Investor Brain

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. 

Saturday, September 26, 2009

The Long and the Short of It

WOULDN’T YOU THINK IT A LITTLE HYPOCRITICAL if your publicly traded online brokerage, which is working hard to appeal to frequent traders, didn’t allow you to have a short position in its stock? When that happened to an Electronic Investor reader in Houston, he shot me an e-mail.

Normally, one establishes a short position in a stock by entering a sell order without holding the stock in question. Traders who take this route are forecasting a drop in the stock’s price; they expect to buyback shares, or cover the position, at some point. The usual stock-trading mantra, “buy low, sell high,” is reversed by short sellers, whose goal is: “Sell high, buy low.”

In order to sell a stock short, the broker has to have stock that the seller can borrow. The inventory of shares that can be borrowed depends on other customers who have purchased that stock in their margin accounts. Traders and brokers must also comply with Regulation SHO (details at http://www.sec.gov/spotlight/keyregshoissues.htm), an SEC guideline designed to, among other things, eliminate “naked” short selling, which is selling the stock short without borrowing it first. But there are other ways to end up with a short position in a stock, notably through options trading.

Your fellow reader said in his e-mail that his broker, TD Ameritrade (http://www.tdameritrade.com), closed a short position on its stock that he held in his account because it’s against company policy to allow customers to short the shares (ticker: AMTD). Somehow, he had slipped through the cracks after writing naked calls against the stock in April that was exercised in May. He had a long position in another online broker’s stock, so he was happy to hold on to the short in AMTD as a hedge.

At first, he said, a TD Ameritrade staffer called and told him the firm closed the position because the stock was on its “hard to borrow” list, presumably because there weren’t a lot of shares available to trade.

Then, the reader noted, the employee conceded that it was against company policy. If you try to sell AMTD short on TD Ameritrade’s system, you will get an error message saying, “Short sell orders for AMTD are not accepted.” However, it is still possible to sell naked calls and buy puts, which generate commissions and can result in a short position down the road. The reader commented, “Come on, now…Why isn’t that precluded, given the potential for ending up short their stock?”

Kim Hillyer, senior manager, communications and public affairs, at TD Ameritrade, confirmed to Barron’s that the policy did exist and had been in place for more than 10 years.

That prompted us to check around with other publicly traded brokers to see if this was a common policy, as Hillyer suggested. And we did find one, E*Trade (ETFC), that similarly prevents its customers from shorting its stock.

However, representatives of Schwab (SCHW) (http://www.schwab.com), Interactive Brokers (IBKR) (http://www.interactivebrokers.com), SiebertNet (SIEB) (http://www.siebertnet.com) and optionsXpress (OXPS) (http://www.optionsXpress.com) say they do allow clients to short their shares.

Even Tom Sosnoff, a senior vice president of the trading group at TD Ameritrade since his firm, thinkorswim (http://www.thinkorswim.com), was acquired by TD Ameritrade earlier this year, says thinkorswim clients can short its stock.

There’s a happy ending to this tale. On Sept. 16, after I asked officials at TD Ameritrade whether my reader’s concern was well placed, the firm revised its stand. Said Hillyer via e-mail, “We have rescinded our policy on shorting TD Ameritrade stock. The [new] policy is in effect as of today. It was a long-standing policy, and your e-mail gave us an opportunity to review and make the decision to discontinue it.”

Now E*Trade is the only mainstream broker to disallow client shorting.

VERIFY YOUR TRADE FOR FREE: Have you ever wondered whether you really got the best price at the instant your trade was executed? The NASDAQ DataStore has made a free version of one of its tools, Market Replay, available to individual investors at the NASDAQ OMX DataStore (data.nasdaq.com). We took a look at version 1.1 of this tool when it was introduced in March 2008; it is currently up to version 2.4.

Market Replay can reconstruct the events around a trade to determine whether there was a missed opportunity or an unforeseen event. Brokers can send clients a Nasdaq-validated screen shot of the moment their particular trade occurred, confirming the quality of the execution, thereby alerting customers if they got the best price.

There are two versions of Market Replay available. Both are Adobe Air applications, and open in a separate window. To get going, you enter a ticker and the date and time you want to examine. Then you view a chart showing all the trades executed for that particular symbol. The National Best Bid is represented by a blue line and Best Offer by a green line.

Market Replay LITE, the free version, lets you view up to 10 queries per day, and gives you one minute of data at a time. You can view replays for trades executed over the three previous days. For $9.99 a month, you can access Market Replay PLUS, which allows unlimited queries showing three minutes of data, and five days of historical data. PLUS subscribers get additional volume data as well.

MORE MOBILE TRADING: Interactive Brokers has announced a beta version of its iTWS trading application for the iPhone. Available from the App Store on your iPhone, iTWS lets you trade stocks, options, futures, futures options, and warrants on over 80 markets internationally. For security purposes, you’ll need your IB-account unlock card handy.

The app also lets you stream data and monitor your trades and account balances. The portfolio manager doesn’t show profit and loss, but that’s a minor quibble.

Published in Barron’s, September 21, 2009. 

