Published in Barron's
Columns and featured published in Barron's.
Saturday, March 06, 2010
Lack of Options in Tax Software
I WAS GOING TO WRITE A COLUMN ABOUT packaged tax software and how well the top programs generally work for retail investors and traders. But I just couldn’t get beyond a nagging question for Intuit, H&R Block, TaxACT, and anyone else who publishes these very useful applications: When will you discover that individual investors are trading options, and reflect that fact in your tax programs?
The Options Clearing Corp. reports average daily volume of 14.4 million contracts in 2009. And already in 2010, the average is up to 16.4 million. Quite a few of those transactions take place in retail brokerage accounts, and will have to be accounted for on someone’s Schedule D. But packaged software isn’t addressing this market at all.
For example, users of Intuit’s 2009 TurboTax Premier, while trying to input their transactions, will not find “options” as a menu choice. Options transactions fall into the “Other” category, which means more mouse clicks are needed to get the information entered. Options are considered securities by the IRS, so gains are subject to the same kinds of treatment as gains on stock transactions. The problem most programs have with processing options transactions is dealing with their symbols, and matching up the entry to the correct exit from the trade.
As a couple of online brokers pointed out to me, the IRS does not yet require them to report options transactions. Your 1099 from your broker includes your total proceeds from sales of stocks, mutual funds, and bonds. That left it up to the individual to report options transactions. It’s difficult to measure the “tax gap” that likely resulted from not reporting gains on options transactions over the years.
That all changes in the next couple of years. Once brokers are required to report options transactions to their clients and to the IRS, I’m hoping that tax software helps traders make these calculations. Got that, publishers?
SmartStops nearly two years ago debuted a service that recommends exit strategies for stocks ("A New Way to Tell When to Fold ‘Em,” July 7, 2008). It’s just added Reentry Alerts to tell you when it might be safe to get back in.
SMARTSTOPS (http://www.smartstops.net) uses proprietary algorithms that categorize the overall market into up, down, or sideways movements in order to help calculate the best exit points for individual stocks. The service costs $9.95 per month for 10 stocks, and up to $99.95 for 100 stocks, with a 20% discount for an annual subscription.
For an additional $5 per month for every 10 stocks covered, Reentry Alerts signal when the risk profile of the equity you’re following has returned to normal. An e-mail alert will be sent to you to let you know you should take another look at this stock, and possibly buy it back or take off any protective hedge you had put in place. The service doesn’t tell you what stocks you should trade; you have to enter the list of stocks to follow manually.
IN PUTTING TOGETHER this year’s edition of Barron’s Best Online Brokers we’ve come across a number of interesting tidbits that we can share with you before the rankings are released in mid-March.
MURIEL SIEBERT AND CO. (http://www.siebertnet.com) has introduced a program to help clients with large positions in difficult-to-locate shares earn a little loan income from them. Positions must be more than 50,000 shares or valued above $100,000, and they must be fully paid for or exceed any margin debit in the account. Clients who decide to lend these securities to Siebert’s clearing firm can receive the income based on market value and supply/demand conditions. In addition, Siebert customers can now use add-on Trusteer Rapport Desktop Security Software to protect themselves from any phishing or spoofing attacks they might receive from Websites they visit.
ZECCO (http://www.zecco.com), which has made a push to improve customer service, has boosted staffing levels by 20% and extended help operations by 18½ hours per week. Over 95% of Zecco’s reps now hold a Series 7 license, a major gain from previous years. Zecco also added live chat in early 2009; CEO Michael Raneri says it’s popular with customers and helpful in reducing response times.
MB TRADING (http://www.mbtrading.com) acquired former partner WizeTrade, a Dallas-based community for traders that has been rebranded MBT World. In addition, its next generation product offering, now called MBT Lightwave, allows traders to create a variety of strategies, back-testing and then sharing them with the community of traders and MBT customers. The firm’s entire suite of software applications received at least one major update during 2009, including an advanced options platform. MB Trading reduced commissions for options, foreign exchange and futures.
TRADESTATION (http://www.tradestation.com) just launched TradeStation Strategy Network, a searchable online marketplace of ready-to-trade strategies assembled by independent third-party developers. TradeStation clients can sort, rank and compare trading strategy products by asset class, risk level, frequency of trading, historical return percentages and other criteria. After identifying an appropriate strategy, clients can subscribe, download it to their TradeStation platform and start using it in simulated or live trading.
TRADEKING (http://www.tradeking.com) expanded its Webinar and All-Star blogger programs while expanding its Online Learning Center. The second edition of The Options Playbook, written by TradeKing’s “Options Guy” Brian Overby, is an entertaining and effective guide to options trading. The firm has also tested a new Trading Dashboard, which integrates a client’s trading activities with the site’s social-media functionality, and rolled it out to the entire client base in January 2010.
OPTIONSHOUSE (http://www.optionshouse.com) updated its research tools last year with the addition of Exchange-Traded Funds-centric research, technical analysis and back testing of strategies. In addition, the firm partnered with a third-party performance monitoring service in order to actively measure execution statistics. OptionsHouse also added a mobile application that runs on a broad range of devices, including the iPhone and BlackBerry, with real-time access to accounts and trading.
