Investor Brain

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. 

Saturday, August 29, 2009

New Ways to Manage Your Portfolio

ASSISTANCE WITH PORTFOLIO BUILDING IS ALMOST AS OLD as the Internet itself. One of the first Websites I ever reviewed for investors, back in 1992, offered asset allocation as a core feature. If I remember correctly, that entailed a short risk assessment and an estimate of how much cash one had to invest. Seventeen years later, these systems are much closer to realizing the ideal of providing good investment advice, free from the pressure of an in-person sales pitch. Two more attempts are on their way: Cake Premium and Covestor Investor Management.

They’re entering a competitive field. Online brokers TD Ameritrade (http://www.tdameritrade.com)and E*Trade (http://www.etrade.com) have recently rolled out tools that recommend portfolios of exchange-traded funds and occasionally select mutual funds. And this summer we’ve seen two other entrants that work alongside your chosen online broker. MarketRiders (http://www.marketriders.com), for example, for a $100 annual fee offers a way to build and rebalance a portfolio of ETFs (Electronic Investor, July 13).

Cake Financial (http://www.cakefinancial.com), an aggregation and community Website that was launched in 2007 (Electronic Investor, Sept. 22, 2008), unveiled the new Cake Premium platform and service late last week. Explains CEO Steve Carpenter: “What we do, with very few pieces of information and by connecting retirement and brokerage accounts, is show you how you can do better, get back on track for retirement and pick a better allocation with better holdings, which we then monitor for you.”

One interesting piece of the analysis Cake Financial performs is comparing the cost of holding various mutual funds with alternatives that it suggests. The service tries to save you money on management fees when it makes a recommendation, which is a nice touch.

At a cost of $99 a year, Cake Premium reviews what you already own and what you’re trying to accomplish. To get started, you enter your age, when you want to retire and your current salary. You connect your online brokerage accounts by entering your user names and passwords, then you enter any other assets that aren’t in either your salary or connected to your accounts, such as home value, checking accounts, cash and other offline assets. Cake connects to about 60 online brokers, including all but one of the brokers we reviewed this year in our annual online ranking, thus avoiding any additional data entry on your part.

From there Cake Premium calculates three things: your asset allocation, your risk level, and what you’re spending annually on mutual-fund fees given your current holdings. The “Cake Take,” a proprietary, investor-generated stock-rating system, is displayed for each of your current holdings.

After running simulations, Cake Premium finds alternative funds and ETFs that are lower cost. Carpenter says, “We handle close to 100 investor-use cases, such as ‘properly allocated but holdings are wrong; holdings and risk levels wrong; within 10 years of retirement; more than 10 years to go,’ and many others.” Carpenter says the built-in models provide solutions for just about every possible scenario.

Cake Premium recommends—based on where you are and where you want to go—a variety of ETFs and low-cost mutual funds across six basic categories: large-cap growth, large-cap value, small- cap growth, small-cap value, international and fixed income. Carpenter notes, “We look for low-cost alternatives, index funds, ETFs and those 5%-10% of actively managed funds that do well over time and actually earn their fees.”

This system is not the way to go for sophisticated investors who trade derivatives, or for investors who are close to, or in, retirement and have the bulk of their investments in cash vehicles. It works well for mainstream investors with over $100,000 set aside for retirement, with the majority in stock funds. It’s designed for a once-a-year rebalancing of the portfolio and for long-term buy-and-hold investing. We also found during testing that it didn’t recognize closed-end funds, but that’s typical of this type of tool.

Once you’re done with all six pieces of the asset allocation pie, you get an action plan that tells you what you have to do in each of your brokerage accounts. You’re advised to print it out and place the appropriate trades; then Cake will monitor it for you on your own dashboard. The site lets you keep up to date on your overall portfolio performance, plus it keeps tabs on how much you’re saving in mutual-fund fees each month.

What I like about Cake Premium is that it ties in all of your existing online brokerage accounts, which means no additional data entry. Once you’ve executed the recommended trades that you want to place, your dashboard back at the Cake site automatically reflects those changes. It’s also interesting to see the savings in mutual fund fees, which will more than likely offset the $99 yearly fee.

COVESTOR (http://www.covestor.com), which is a community Website for self-directed investors, has entered the fray with Covestor Investor Management (http://www.CV.IM). This system creates a money-management account that you use to subscribe to a particular investing model. You must have a brokerage account with either TD Ameritrade or Interactive Brokers (http://www.interactivebrokers.com) to use this service.

The models are built by Covestor members, who share their trading strategies and techniques with one another. You go through a series of qualifying questions to determine your risk appetite, then you are shown models that would work for your style. You commit some of your portfolio to follow recommendations issued by one of the model builders. Each model author has an extensive profile, showing his or her trading frequency, number of holdings, preferred asset classes (stocks, ETFs, short sales, etc.), and returns against a variety of benchmarks.

Covestor Investor Management has just 10 model managers right now, but the firm expects more in the near future. You’ll pay each money manager 0.8% to 1.5% of the amount entrusted to his or her care in management fees, plus any commissions generated by your broker. It could get expensive following managers who recommend 30-plus trades a month, and a quick survey of the available models showed none beating the S&P 500.

Published in Barron’s, August 24, 2009.