Investor Brain

Saturday, June 24, 2006

A Hand for Heavy Lifters

First, a confession.  I made a huge mistake in the version of this column that was printed in Barron’s in the June 19 edition.  I had a correction published in the July 3rd issue, but here in InvestorBrain I have done some editing to get rid of the problem altogether.  If you have access to Barron’s Online, you can see the original messes.  I have posted the link at the end of this piece and of the July 3 column.

“HOW CAN I KEEP TRACK of my portfolio performance, especially when I’m trading more than just stocks?” It is one of the questions I’m most frequently asked, and there’s no single answer. It might be best to put your personal finance program, such as Intuit’s Quicken or Microsoft’s Money, to work. Or it might be worth checking out programs that are designed for heavier lifting.

Portfolio Systems, based in New York City, publishes several programs aimed at this group of muscular users that includes frequent traders and portfolio managers.

Of these, Option Money (last reviewed Oct. 29, 2001, “Exploring All Options"), intended for the very active individual investor, does a terrific job of tracking options positions as well as helping prepare your tax returns. The program has 40 options strategies built in, including a variety of spreads, butterflies, condors, straddles and strangles. The program’s analysis module provides the graphing of volatility, profit/loss and the “Greeks,” as well as other intriguing analysis.

Option Money also tracks futures, fixed income and mutual funds. If the 40 built-in trading strategies aren’t enough, you can create your own. Its reports, which can be customized, are helpful in figuring out which trades are working for you, and which are costing you money.

One of our chief criticisms the last time we looked at Option Money was that it required manual data entry. Portfolio Systems has fixed that in its current version 7 (development of version 8 is under way, and should be published later this year). You can now import transactions into Option Money from online brokers including E*Trade, Fidelity, Schwab, optionsXpress, TD Waterhouse, Ameritrade and others. The full list is available on Portfolio Systems’ Website, https://secure.scscompany.com/brokers.htm. (Note that some brokers, such as E*Trade, prevent you from downloading transactions during market hours.)

Option Money will set you back $30 a month, or a one-time payment of $345. Active traders who want to analyze their portfolio performance ought to look at the demo and take advantage of the free trial period.

For the professional portfolio manager, broker/dealer, hedge fund manager, family office or investor with multiple active accounts, Portfolio Systems offers Portfolio Director (http://www.portfoliodirector.com). This program offers consolidated reports, market data in real time, quick profit and loss calculations and the ability to generate numerous customized reports.

Portfolio Director is designed to be expanded as the number of users increases, and costs $150 per month for a subscription. It can import data from most online brokers, or the user can enter them manually. The opening page gives the user access to a number of summary reports that take various cuts at portfolio performance. In addition, the user can create a customized benchmark, such as a group of stocks or several indices, and use it for comparison.

Advisers will find client-management capabilities, such as templates for model portfolios, customizable reports and Web access to reports. Version 8 is currently available.

TRANSITIONS: I’VE HEARD from quite a few former Brown & Co. customers who have been transmogrified into E*Trade (ticker: ET) clients. Overall, this transition has gone significantly more smoothly than the Harrisdirect takeover, which began in January and dragged on for several weeks. I received about 400 e-mails complaining about that hand-off, and only 35 missives about the BrownCo linkup—several from people who were also Harrisdirect customers.

Harris had about twice as many customers as BrownCo, but the 90%-plus reduction in complaints tells me that E*Trade was better prepared this time around.

One of the biggest mishaps communicated to us involved a stock split the day the transition was completed. The customer promptly entered an order to sell off his post-split shares, but the transaction got seriously muddled, resulting in short sales, margin calls and a variety of other problems. I forwarded this customer’s complaint to my contacts at E*Trade, and an E*Trade senior vice president called the customer and fixed everything.

We’ve gotten several messages from former Brownies who wanted to know why they had to enter the cost basis for their positions manually once they were moved to E*Trade. Unfortunately, cost basis in Brown’s portfolio reporting was not available online, forcing customers to maintain it themselves. The lack of electronic storage meant the data couldn’t be transferred to E*Trade. The result? Some unpleasant data entry.

Original published in Barron’s, June 19, 2006.

Saturday, June 10, 2006

Nasdaq's Live Floor Show

THE NASDAQ IS MORE THAN JUST a high-tech all-electronic stock exchange.  Thanks to all the transactions processed on the board, it’s also a place that collects a great deal of data about price movements and volume. 

The NASDAQ now offers a variety of data products such as TotalView, which displays every quote and order at every price level on all Nasdaq National and Capital markets stocks available for execution at the Nasdaq Market Center. That way, traders get a better idea of what the actual market is for these stocks. Several online brokers, including Scottrade and a number who utilize the RealTick electronic trading platform, now offer TotalView to their customers. It is otherwise available for $70 a month for professionals and $14 per month for non-professionals.

