Investor Brain

Saturday, September 27, 2008

More Icing on the Cake

CAKE FINANCIAL, AN AGGREGATION AND COMMUNITY Website for online investors that was launched last year, has recently acquired some new layers and flavors of frosting. Cake members now can aggregate their transactions from over 60 online brokers, including Fidelity, Schwab, E*Trade and Scottrade, as well as Edward Jones, ShareBuilder and Zecco.

One of the goals of the Website, according to CEO Steve Carpenter, is to help investors make better trading decisions. The sign-up process shows you how to link your various portfolios so you can see how your overall holdings are performing—and how you’re doing compared with other Cake members.

Each member decides how much to disclose, but in general it’s possible to see the top portfolio performers and the items in their portfolios. You can’t see exact dollar amounts—nor can anyone see yours—but each member’s portfolio is rated to give you an idea of what mix of investments is faring best.

New this fall are three tools: The Cake Take, Scout and Cakedex.

The Cake Take is a proprietary, investor-generated stock-rating system, which assigns A (highest Buy) through F (strongest Sell) grades to approximately 2,000 stocks based on aggregated buying, selling or holding decisions. The best-performing investors have a greater influence on the rating.

There are many other rating systems, but Cake’s ratings are updated in real time rather than monthly or quarterly.

When we took a look at the Cake Take in mid-August, for example, Microsoft (ticker: MSFT) was rated F-, but as of mid-September it had climbed into B territory. “The goal of the Take is, as we get more investors on the platform, to get ratings updated in real time, as real-world trading decisions are made,” says Carpenter.

The Scout is a portfolio-idea engine that is activated as soon as you link your brokerage account. Cake calculates measures you can’t get at most brokers’ sites, such as risk assessment and complete portfolio performance. Then, as Carpenter says, “Similar to the Netflix [DVD] recommendation engine, we take your portfolio and your key measures like risk, historical performance and number of trades per year, then aggregate the performance of investors similar to you but doing better over longer periods of time. These recommendations usually entail less risk also.”

Cake aggregates those top holdings, providing a list of ideas to help you build a better version of your own portfolio and to receive trading ideas. “Ultimately we would like to build a recommendation engine—sell X and buy Y—to improve your portfolio,” Carpenter says. “This lets investors validate ideas based on the successes of other people, all updated during the day as the markets change.”

The Cakedex takes the concept of community investing to another level. Carpenter hopes to develop a family of index funds based on the holdings of the best performing 10% of Cake’s investors. A trial of the Cakedex, according to Carpenter, has outperformed every major market index for the past six years; the firm hopes to make it possible for members to buy shares of Cakedex by the end of the year.

Trading for dollars: One of my favorite competitions is back. Interactive Brokers Group has announced its fourth annual IB Collegiate Trading Olympiad, where students create and implement a real-time program-trading application and vie to generate the largest profit. Students compete for potential jobs and up to $100,000 in prize money. IB’s Andrew Wilkinson says, “This year, we expect to award $400,000 and will consider all participants for employment opportunities at Interactive Brokers.”

Each week, the names of the competition’s leaders will be posted at http://www.interactivebrokers.com. Trades must be generated by computer algorithms using the same IB Trader Workstation Application Program Interface that professional traders use to create automated trading solutions. Student-created algorithms may trade U.S. stocks, options, futures, forex, or bonds as often as their programs require over the contest period, but must make at least 25 trades. Entering the contest is free.

WE RECENTLY TOOK A LOOK at SmartStops (http://www.smartstops.net), a service that advises on when to bail out of a stock holding ("A New Way to Tell When to Fold ‘Em,” July 7). At the time, you had to manually enter your portfolio holdings, but a recently announced new service called BrokerLink now ties your brokerage account to the SmartStops service.

The first broker to have signed up is TD Ameritrade (http://www.tdameritrade.com) whose customers can now use the SmartStops 10-stock Portfolio Protection Plan free for a year (with some restrictions).

Published in Barron’s, September 22, 2008

Saturday, September 06, 2008

Making Changes at Lightspeed

A SMALL FRY IN THE FREQUENT-TRADER marketplace not long ago, Lightspeed Trading has grown up since a management buyout of E*Trade’s professional platform in 2006.

In a recent chat with Barron’s, CEO Stephen Ehrlich reported that his clients trade an average of 150,000 to 200,000 shares per day—and approximately 800,000 trades are executed daily. No wonder that Lightspeed’s revenue popped from $15 million prior to the deal’s closing to more than $100 million in just over a year.

