Investor Brain

Saturday, June 30, 2007

Pick Your Own Online Stock Sherpa

Working Title:  Beat the Cheat

A FEW WEEKS AGO, a stock-market trading contest run by TheStreet.com was found to be compromised—i.e., some participants were cheating. So the game, called “Beat the Street,” was cancelled and the prize money withheld. The provider of market news and commentary then started up another round of the game on June 13 (beat.thestreet.com), throwing in the original $100,000 prize money to create a grand prize of $150,000 for the second tourney. TheStreet.com also said it had added new safeguards that would make it impossible to trick the results this time around.

Cheating in a trading game? It’s like finding out that the apple pie was made with crackers. Stock-picking tournaments, which Barron’s also runs, are great ways to learn about high-risk trading strategies without losing any of your own money. But they’re no fun when your rivals have found holes in the contest’s rules that give them an unfair advantage.

I came in second in an investing game a few years ago, and enjoyed the rush of competition immensely. It was also educational to see what other contestants were doing, and to learn from their successes and failures.

Several online-brokerage sites allow traders using real money to give others a peek at their strategies. TradeKing (http://www.tradeking.com) customers, for instance, can set themselves up as “Certified Traders” and the firm will publish their actual transactions on the site’s “Community” section. However, the certified trades include only those executed at TradeKing, so customers trading with other brokers can show only a portion of their activity.

ENTER COVESTOR (http://www.covestor.com), which opened its virtual doors on June 5. Covestor is designed to enable individual investors to view the portfolio allocations of others—and to follow in the path of those who enjoy successful outcomes.

Stock-picking games like those run by TheStreet.com display fantasy trades, but at Covestor you see real trades, documented by brokerage records. Members’ names don’t have to be displayed for all the world to see, but to sign up for an account, they must provide proof of identity and upload brokerage statements to verify their actual holdings.

Rikki Tahta, co-founder and chairman of Covestor, explains: “We all know people who are managing their own money, and doing a great job. Our research shows there are tens of thousands of unsung heroes and millions of others who would be keen to invest alongside them.”

After an account is created, Covestor logs that member’s trades and holdings—using a secure link into his or her brokerage account, or accounts. The link is provided by Yodlee, an account consolidator that we’ve written about many times. Those who don’t want to link their brokerage accounts can enter their transactions manually. Covestor checks these entries periodically against paper brokerage records to assure accuracy. Other members, or “followers,” can then track the real-time investments of those who share their investment goals.

All of the participants can opt to publish their real names or remain anonymous by selecting screen names. It might be hard to give much credence to the financial acumen of “bigdaddy69,” so it would be a good idea to pick a moniker that doesn’t scream goofiness. Actual trade sizes are not disclosed, merely the item purchased and the price.

Covestor could give a marketing push to some small investment managers by publicizing their picks, but it would be difficult to calculate an actual portfolio return without knowing the size of a particular investment.

Should you become a Covestor member, each time you execute a trade you will be invited to give the rationale for your move. Covestor will then build you an auditable, time-stamped record of your decision-making and will track your returns.

Within a year, says co-founder Perry Blacher, members will be able to sign up to follow the trades of their favorite Covestor Sherpas. That will entail a fee for what is now a free service. And here’s where it gets more interesting. Covestor plans to partner with several online brokers that eventually will allow members to sign on with high-performance money managers of their choosing. These guides will essentially run separately managed accounts for their followers. This service also will require a fee, most of which will flow to the adviser, thus rewarding those who have created the biggest online following.

Blacher says that a verified track record will start with the existing holdings in your account. Owing to the rollout of these additional services in a year or less, it pays to sign up relatively soon to start creating a successful track record, he notes. The firm is also still working out some regulatory issues.

We’ll check back on Covestor in a few months to see if it’s taken off.

ONLINE-BROKER NEWS: Advanced Chart Patterns are now available to all optionsXpress (http://www.optionsxpress.com) customers, allowing them to search for bullish, bearish and other trends among thousands of securities, using real-time data. Investors can access 36 technical trends from the familiar, such as Double Bottoms, Head and Shoulders, Moving Average Crossovers and Breakouts, to the more esoteric, such as Bearish Symmetrical, Continuation Triangle or Descending Continuation Triangle. The charting-pattern software is provided by Recognia.