To see what Nasdaq (ticker: NDAQ) has cooking, check out its experimental data page at http://emi.nasdaq.com. Its newest real-time offering is Market Velocity, which is designed to give investors who aren’t working on a live trading floor access to information that a floor trader could glean from the surrounding action, according to Nasdaq executive vice president Adena Friedman. Instead of hearing the buzz about a stock or seeing others gathered at a certain location on the floor, Market Velocity aggregates current arriving orders, and compares them to the average activity in that stock over the prior three months. As a result, a trader is alerted to shifts in market direction, momentum or liquidity in individual stocks that might suggest future price moves.

“We look at this particular point in time, relative to the base and see whether there is more activity or less, says Friedman. “It’s comparable to traders running around with tickets on the floor.”

Market Forces, another recent Nasdaq entry, breaks Market Velocity data up into buy or sell interest, which can suggest whether the heightened activity is about to move the stock price higher or lower. A real-time feed, Market Forces is most useful for frequent traders who focus on a particular set of stocks and want to know the intra-day dynamics of certain shares.

“This is the start of a new genre of market data that we’re creating,” says Friedman. “It’s meant to be more analytical in nature to take advantage of things coming in to our system that will help traders determine trends in stock pricing.” Both Market Velocity and Market Forces are part of Nasdaq’s Market Analytix data package.

Check with your data provider or online broker to see if they have Market Velocity or Market Forces available (they aren’t being offered independently by Nasdaq) and at what, if any, cost.

INTERACTIVE BROKERS (http://www.interactivebrokers.com) sponsored a Trading Olympiad for college students earlier this year ("Get With the Program,” Nov. 7, 2005) in an effort to identify some of the best and brightest up-and-coming techies.

Starting with an account of $100,000 in phantom money, University of Texas graduate student Patrick Christmas earned an additional $120,000 in 10 weeks using computer algorithms he developed for Interactive Brokers’ Trader Workstation Application Program Interface.

The victorious Christmas won a very real $50,000, which IB will match in a donation to his grad school in Austin. The electronic brokerage paid out a total of $307,000, including $1,000 each to 100 participants. “Anybody who entered and made a penny won $1,000,” says executive vice president Steve Sanders. To top it off, the company hired the fifth place winner, Li Zhiyan, of the University of Toronto.

Any IB customer can open a paper trading account and test to their heart’s content, says Sanders. “We simulate whether there would be a fill or not (whether an order would be filled), so when someone puts in a limit order we simulate the fill based on whether that price and volume were available,” Sander says. Recently, IB added all of its global products to the paper trading platform as well.

New features include Volatility Trader for options traders, and SpreadTrader for futures spread trades. More on these features in a future column.

JUST ARRIVED FROM optionsXpress (http://www.optionsxpress.com) is Xtend, which brings streaming quotes and many features of direct trading to the browser. To launch it, click on Streaming Quotes, then customize the screen to your specifications. Unlike many software-based trading applications that are stored on a single computer, this one allows the user to set up layouts that are accessible wherever he or she logs in.

Right-clicking on a bid or ask brings up a quick way to enter an order, displaying three prices near the market if you want to enter a limit order. Click on one of the prices to generate an order ticket. Options-spread information is built in, as is real-time futures pricing and order entry.

A trader can use some of the Xtend screens, plus favorites from the optionsXpress browser-based tools, such as StrategyScan and Dragon. “That’s why we call it Xtend—it extends your browser,” says optionsXpress President David Kalt.

Published in Barron’s, June 5, 2006.

Saturday, May 27, 2006

From Info to Insight

SEC FILINGS GENERATE TRUCKLOADS of financial data for fundamental investors, but offer little guidance on what it all means. And most companies aren’t going to go much beyond what’s legally required in providing a perspective on their own numbers. Analysts, of course, can make sense of the figures, but they track only about 2,500 of the 9,000 publicly listed companies. So where can investors turn for complete—and understandable—financial information?

Sageworks, a Raleigh, N.C., company, hopes they will visit its ProfitCents (http://www.profitcentspublic.com) Website, where its software interprets financial data and then explains it. For $199 a year, a user can run an unlimited number of reports. In each of them, the aim is to offer a credible picture of how a company is performing and to describe the performance in straightforward language that a wide variety of readers can understand.

“Most investors can’t read financial statements,” says CEO Brian Hamilton, who co-founded financial reporting specialist Sageworks in 1998. Utilizing its patented artificial intelligence rubric, based on thousands of expert systems rules, ProfitCents can give any user a solid, factual understanding of a company’s finances, he says. The financial industry is the only one that ProfitCents doesn’t track, because its balance sheets differ from those for most publicly held companies, says Hamilton, a certified public accountant.

