especially if you’re looking for rock-bottom commissions and can live with some of the shortcomings.

Browser-Based Brokers

TradeKing (http://www.tradeking.com) is the new kid on the block, offering very low prices ($4.95 for stock transactions, and $4.95 plus 65 cents per contract for options) and a slick Website. We also like the Probability Calculator, which gives TradeKing clients the ability to estimate the probability that a trading strategy will be successful. On the downside, you have to enter an additional password to place a trade, which seems to be an artifact left over from the late 1990s, and the order-routing technology is weak; it doesn’t get the best pricing. It’s the cheapest of the browser-based brokers, however, undercutting Ameritrade’s Izone by a nickel.

TradeKing’s CEO Rich Hagen contacted me after the article was published in Barron’s to say that the additional password is no longer necessary when placing a trade.  He also states that the order routing technology is in place, with the aim of getting customers the best price, but that he could not provide me with statistics backing that up since the company is so new.  We’ll keep an eye on TradeKing’s price improvement strategies as they develop a track record. 

Charles Schwab (http://www.schwab.com) has greatly improved its marketing, but the Website feels crowded, disjointed, and difficult to navigate. Schwab also fell considerably behind the pack in terms of trading technology this year, as customers can’t place trigger orders—orders that get automatically executed when a specific price or other target is reached—nor can they direct their orders.

Still, the site’s research capabilities are terrific, although they may not link easily to a customer’s portfolio holdings—you may have to do some spelunking through a series of tabs and tickers. Its stock picks also have been among the best of major brokerage firms ("Picking the Top Stockpickers,” Feb. 13). For investment neophytes looking to assemble a portfolio of mutual funds, Schwab’s research provides worthwhile guidance.

Balance and position reports are delayed for households with less than $100,000 in their accounts, and margin fees are on the high side. The firm recently stopped charging account-maintenance fees, and improved its portfolio-reporting capability—welcome news.

Ameritrade’s Izone (http://www.izone.com), another relative newcomer, was rolled out in early 2005 and ended up supplanting the late Freetrade. It’s cheap, but there’s no phone for customer service, as Izone is designed for those who are self-directed and self-sufficient. E-mail queries usually are answered promptly, however. In return for this no-frills approach, you get low commissions for stock trades—$5 for market or limit orders. There’s no online bond-trading capability, yet you get access to Ameritrade’s order-routing technology for stocks and options. Many Ameritrade tools are available—but at extra cost.

Wall Street*E (http://www.wallstreete.com) used to be one of our favorites, but the site has seen little updating in several years. We still like the prepopulated trade tickets and real-time account information, and the changes implemented last year for entering spread orders. The firm offers three levels of service, depending on how much your hand needs to be held. There are services for Spanish-speaking customers and for non-U.S. residents.

TD Waterhouse’s (http://www.tdwaterhouse.com) site has been cleaned up considerably this last year, and includes improved research and charting tools. It doesn’t offer smart- order routing or customer-defined order routing, however, and its options-transaction fees are on the high side. Margin rates are very high. We do like the new research layout; some of it can be viewed without logging into an account. TDW lets you access your account in many different ways—online, touch-tone, wireless, or by walking into one of its offices. The site will be rolled into the new TD Ameritrade later this year as the result of a merger of the two.

Firstrade (http://www.firstrade.com) has a promotion running through the end of April that gives new account holders 2.99% margin fees for 90 days. After that, they revert to their usual rates, which are currently in the middle of the pack. As with TD Waterhouse, Firstrade’s trading technology is weak, but its fees are much lower ($6.95 market and limit orders). Another plus for cheapskates: no extra fees to buy mutual funds online, provided you hold them at least six months. You can’t trade complex options online, but its bond and CD inventory is easy to search and trade. There are Chinese-language links available as well.

Software-Based Brokers

Here are three software-based offerings, two of which are from brokers that are primarily browser-based.

Power E*Trade (http://www.poweretrade.com) is a software application, but there also is a Web component. A recent redesign gives customers a complete view of their accounts, plus access to spiffy new charting tools. We like the Prepared Orders feature, which lets you create a list of up to 25 orders, which you can execute singly or all at once. There are some strange holes in the software platform, however, such as an inability to trade complex options. As with E*Trade’s regular offering, margin fees are high, while interest payable on cash balances is low.

ScottradeELITE (http://www.scottradeelite.com) offers a great introduction to software-based trading for the relatively active trader. But to run with the big dogs, it has to have better order-routing technology and the ability to trade complex options online. It’s got low barriers to entry compared with other software-based platforms, and could work out great for the newcomer to the field.

AB Watley (http://www.abwatley.com) lets users trade stocks and simple options online through its trading platform, but everything else must go through a live broker. Commissions range from $6.95 down to $1.95 per transaction depending on your trading volume. Watley definitely caters to active traders in OTC Bulletin Board and pink sheets, including Level II quotes for pink sheets. AB Watley also lets you access your account via a browser in case you’re away from your main computer.

Pairing Up and Bulking Up

Consolidation continues to be a major theme in the online-broker industry. Terra Nova Trading was thought by industry insiders to be on the block, and they were right.

RushTrade Securities announced that it has agreed to acquire 100% of the outstanding membership interests of Terra Nova Trading, which includes Market Wise Securities and Market Wise Stock Trading School. Both Rush and Terra Nova have been marketing themselves to day traders and hedge funds. According to a press release, the combined companies will have approximately 20,000 customer accounts and over $500 million in customer-account assets. Chris Doubek, Terra Nova’s president, says the rationale for the merger is to combine RushTrade’s proprietary trading software with Terra Nova’s back-end processing and clearing operation to create an entity that owns its own technology “from soup to nuts.”

Terra Nova now licenses Townsend Analytic’s RealTick software, which Doubek admits is “a little much” for the average retail investor. Doubek says that RushTrade’s trading platform offers about 70% of RealTicks’ functionality, but will be much less expensive to offer. It will continue to offer RealTick to its high-end customers.

Doubek adds that the combined firm plans to offer “very competitive” commissions, but will avoid the low end currently occupied by Interactive Brokers and MB Trading.