COMING SOON: A series of regulatory initiatives designed to modernize and strengthen the National Market System for equity securities, brought to you by the Securities and Exchange Commission, is due to be implemented for 250 stocks (100 NYSE, 100 Nasdaq, 50 Amex) on July 9. Full compliance with the Regulation National Market System (Reg NMS) is scheduled for Aug. 20.

Most of the changes won’t be visible to the retail trader’s eye, but trading centers have been extremely busy getting ready over the past couple of years. They are required to make a serious effort to avoid executing trades at prices inferior to protected quotes displayed by other trading centers, which means trades ought to execute at the best price available when your order was entered.

Quite a few market centers are setting up “dark pools,” or inventories of stock to be sold outside the NMS. How will this affect you? It should not be of much significance to the smaller retail trader, but we’ll let you know if that changes.

Published in Barron’s, June 25, 2007. 

Saturday, June 02, 2007

TD Ameritrade's Quiet Consolidation

A SURPRISING THING HAPPENED OVER THE WEEKEND of May 12 when 2.7 million one-time TD Waterhouse accounts were converted to the TD Ameritrade (http://www.tdameritrade.com) platform.

Virtually nothing.

That’s news because the Electronic Investor’s experience with account changeovers has shown them to be filled with pain and misery. Our e-mail inbox has at times been stuffed to overflowing with investor complaints as online brokers muddled through the process. But this is TD Ameritrade’s eighth consolidation of another firm’s customers, and it seems to have gotten the job done right.

We did hear a few murmurs, mainly about the processing of dividends that were paid within a day or so of the conversion. The dividends were sent to TD Waterhouse’s previous clearing firm, ADP, so they didn’t show up immediately in the newly converted accounts.

Kim Hillyer, TD Ameritrade’s manager of communications and public affairs, says that all those dividends were in the correct place by May 21. “We allocated 18 months for the conversion, and it only took 15 months,” she adds.

There was a notice on TD Ameritrade’s Website for a few days after May 12, indicating that call volume to its phone support lines was way up, and letting potential callers know that they might have to hold for a while. Hillyer says that most calls were queries about navigating the site, and a few involved a minor glitch in processing online cash transfers. “This was a new site for legacy Waterhouse customers who hadn’t seen it yet,” she notes.

A couple of clients were upset about changes in service. Former TD Waterhouse customers who don’t qualify for TD Ameritrade’s Apex service level (over $100,000 in assets in all accounts) must pay $2 per month if they want their statements sent via snail mail. In addition, TD Ameritrade doesn’t generally give its clients access to initial public offerings; that was a major draw for many TD Waterhouse customers. Hillyer says that the firm is evaluating the possibility of offering access to IPOs.

With the biggest conversion in online broker history now complete, what’s next for TD Ameritrade? The firm is getting ready to launch some new tools over the summer, aimed at both long-term investors and frequent traders.

“We’re really pleased by how it’s turned out,” said Hillyer. “It’s done and now we move on.”

Tool for Trend Trackers

Interested in market timing? VectorVest (http://www.vectorvest.com) offers an interesting package of analysis, graphing and sorting that can help you pick stocks on the move. To be honest, the firm’s Website looks like a direct-mail piece and is therefore off-putting. But if you can get past that, you’ll find a suite of stock-picking and back-testing tools that can help you develop your own trading system.

We looked at VectorVest Online, which lets you analyze the U.S. markets. There are also versions focused on Canada, the U.K. and 10 European markets; an Australian version will launch over the summer. The product uses end-of-day trading data, but the firm plans to offer real-time processing during the third quarter.

The opening page shows the prevailing market trend and is designed to read like the front page of a newspaper—albeit one where the big story is timing the market. The first thing you see is 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 site calculates various market timing indicators, assessing a stock’s value, safety and whether it’s time to buy or sell. VectorVest tracks 8,000 U.S. stocks, and its UniSearch tool lets you dig through the information and locate stocks that fit certain technical criteria.