Published in Barron’s, March 1, 2010.
Sunday, January 31, 2010
Has a New Price War Broken Out in Online Trading?
Analysts argue that firms like Schwab are lowering commissions to remain competitive while building up assets.
WHEN CHARLES SCHWAB RECENTLY reduced its fees for online trading in stocks and non-Schwab exchange-traded funds to $8.95 per trade from $12.95 per trade, many wondered if this move signaled the start of another round of online-broker price wars.
Prior to the change, which was implemented on Jan. 19, Schwab had had a tiered pricing structure. Retail clients who were considered active traders, or who held more than $1 million in household assets, paid the $8.95 rate for several years.
According to William Blair & Co., a market maker in Schwab stock, the pricing change is targeted at a specific customer segment—retail clients with less than $1 million in household assets, bringing this segment in line with the company’s existing pricing scheme for more affluent clients and active traders.
Blair’s analysts, Mark Lane and Katherine McCauley, say that, “We view these actions as a refinement and not the start of more intense price competition. While we believe there will continue to be modest pressure on pricing over time and our models reflect this pressure, we view online equity trading commissions as largely at a point of indifference.”
However, Jason Raznick, who serves as a director at Benzinga.com and Investimonials.com, two Websites that offer stock trading ideas and financial product reviews, believes that price competition is becoming increasingly fierce between various firms. “The revenue model at these companies appears to be shifting from commissions to selling order flow to larger brokerage houses and amassing more assets,” he says.
Looking ahead, Raznick says that this trend is unlikely to abate in 2010 as firms find it necessary to lower prices in order to remain competitive. “Under such circumstances, the need to gather more and more assets and steal market share becomes more important than ever,” Raznick asserts. “Brokers that are losing this battle will likely need to pursue consolidation by selling themselves to another firm or attempting to acquire competitors in order to increase their asset base.”
Raznick notes that “bare bones” brokers such as SogoTrade (http://www.sogotrade.com) charge as little as $3 per transaction. Dave Whitmore, president of SogoTrade, sees the commission price cuts as beneficial to the industry as a whole.
Whitmore says that brokers like Schwab (SCHW), Fidelity, and E*Trade (EFTC) have had high commission structures, and points to TD Ameritrade’s price cut to $9.99 per trade a few years back as a turning point for the larger firms. He points out that SogoTrade’s fee of $3 per trade, while offering many of the same services and functionality of other brokers, should prompt consumers to step back and ask themselves what they are really paying for.
Wade Cooperman, CEO of tradeMonster (http://www.trademonster.com) says, “If it’s good for the investor—and low easy-to-understand commissions are—we welcome it.”
Stephen Ehrlich, CEO of Lightspeed Financial (http://www.lightspeed.com/) believes that today’s active and semi-active traders are sophisticated enough to know that there’s more to choosing a broker than simply which is offering the lowest commissions. “If your trading platform is subpar or educational resources have been pared back or eliminated then cheap trades suddenly don’t mean as much,” Ehrlich says.
Steve Sanders, a vice president at Interactive Brokers (http://www.interactivebrokers.com), believes that Schwab’s new fees still make no sense for active traders or institutions. IB moved to a transparent unbundled-pricing structure a number of years ago whereby the firm explicitly charges (or rebates) exchange and clearing fees, and charges an IB fee based on monthly volume. “The more you trade the less you pay under IB’s structure,” Sanders says.
He notes that IB’s pricing for 100 shares is $1 or lower, and that the average trade size these days is 200-400 shares, even for institutions, as nobody likes to expose their trading intentions. Sanders says, “200 shares still costs $8.95 at Schwab, which is OK for the occasional investor, but not for the active trader.”
Different brokers have different ideas about why investors and traders switch platforms. SogoTrade’s Whitmore says, “Value is becoming very important to active traders. In a recent survey, SogoTrade found that price was the most important reason among traders to switch to another brokerage.”
Lightspeed’s Ehrlich notes, “In the second half of 2009 alone, more than 30% of new accounts opened at Lightspeed where traders who had come from one of the traditional online brokers, this was up from the single digits for the entire year in 2008. Lightspeed attributes this uptick to its continued commitment to its trading technology, education, and client service.” Over at tradeMonster, Cooperman states, “In addition to low commissions, though, a proactive investor needs a potent mix of intuitive trading tools, embedded education and a customizable platform to succeed long term.”
The $8.95 rate puts Charles Schwab right in the middle of the pricing among the 30 or so brokers we follow regularly in The Electronic Investor. It’s not an earth-shaking price change, but it’s interesting to see one of the big players hit that level. E*Trade and Fidelity continue to have tiered pricing. To me, the big signal is that different prices for different types of customers might come to an end.
It appears to me that Schwab’s peers and competitors have interpreted their pricing change as a positive move overall, putting their fees more in line with the rest of the world rather than marking a new low. Will it spur Schwab’s customers to place more trades? Or entice customers of Schwab’s competitors to switch over? We’ll check back and find out.