Investors can log on to the service through any browser and enter the ticker symbol of the company they want to analyze. They choose from three temporal comparisons: fiscal year to fiscal year, current quarter to year-ago quarter or current quarter to previous quarter. ProfitCents reviews the financial statements, and evaluates the firm’s performance over time. It also compares the results to the company’s industry peers. An investor can select from two different versions: Basic, which awards 1 [lowest] to 5 stars in four basic operational areas—Liquidity, Profits, Borrowing and Assets—and Analyst, which provides more depth and rates these four areas from 1 [lowest] to 100.

Once a version is chosen, the program crunches the numbers for a few seconds and displays its analysis, which can be printed or saved in Microsoft Word format.

Hamilton cautions that the ProfitCents analysis shouldn’t be used in isolation: it needs to be supplemented with valuation calculations and an assessment of how the company is positioned within its industry. “If you had our product and a good assessment of the value of the firm, you’d be able to make a reasonable investing decision,” Hamilton says. “I feel confident in the technology—it’s sophisticated and complex. But we can only get you 80% of the way there. We don’t replace Wall Street analysts,” he says.

The reports instantly identify financial trends that otherwise might take hours for investors to pinpoint. For example, one fiscal year comparison we ran provided the following insight into a small company’s profitability: “During this period, net profit margins have improved while sales have improved by 13.14%. The company is generating significantly more revenue than last period and managing it better by improving net margins—an excellent combination. It looks like the company is pushing itself nicely within its ‘relevant range’—the company’s operating range for its current cost structure. Even with all of the growth, the company has been able to maintain its control of direct costs, keeping the gross profit margin near where it was last period.”

There are caveats: ProfitCents doesn’t recommend buying or selling stocks, and its analysis is based on recent SEC filings, which aren’t always up-to-date. If you’re used to real-time stock pricing data, a company’s fundamentals may seem a little out-of-date.

But the analysis is a lot faster and generally more insightful than most shareholders can muster on their own. ProfitCents is a good tool for the serious fundamental investor.

E*TRADE’S TAKEOVER of BrownCo was phased in during the week of May 8. So far, mostly so good. The conversion of accounts has gone much more smoothly than E*Trade’s (ticker: ET) absorption of Harrisdirect customers earlier this year ("Seek and It Shall Find,” Feb. 20) when numerous communications problems arose and many account holders were upset. In contrast, one former BrownCo customer told us: “E*Trade went out of their way to make the transition successful and even called me at home on a Saturday to make sure I was able to log into my accounts.”

That’s not to say there weren’t any ruffled feathers. An investment adviser sent us a list of problems he and his clients had experienced. One customer, he said, was inadvertently given log-on access to 19 other client accounts via E*Trade’s customer service, and advisers were asked to share logon accounts (and passwords) with their clients because E*Trade’s systems couldn’t handle more than one view into an account online. Another Brownie convertee complained, “At E*Trade, I feel like someone is trying to sell me something every minute.”

From E*Trade’s vantage point, managing director Michael Curcio says the conversion “was executed successfully” and that the firm looks “forward to building a stronger franchise that blends the best of both businesses.”

Keep us informed about the progress and any other matters at electronicinvestor@yahoo.com
.
TWO WEEKS AGO, we reported that Greenlightstocks.com, a Web-based stock analysis site, gave potential users a 30-day free trial. Alas, between filing the column and its publication, Greenlightstocks.com changed its trial period to seven days. President Gideon Vigderhous says he shortened the free trial period because some users were abusing it by, among other things, signing up multiple times under different addresses. However, he suggests that Barron’s readers interested in the 30-day free trial contact him at gv@dmmax.net
.
THE SEC RECENTLY announced a cut in the fee it charges brokers when a security is sold or a new offering is registered. News of the reduced fee was trumpeted with headlines about a billion-dollar savings. SEC Chairman Christopher Cox said in a statement accompanying the change: “This is terrific news for investors. Even by Washington’s standards, a billion dollars is a lot of money.”

I thought so, too, so I checked with several online brokers to see if they would cut commissions in October, when the new fees go into effect. Tom Sosnoff, CEO of thinkorswim (http://www.thinkorswim.com), a well-regarded online brokerage, definitely didn’t share the SEC’s enthusiasm. “They’re cutting a tiny fee, which is now $30.70 per million dollars (of total transaction value), to $15.30. Big whoop!” Sosnoff doesn’t see commissions dropping, despite the SEC’s grand expectations.

Published in Barron’s, May 22, 2006.