VectorVest issues a Buy, Sell or Hold rating on each stock in the database every day, based on a combination of fundamental and technical studies. A graph of a particular stock shows the price and a recommended stop price; at the bottom, timing indicators are displayed. Sell signals are typically generated when the stock-price line drops below the stop level. Buy signals integrate fundamental data and, as a result, are more complicated.

You can test the program yourself for $9.95; a subscription costs $59 per month or $645 per year for each product. You can add products—say, Canadian equities—to a U.S. subscription for another $20 a month.

Saturday, May 19, 2007

Giving Bonds an Electronic Upgrade

TO ENABLE ITS LISTED COMPANIES TO OFFER UP more of their balance sheets to efficient trading and to enhance fixed-income market liquidity generally, the New York Stock Exchange is relaunching its bond platform this quarter. The upgraded electronic bourse should end at least some of the fragmentation in corporate bond trading, an enormous marketplace that’s still mostly off-exchange—which means retail investors typically buy from and sell to a brokerage’s internal inventory.

Finding out whether you’re getting the best available price for a stock trade is easy these days, thanks to the wide availability of real-time quotes. If you want to get the latest quote for, say, General Electric (ticker: GE), you just type the ticker into a quote box. Bond-price quotes, particularly for the many thinly traded names, are considerably more difficult to locate than stocks’. The market’s complexity is partly to blame. There is one class of GE stock available in the U.S., but many, many more GE bond issues, all at varying interest rates and maturity dates.

During June, the NYSE will launch a bond-information site at http://www.nyse.com/bonds that will provide 20-minute delayed bond-price quotes as well as a look at the market for individual bonds. The site will contain listings of all available bonds and give users the ability to search the inventory, based on criteria such as maturity date, coupon, and industry sector.

What will this mean to individual investors? The NYSE’s goal, according to John Holman, vice president and head of fixed income for the exchange, is to open up the bond market, increasing the visibility of pricing and adding liquidity. Holman says that the NYSE is making it simpler for liquidity providers, such as brokerage houses, to link into the platform.

“Having centralized information always drives the cost of execution down, which is an advantage to the retail investor,” adds Holman.

The new platform started with 1,000 bonds and is adding about 500 new issues every few days with the eventual goal of 5,000 to 6,000. Government bonds will eventually be available.

Currently, brokers that allow their customers to trade using Townsend Analytic’s RealTick platform, including Terra Nova Trading and MasterTrader, can view data and place trades on the NYSE bond platform. Holman says several online brokers, including Fidelity, are currently working on giving their customers access. “We hope the online discount brokers hook up to us,” says Holman.

Why We Prefer Barron’s

Consumer Reports magazine’s newly released ranking of online brokerages is strikingly different than the one Barron’s compiled back in March. CR’s top-ranked firm, Firstrade, for instance, came in tenth in our comparable category and its runner-up, E*Trade, was sixth in Barron’s.

Some readers have inquired about the differences. Actually, the results aren’t so shocking in light of the criteria the two publications use. We’re definitely biased, but we happen to like ours better.

The differences mostly stem from the target audiences. Barron’s seeks to address a more sophisticated investor with a more comprehensive array of broker tests. Our online-brokerage client profile is a relatively wealthy individual with at least $100,000 in his or her account who is a moderately active trader and technologically savvy. Consumer Reports’ Money Lab’s target reader is a “typical small” investor who, the service says, “makes two or three stock trades a month at most” and “adds steadily to...core mutual-fund holdings.”

CR rates only Web-based systems (Barron’s also assesses software-based brokers) on trading cost and scope, minimum trade fees, mutual-fund programs, the number of mutual funds available without a transaction fee, banking and asset-management services, the amount of free research and education tools, and customer support.

Barron’s evaluates the trade experience, technology, usability, product selection (with partial credit for items available only via a live broker), research amenities, portfolio analysis and reporting (with an emphasis on tax reporting), the quality of help and means of access, and costs of the Website or software program.

For Barron’s, high-quality trade execution, smart-order routing technology (which finds the best bid or offer), and the absence of internalized orders and reliance on payment for order flow were necessary to earn a high rating. CR’s rankings don’t consider any of these criteria.

Another key difference: Our emphasis is on hands-on testing. We get a trading account with each broker, and run the sites and software offerings through a comprehensive script. I’ll leave it at that.