The firm’s target customer is obviously not your average buy-and-hold investor. Lightspeed (http://www.lightspeedtrading.com) appeals primarily to hedge funds and those trading large portfolios, but the firm is seriously going after the heavy hitters among individual investors as well.

We took a look at there vamped system this summer, and believe the changes will benefit frequent traders.

LIGHTSPEED OFFERS ITS CUSTOMERS a powerful software-based trading platform, which is downloaded and then installed on a local computer. It isn’t Web-based, so it’s best if you have a single location for your trading activities. You can install the platform on multiple computers, however.

Frequent traders have a need for speed, and Ehrlich says that most of his efforts are focused on increasing quote speed and capacity. The firm installed a new quote server during August that he regards as significant advance. “Here at Lightspeed, we feel fast quotes are the key to the whole trading system,” he says. “Our competitors have quoting systems that tend to slow down when the markets speed up, so their customers are putting in orders at inaccurate prices. What we strive for here is the ability to handle those situations when the market is most volatile.”

Ehrlich says that in-house measurements indicate that the new server is delivering quotes about 20% faster than the old server, and that overall capacity has been tripled. “All of our customers can be online simultaneously in a fast market,” asserts Ehrlich, who was vice president of brokerage operations at E*Trade prior to the acquisition.

Lightspeed brings a number of institutional research tools to the platform, such as a net-order-imbalance indicator and a block-trade screener. Both Nasdaq and the NYSE have tools that display stocks with net order imbalances—Nasdaq offers its Opening Cross and Closing Cross, while the NYSE has Market on Open and Market on Close. These measures list the stocks that have major order disparities in their buy-sell ratios, suggesting a strong price move in one direction or the other. Lightspeed’s order-imbalance tool displays these stocks on a single screen, and lets you search for those you might find appealing.

Lightspeed’s Block Trades tool has two components. One indicates when a trade of more than 10,000 shares is executed on any public exchange under any ticker symbol, while the other can be set to display stocks that fit certain user specifications. For instance, you can customize the tool to show stocks that trade more than 100,000 shares during a specified period. Many peripatetic traders want to be alerted to institutional activity in the stocks they’re following, which can indicate that a mutual fund or insider is making a move they can profit from.

One of the tools we look for when reviewing brokers is how easy it is to calculate profits and losses on trades, taking into account the commissions paid. Until recently, Lightspeed’s P&L calculations hadn’t included commissions, but that shortcoming has been fixed. That’s especially important because Lightspeed doesn’t charge a flat fee per transaction (such as brokers like TDAmeritrade and Fidelity do), making commissions a little tricky to determine. Plus, rates depend on trading frequency.

THERE ARE THREE COMPONENTS to Lightspeed’s fees—a base rate calculated per share traded ($3.95 and an exchange fee per 1,000 shares), plus a fee or a refund for removing or adding liquidity. (Buyers remove liquidity, while sellers add to it.) Clients can use the new Net P&L Calculation Tool, found on the Design Tab, to enter in a Base Rate, an average Remove Liquidity Rate and an average Add Liquidity Rate. Once this option is activated, Lightspeed will reflect your new estimated Net P&L.

We’ve criticized Lightspeed’s platform in the past because trades could only be executed while you were logged in. That has been changed; you can now stage orders to be processed after you log off. Ehrlich says that the firm added this capability in order to capture high-volume traders who don’t spend the entire day in front of a computer.

Futures trading also was enhanced recently at Lightspeed. Customers can now trade CME equity futures, Nymex energy futures, Comex metal futures, and six currency futures.

Lightspeed’s trading platform, like most software based systems, requires users to make a time investment in order to become comfortable with all of its tools. These new and enhanced tools are well-implemented, however—and worth a look.

Published in Barron’s, September 1, 2008. 

Saturday, August 23, 2008

Shopping for Back-to-School Loans

AFTER WORKING AND TAKING COLLEGE CLASSES when she could for about 20 years, Nicole King decided she wanted to focus on her degree. So she quit her job at Barnes & Noble and headed back to academe full-time. “I would have been 80 by the time I graduated if I’d kept going to school part-time,” she laughs. The single-mom now finds herself in an unusual situation: She and her daughter will be attending—and paying for—college simultaneously.

After consulting with the financial aid office at her school, San Diego State University, Nicole put together a package of grants, merit awards, and loans to help her finance her accelerated education program. Her daughter, who will be attending San Diego’s Mesa College, also qualified for scholarships, and is rounding out her financing with loans.