Published on Barron’s Online, January 28, 2010.
Saturday, January 02, 2010
E*Trade Powers Up
E*TRADE LAST WEEK UNVEILED the most extensive overhaul of its downloadable trading platform, Power E*Trade Pro, since its launch in 2000.
Chris Larkin, the firm’s senior vice president of the U.S. retail brokerage, says the older version will be phased out around the middle of January. Until then, E*Trade (http://www.etrade.com) customers have the option of using either system.
Among the changes: Instead of the column of icons down the left side of the screen, the various major functions are displayed in a horizontal line across the top. You can alter the size of the icons, switch the order in which they appear, and delete the ones you don’t use.
Larsen says that the developers were very mindful of the use of real estate on customers’ screens, and added tools for those with multiple monitors. Like many other downloadable platforms, Power E*Trade Pro is made up of a montage of windows that you can arrange to your liking on your screen. With the update, you can “tear off” any window—for example, the charting application—and move it to a second monitor. Many frequent traders these days use multiple monitors to track quotes and technical charts, or to view stock data on one screen and options data on another. This capability is simpler in the new version.
Once you you start up Power E*Trade Pro, you will see the default display on the top right. Then you can add or delete indexes and set the scroll rate so that it changes at a pace that’s comfortable for you. A new feature called the Ticker shows your trades in the symbols you want to see, either from a watch list or your current portfolio (or both). The Ticker can be set up to display real-time quotes or streaming news headlines; when you click on a headline, a box opens containing the complete story.
The Options functionality has also been updated so that the new options symbols, which will be introduced in February 2010, are fully supported.
“We’re doing a lot to get our customers prepared for the new options symbology,” Larsen says.
Starting Jan. 1, the platform will include a video player showing CNBC Plus over a live feed. This feature will be free to all customers, and will include archived videos. Larsen says the firm plans to grow the video player within the platform, and that E*Trade will add educational programs to the playlist over the next year.
“As traders are taking a break throughout the day they can watch a video. We plan to add a lot of educational videos with this new player,” he says.
Larsen explains that the platform also attempts to embrace the outside world. In the past, he notes, “The question was, ‘How do we get them to come to E*Trade and stay on our site and not leave?’ The world is changing, so we’re adding the outside world to our platform.” If you find an RSS news feed that you want to follow, you can drag and drop it onto the news page in Power E*Trade Pro.
I found the changes make the platform much easier to navigate and customize. The new version is even a smaller download—14.5MB instead of the 19MB of the older version. Also, Mac users will be pleased to hear that the new version runs on their systems; many downloadable trading applications do not.
THE E*TRADE UPDATE is just one of many innovations we expect to see at online brokers’ Websites and in software downloads in the next couple of months, as Barron’s gears up for its March 2010 ranking of online offerings for retail traders and investors.
Your comments help us adjust our ratings system from year to year and are extremely helpful. Has your trading behavior changed in 2009? What tools would you like to see your broker offer? What do you like and dislike about your current online broker? What key functionality or service could a different broker offer to entice you to open another account—or switch brokers completely?
If you’ve been using an online brokerage account over the last year, please drop us a line at electronicinvestor@yahoo.com with your comments.
TRADEKING’S (http://www.tradeking.com) Chairman and CEO Don Montanaro last week issued a strong statement against a new Congressional bill, H.R. 4191, which goes by the title “Let Wall Street Pay for the Restoration of Main Street Act of 2009”.
Under the proposed bill, a new fee would add 3[frac12] cents per share to the cost of placing a trade, and Montanaro thinks it’s unlikely that the brokers will just eat the cost and lower their own profits. The bill amends the Internal Revenue Code of 1986 to impose a tax on stock, futures, options and credit-default-swap transactions, and is intended to fund job creation and deficit reduction following the recent financial crisis.
“It is understandable that American taxpayers and their representatives are angry and distrustful of our financial institutions, given the economic struggles of the past year, high unemployment rates, and the taxpayers footing the bill for the bailout,” says Montanaro. “But we believe this proposed transaction tax will end up doing more harm than good to more of our citizens than is purported by the bill’s supporters.”
OPTIONS FEES HAVE NOWHERE to go but up. U.S. options trades take place on seven major exchanges. Three of them—The Chicago Board Options Exchange (CBOE.org, CBOE.com), International Securities Exchange (http://www.ise.com) and Boston Options Exchange (http://www.bostonoptions.com)—have recently filed for fee increases that will kick in during 2010. These fee structures are quite complex, but will result in higher fees paid by brokerages to conduct trades.
Firms that have had relatively low fees for options trading will most likely have to raise their rates just to maintain some kind of profit margin. I imagine the firms that have charged higher commissions will just go ahead and absorb the increased exchange fees.
Wade Cooperman, CEO of tradeMonster (http://www.trademonster.com), says, “We are increasingly concerned the rising exchange fees will lead to retail investors seeing their cost of trading increase.”
Published in Barron’s, December 28, 2009.
