Investor Brain

Saturday, November 07, 2009

Fidelity Helps Investors Shop Abroad

FIDELITY HAS JUST LAUNCHED A NEW, online international-trading center for customers, with the goal of making investing in foreign equities and currencies easier and more affordable. Retail investors can execute trades in a dozen foreign markets and eight currencies from their Fidelity brokerage accounts.

The 12 markets—Australia, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Netherlands, Norway, Portugal and the United Kingdom—represent 95% of current Fidelity clients’ international trades, which until now had to be executed through a live broker. Customers will be able to settle their trades in eight currencies: the Australian dollar, British pound, Canadian dollar, euro, Hong Kong dollar, Japanese yen, Norwegian krone and the U.S. dollar.

One interesting twist to the Fidelity platform (fidelity.com/internationaltrading) is the ability to settle trades, no matter where they occur, in U.S. dollars. This eliminates the added step of having to exchange currencies prior to placing a trade. Fidelity will perform a currency exchange so long as the trade goes through in the exact amount required; if the order isn’t filled, the currency exchange won’t happen.

Trading in international markets obviously isn’t a new idea, but when a broker the size of Fidelity enables retail investors to participate online, it shows how widely accepted foreign investing is.

James C. Burton, president of Fidelity’s retail-brokerage arm, notes, “When you consider that over the last 10 years, 80% of the world’s best-performing stocks were listed outside the U.S., it is understandable why investors are increasing their focus on international investing.”

To be eligible to trade internationally, you must hold a nonretirement account and qualify for Fidelity’s gold-level commission. Gold-level customers are those who either trade at least 120 times per year and have at least $25,000 in a Fidelity account, or have $1 million or more in household assets held at Fidelity.

Fidelity just raised the suggested level of exposure to international equities to 30% from 20% of a portfolio (see Barron’s, “Fidelity Shifts Its Assets Allocation,” Oct. 12). This new weighting will be reflected across Fidelity’s online-advice and guidance tools, including asset-allocation portfolios and managed accounts, as well as the Freedom Fund product lines. (Freedom Funds are target-date mutual funds.)

If you are eligible for international trading, your first step probably would be to explore the research available at Fidelity. You can get real-time quotes when international markets are open. Most common stocks and exchange-traded funds (ETFs) are available to trade online, while other types of securities (rights, warrants, Class A or Class B stock) might not be.

FINDING A STOCK SYMBOL allows you to get a real-time quote; when you look up a symbol, you will also see the various countries where you can trade. Note that once you buy a stock on an exchange, you have to sell it there, too, even if the shares trade on several bourses. The symbol look-up also shows 10-day average volume, which should help you locate the markets where there is more action.

To trade, you have to have enough U.S. dollars on hand (displayed as cash available to buy securities) or the foreign currency needed to place the order. For instance, if you’re buying a stock that trades in the U.K., you will need to have enough pounds sterling in your account prior to placing the transaction, or enough U.S. dollars if the trade is settling in dollars. Once you’ve placed your orders, either for stocks or for foreign currency, they’ll be displayed on your “Open Orders” page; once they’ve gone through, you can see your international holdings on your “Positions” page.

International exchanges have some restrictions that may seem—pardon the pun—foreign to investors who are most familiar with U.S. exchanges. Most markets have a tick-size requirement (meaning a price has to move a certain minimum amount before the stock price will display as having changed), as well as a lot-size requirement (a minimum number of shares); these are all detailed on the Fidelity site. Fidelity has live help available 24/7, with specialists who can walk you through the complexities.

Your international returns will depend on two factors: the usual market volatility that affects every stock, plus the fluctuations in the foreign currency against the U.S. dollar. Fidelity doesn’t pay interest on foreign-currency positions.

You will also have to keep commissions in mind; each foreign market has a different rate. For example, trading an Australian stock online will cost A$32, which is roughly US$28.90. A trade in Japan is 3,000 yen, or about US$32.90. Euro trades run €19, or about US$28.10. There are added charges for placing a trade with a live broker.