Saturday, September 12, 2009

Fidelity Spiffs Up Its Bond System

THERE’S A LOT OF HELP OUT THERE FOR INVESTORS looking to locate the right stocks, exchange-traded funds and mutual funds for their portfolios. But there hasn’t been as much assistance available for potential bond and options investors.

Fidelity is now trying to fill a portion of this gap with the launch of a new fixed-income program that’s designed to help investors better understand and consider these investments as part of an income-generating strategy for managing overall portfolio risk and creating potential tax efficiencies.

The program has three main components that are delivered both online and in person. You’ll find the updated online fixed-income resource center available at http://www.fidelity.com/fixedincomechoices.

Choose the “Review or Build Your Fixed Income Portfolio” option to get to a drop-down filter that lets you select your time frame and risk tolerance. It then displays a list of fixed-income alternatives.

When I picked “I have a longer time frame to reach my goal,” Fidelity suggested four possibilities arrayed from lowest to highest risk: investment-grade corporate bonds, two Fidelity bond funds, and non-investment-grade corporate bonds. Each choice is accompanied by a Research/Buy button, which takes you to a longer description of the product.

From there, you can search the available inventory using Fidelity’s bond-filtering feature, which gets pre-filled depending on what type of bond or bonds you’re considering.

You can tweak the maturity date, rating, and other criteria, then let the filter run. The results are displayed in a graph that shows yield versus maturity; clicking on a point on the graph brings up the offer page for that particular bond.

All of these functions are available before logging in to fidelity.com. To place a trade or to see how buying a particular bond would affect your portfolio requires a Fidelity account.

Also outlined in the resource center are target-asset mixes for different investment strategies. These include mixes that range from conservative, balanced, and growth to more aggressive models. The center includes market research on a variety of fixed-income topics, and a link to Fidelity’s Portfolio Review tool.

Fidelity customers can use the information about the types and behaviors of different fixed-income products to begin building a bond ladder, using the appropriately named Bond Ladder Tool, available at Open Bond Market. The Open Bond Market includes a full suite of detailed information, previously supplied only to professionals, about more than 10,000 bonds on Fidelity.com. This provides information on bond availability, trading data and pricing.

The other pieces of the Fidelity fixed-income offering feature phone access to the firm’s team of fixed-income specialists, and free educational seminars at Fidelity’s U.S.-based Investor Centers. “Demystifying Bond Selection for Your Portfolio” is one such seminar. A schedule of seminars and registration information are available at http://www.fidelity.com/seminars.

Richard Carter, vice president in Fidelity’s retail-brokerage business, says, “As market volatility has settled down, and rates for Treasuries and [certificates of deposit] have continued to fall, we’ve seen our customers show an increased interest in individual bonds and bond funds for the potential higher returns and the diversification benefits these products can bring to their portfolios.” Carter says that the rapidly shifting market conditions of the past year only re-emphasize how important it is to be diversified.

In the first six months of 2009, Fidelity retail customers’ assets in corporate bonds rose by 24%, and their assets in municipal bonds increased 7%. In addition, Fidelity’s overall bond-fund assets jumped by nearly 17% in the first six months.

SO WHAT ABOUT OPTIONS? HERE’S AN intriguing site that would greatly benefit from some well-written documentation. But it’s fascinating anyway. A group of options traders who happen to love coding came up with their own online tool to test their online options-trading strategies, and now they have introduced The Options Lab (http://www.theoptionslab.com).

To use it, just create a login ID and go. You can reach the site in either Online or Offline mode. When Online, price data are filled in for you, but some strategists use it offline to play around with FX options, commodities options and interest-rate options where data are not always available or a ticker is not clearly defined.

There are several dozen predefined strategies built in, or you can make up your own. Once you enter a ticker and choose a predefined strategy, aspects such as risk parameters (greeks), initial cost and current profit and loss are calculated. You’ll also see a graph displaying the profit and loss over time. From here, you can adjust the number of days you plan to hold the position, implied volatility, or the price of the underlying stock, to see how the chart changes or how the greeks adjust.

You can include up to four legs with your options strategy; it’s easy to exclude a leg or include a stock transaction to measure the effect on your P&L. If you click on the button marked “Exp,” you can see what the position is predicted to look like at the expiration date. The “Quick Gain” button lets you see what the gain will be if the market moves your way the moment you place your order; “Quick Loss” shows your loss if the market moves against you.

The Options Lab is free for use by individuals but charges a fee of $75 to $150 per month for companies that want to allow group use. The authors say that it won’t help predict the trend of underlying items and it won’t predict the trend of volatility. It will, however, help analyze numerous useful angles on the options strategy you decide to study. You may also use the Options Lab to create your own strategy.

DO YOU FEEL LUCKY? FX Solutions (http://www.fxsolutions.com) is launching the 2009 version of its annual forex-trading competition this week. They’ll hand out more than $100,000 in awards, based on the highest percentage increase in a forex portfolio between Sept. 20 and Oct. 16. Participation requires an account funded with at least $500 in equity; any deposit made between Sept. 6 and 18 will receive a bonus of 10% (maximum $1,000 bonus on a $10,000 funding).

The top two winners will be named World Champion and Runner-Up, plus there will be another 28 winners—the top four in each of seven geographical zones.

Published in Barron’s, September 7, 2009.