Nicole had taken out education loans back when she first started going to college in the late 1980s and faithfully paid them all off and therefore was able to secure a new line of credit without too much trouble. She and her daughter both qualify for federally subsidized loans, which is a plus now that nearly 100 banks, most recently Wachovia, have stopped financing private undergraduate student loans.

SLM, OR SALLIE MAE, A MAJOR provider of college-savings and loan programs, has itself had a tough time amid the recent credit crunch. The lender, which oversees about $172 billion in loans for 10 million students and their parents, saw its earnings drop 72% in the second quarter. After the first quarter, it had warned that it would have trouble lending profitably as the capital markets seized up.

In spite of that, Sallie Mae’s Website (http://www.salliemae.com), remains a great resource for education-cost calculations and other metrics for borrowers. You can also sign up there for Upromise, which links spending at roughly 40,000 participating retailers and services like J.C. Penney and Bed Bath & Beyond, to a rebate program. The rebates accumulate and are deposited in a college savings plan, which can also be used to repay student loans.

The credit crunch has not completely turned off the federal student-loan tap for those who qualify, but private loans are becoming more difficult to find. More banks are insisting on the student’s having a co-signer for the loan, and there are higher rates and fees being assessed. Because of rising defaults and the increasing number of students declaring personal bankruptcy post-college, the banks have become more cautious about these loans, particularly for those whose creditworthiness doesn’t match Nicole’s.

SO WHAT’S A STUDENT to do if loans are a key component of financing his or her education, and that financing hasn’t yet been nailed down? Search the Web.

Your first stop should be the university’s own Website, where you can look for financial-aid information that is focused on that particular school. For instance, my younger daughter is a sophomore at the University of Washington and its Office of Financial Aid publishes a Student Loan Program Chart that spells out the differences among the loans available, at http://www.washington.edu/students/osfa/ ugaid/student.loan.program.chart.html. Another good clearinghouse of information is at the National Student Loan Data System, which is the U.S. Department of Education’s central database for student aid. It receives data from schools, agencies that guarantee loans, the Direct Loan program, and other U.S. Department of Education programs. Check it out at http://www.nslds.ed.gov/.

A site that provides a variety of loan possibilities, based on the student’s needs, residence, and co-signer status, is Simple Tuition (http://www.simpletuition.com). When I made up a scenario of a freshman at the University of California, with a co-signer, who needed to borrow $25,000 without a federal guarantee, the site presented me with nine possible loans. The results screen lets you sort the possibilities by variables such as interest rate, grace period, monthly payment or the loan’s total cost.

In the case of my fictional scenario, the loan that would cost me the least overall was proposed by Discover Student Loans, the college-lending affiliate of the credit-card outfit, at $41,137.67. The most expensive loan proposed came from bank SunTrust, at $52,321.53. These totals are based on a borrower with excellent credit, though—the small-print disclosures indicate that a less creditworthy borrower could end up paying well over $150,000 over the life of the loan to borrow $25,000.

Most banks now generate floating-rate loans, based on either the U.S. prime rate or Libor (the London InterBank Overnight Rate), and the borrower’s credit rating. A grace period begins when the student leaves school, either through graduating or dropping out, after which the borrower is required to start repaying .

Social networking has hit the student-loan market with the recent launch of GreenNote (http://www.greennote.com). This site is set up to allow students to connect with their social network—friends, family, friends of family, community leaders and others—to ask for small student loans. GreenNote helps formalize everything into legally binding loans and handles everything from loan documentation through repayment.

Those desiring a loan set up a profile, then enter e-mail addresses for friends and family, asking them to visit GreenNote and help fund their education. You can also register as a lender and search through those seeking funding, and choose whether or not to help. You can sort through students by various affinities, such as school attended, sports played, educational major and gender. The minimum pledge is $100.

THE INTEREST RATE IS CURRENTLY set at 6.8%, and lenders are assessed a 1% administration fee annually. GreenNote does not require that the student find a co-signer, though interest is accumulated and added to the total cost of the loan while payments are deferred. (Most programs don’t require repayments begin during college years or in the immediate months afterward.)

My method of financing my kids’ education was to start saving when they were very young. Given the complexities of the credit markets, I’m glad I was able to put away enough to get them both through college. Nicole is again facing the same complexities: She has a second daughter starting her junior year in high school.

Published in Barron’s, August 18, 2008