If you aren’t ready for international-equity trading, Fidelity has a mutual-fund and ETF evaluator that focuses on other types of foreign-investment approaches; please see the Website noted above.

The entire site reflects the firm’s emphasis on international trading. Fidelity’s “Markets and Sectors Overview” page now displays a world map, showing changes in indexes not only in the U.S. but globally. You can customize the indexes displayed by clicking on “More U.S. & World Indexes” just beneath the map.

Overall, this appears to be a good way for a U.S.-centric investor to look further afield for opportunities. Fidelity customers can get it all done without having to open a new account, unlike E*Trade’s international-investing feature. The interface is easier to use than that of Interactive Brokers, but the cost is higher.

TRADING TECHNOLOGIES and Tulane University are holding a trading contest that will wrap up with a live competition Nov. 13-14 at the Freeman School of Business at Tulane in New Orleans.

Twenty-two teams of four from 14 universities competed Oct. 12-23 using Trading Technologies’ software and live-data feeds from Advantage Futures. Teams from Tulane, the University of Chicago, Carnegie Mellon University, the University of Texas and the University of Toronto qualified for the final round.

Trading Technologies specializes in futures-trading. X_Trader, its flagship product, offers access to U.S. and global commodities exchanges, with links to Excel-spreadsheet analytics. The students’ performance is judged on risk-adjusted rate of return. Top prizes include internships with a leading trading firm. Good luck!

Published in Barron’s, November 2, 2009. 

Saturday, October 24, 2009

Margin Expands Regardless of Rate

THE SEPTEMBER 2008 market crash not only wiped out a huge amount of wealth; it also provided a reality check for traders using margin debt to buy their shares. But even before the Dow cracked the 10,000 mark last week, margin debt had started to climb. And though the rates investors pay for margin borrowing haven’t changed much in recent months, they still vary by as much as six percentage points, depending on the broker you use. Such a huge gap can make a big difference to an investor’s trading costs.

What exactly is margin? The Securities and Exchange Commission defines it as “borrowing money from your broker to buy a stock and using your investment as collateral. Investors generally use margin to increase their purchasing power so that they can own more stock without fully paying for it. But margin exposes investors to the potential for higher losses.” There is a further description, including possible risks and rewards, at http://www.sec.gov/investor/pubs/margin.htm.

New York Stock Exchange members had a record $381.4 billion in margin debt in July 2007, when the stock market was still charging ahead, according to the bourse’s Nyxdata.com Factbook. The low since January 2005 occurred close to the market bottom, in February 2009, when NYSE members’ margin borrowing stood at just $173.3 billion. It had climbed to $206.7 billion by August 2009, the most recent month for which the stock exchange’s data are available. Obviously, shifts in the stock market will increase or decrease the value of this collateral.

THE RENEWED BULL MARKET has inspired an increase in margin trading, and with investor confidence on the rise, more retail traders are apparently willing to take a chance and borrow to accumulate more stock—so think virtually all of the 19 brokers in a survey we just conducted. (This is the same group we covered in our annual ranking of the best online brokerages, “Blue Chips,” March 16, 2009.)

Lightspeed’s CEO Stephen Ehrlich explains that “the perception of a stabilizing economy, along with the recent run-up in the market, has given investors some added comfort with holding larger overnight positions, which translates directly into an increased use of margin.”

Most of the brokers we surveyed haven’t changed the rate of interest they charge for margin debt in recent months, presumably because short-term rates have remained low.

But the rates charged vary from a low of just 1.63% on a $50,000 balance at Interactive Brokers (http://www.interactivebrokers.com) to a high of 8.75% on a balance of $10,000 at TD Ameritrade (http://www.tdameritrade.com). IB’s and TD Ameritrade’s margin rates haven’t changed since our last report, in February 2009.

The underlying rate that brokers arrange with banks in order to finance margin transactions, called the call rate, has stood at 2% throughout 2009. A handful of brokers mark that rate up by one to three percentage points, while most charge five percentage points or more than their call rate.

Besides IB, the firms with lower-than-average margin rates include Siebertnet (http://www.siebertnet.com), Just2Trade (http://www.just2trade.com), tradeMonster (http://www.trademonster.com), Lightspeed Trading (http://www.lightspeed.com) and OptionsHouse (http://www.optionshouse.com).

Firms with higher-than-average rates, besides TD, include Schwab, E*Trade, Fidelity, Firstrade, and Scottrade. Surprisingly, two firms that cater to frequent traders, MB Trading and TradeStation, also charge margin rates of more than 7%.

Andrew Wilkinson, director of media communications at Interactive Brokers, attributes “some of the growth in margin use by our clients to the low financing costs available at IB.” But he also allows that “some of the rise is clearly attributable to a restoration in investor confidence as risk-appetite returns.” He notes that the use of margin increased 81% between December 2008 and September 2009 among IB’s customers.

Despite her firm’s higher-than-average rates, TD Ameritrade spokesperson Kim Hillyer says more and more clients are tapping this debt to make transactions. The use of margin at TD Ameritrade increased nearly 50% from the end of March through the end of June of this year.

If you are a heavy user of margin, it makes sense to shop around for lower rates to keep your trading costs in check. It will cost you $13.58 to carry a $10,000 margin debt for a month at Interactive Brokers while the same-size debt at TD Ameritrade will run you $72.92 a month—a difference of almost $60 a month. With a $50,000 balance, the monthly bill will be $67.92 at IB and $312.50 at TD Ameritrade. That’s a difference of about $245.

Margin increases in 2009 have largely tracked the market gains on a percentage basis, notes Tom Sosnoff, TD Ameritrade’s senior vice president of trading. “The market rallies 50%, debit balances increase 50%,” Sosnoff says. Thinkorswim.com, which is now a subsidiary of TD Ameritrade, raised its margin interest rate the most of any broker between February and October, by 2.2 percentage points, to bring it up to 7.45% for balances of $50,000.

Though the use of margin is increasing pretty sharply, few brokers expect the totals to reach 2007 levels because huge stock-market losses are still a recent investor memory. As Muriel Siebert, president and CEO of Muriel Siebert & Co., told Barron’s: “Given the dramatic market volatility over the course of the last 18 months, we don’t anticipate, anytime soon, as much use of margin as there was a few years ago.”

It will take time to restore confidence to the levels seen in 2007. “The last 12 months were a great stress test for industry risk departments,” says George Ruhana, CEO of OptionsHouse. He adds, “We are going to see them try and adjust after realizing three-standard-deviation events can happen on occasion.”

William P. Cahill, president and chief operating officer at TradeStation, compares the current situation to earlier in the decade: “The rebuilding of wealth and risk-taking is similar to the post-dot-com meltdown, when the Nasdaq dropped 70%.” That means it’s going to take awhile.

(Table referenced can be viewed at http://online.barrons.com/article/SB125573858162291219.html?page=sp)

Published in Barron’s, October 19, 2009. 

Saturday, October 10, 2009

The Simplest Way to Get Out

WHAT COLOR IS YOUR TRADING PARACHUTE? On tradeMonster’s system (http://www.trademonster.com), it’s white on a black background, and encourages you to take advantage of the online broker’s most recently launched tool, Exit Plan.

This enhancement, an icon visible on a portfolio-detail screen, simplifies the creation of conditional orders for getting out of a position. Many online brokers allow you to set up bracket orders when you buy some stock; these orders permit you to define your profit target or set a stop-loss, which automatically sells the stock if its price rises or drops by a certain percentage. You enter these sell orders at the time you buy the stock, which (in theory) gives you some trading discipline.

Exit Plan aims to make this basic risk-management procedure easier by using understandable words and icons to replace opaque jargon such as trailing stops, or alphabet-soup descriptions like OCO (meaning “one cancels other") and OTO ("one triggers other"). To use Exit Plan, click on a position in your portfolio and you’ll see a button with a parachute on it that says, “Set exit plan.” Exit Plan can be used for options positions as well as stocks.

There are three basic steps to defining your plan: Set a time horizon, a profit target and a stop-loss.

The profit target and stop-loss are attached to an on-screen calculator so you can create a target price based on a percentage or total change, or price-per-share change. If you fill in one field, such as percentage change, all the others are calculated for you.

At this point, you can set up either an alert or an order. Click on “Create alerts” to send yourself profit/loss notices via e-mail, which should prompt you to visit your portfolio and make needed adjustments. “Create order” automatically generates an OCO order.

The conditional orders you set up with Exit Plan aren’t visible to the market until the trigger is reached, so your intentions aren’t public knowledge. If, for instance, your profit target is reached, the order capturing your profit is executed, and the stop-loss order is cancelled.

Once your exit plan is in place, it’s displayed when you click on the position in your portfolio. Exit Plan also displays in portfolio view, which is the part of tradeMonster’s Website that lets you keep tabs on your current holdings. Portfolio reports are customizable, so you can set up a column in your portfolio view that displays your profit target and stop-loss.

Exit Plan is available on tradeMonster’s paperTrade, where you use fake money to learn how the system works. One of the features we like about the tradeMonster system is that its paperTrade is identical to its live-trading platform and you can use it without having to open a funded account.

The Chicago Board Options Exchange started to offer tradeMonster’s paperTrade on its Website (cboe.com) in the first half of September as a way to let investors learn more about trading options and other securities without risking any capital.

Exit Plan is a nicely designed tool, even though it isn’t unique. Still, it is a good addition to a platform that has numerous thoughtful touches.

The price points you define in Exit Plan are based on your own thoughts about where the stock might go, and the risk you are willing to take. An alternative that we like provides more support—but only for creating stop-losses.

SmartStops.net (http://www.smartstops.net) calculates price triggers (for stocks and exchange-traded funds only; no help here with options) each day based on current market conditions, historical trends and its own internal exit methodology. SmartStops float beneath the stock’s expected daily price range.

You could take a peek at SmartStops.net’s Website when you’re entering a stock position—you can get five SmartStops per day for free—and use its suggestions for stop-loss prices.

CHECKING ON YOUR BROKER: The Financial Industry Regulatory Authority (FINRA, http://www.finra.org) lets you browse its database of brokerage firms and individual brokers. It’s full of information about a firm or individual’s history as well as disciplinary and regulatory events.

The database, called BrokerCheck, is available at http://www.finra.org/brokercheck; you can also find it on the main Finra page, but that will take some wading through (hint: click on “Investors” and then the banner for “BrokerCheck” toward the top of the page).

The reports that BrokerCheck generates can be full of legalese and capital letters, since they are compiled from forms collected through the securities industry’s registration and licensing process.

When it comes to the online brokers we regularly cover in this column, the section of the report entitled “Arbitration Award” can be very interesting. For instance, when I looked at the arbitration reports for E*Trade, there are about 250 going back to 2000, most of which appear to involve investor losses that customers blamed on the firm. Almost all of these arbitrations ended with the phrase, “Denied in full,” indicating that the arbitrator did not find E*Trade at fault.

Individual details such as names and Social Security numbers aren’t published, but you might find it of assistance to see the complaints lodged against a broker you’re considering using.

UPDATE: In “The Long and the Short of It” (Sept. 21), we discussed publicly traded online brokers’ policies on permitting customers to short the brokers’ own stock. We asked all the publicly traded online brokers that we cover: “Do you allow your customers to have a short position in your stock?” A representative of E*Trade responded that the firm didn’t permit customers to short its shares.

We received a clarification following publication. What E*Trade doesn’t allow is a short position in any shares priced at less than $3, the range in which E*Trade stock is currently trading.

If the firm’s shares again trade above $3, E*Trade’s customers will be able to short them.

And now that Ameritrade has reversed its previous policy (as we reported in the column), we can say that no online brokers prevent clients from shorting their stock—as long as it is shortable.

Published in Barron’s, October 5, 2009.