Investor Brain

Saturday, June 28, 2008

Online Offerings to Cure the Summertime Blues

TO KEEP YOUR ONLINE TRADING INTERESTING THROUGH the summer doldrums, several brokers have added new wrinkles to their offerings.

In early June, Scottrade (http://www.scottrade.com) made a couple of intriguing Nasdaq-developed data tools available to users of its Elite platform. These real-time tools—Nasdaq Market Velocity and Nasdaq Market Forces—are available at no charge to customers who use Scottrade’s active-trading platform.

To qualify for Elite, you must keep at least $25,000 at the online discount broker. You download and install the software onto your PC. (Mac users running Boot Camp or Parallels can install the Elite platform as well.) Commissions for stock trades are $7 for Scottrade clients, regardless of the hardware they use.

Nasdaq Market Velocity provides a real-time picture of activity in individual stocks and ETFs by showing how current pricing and trading interest compare to historical averages. (The data presented includes all orders—even those that are cancelled or revised, whether they reach an exchange or not.) Intended to measure the intensity of trading interest in a particular security, Market Velocity can help traders detect shifts in momentum that they can play. The data display looks like a speedometer, which allows for quick visual comparisons.

The same window displays Nasdaq Market Forces, which shows order frequency by the ratio of buys to sells. A trader can use this information to see if there’s more buying or selling interest in the shares. For instance, if the ratio is weighted 7:3 buy versus sell, you’d expect the price to rise near-term.

Combined, the two tools alert traders to unusual activity in a given stock, as well as its possible direction. (They cover Nasdaq, NYSE and American Stock Exchange issues.) “What was once an indicator only available to those physically present on a floor-based market or to professionals at large brokerage firms, is now available to Scottrade Elite customers,” says Kevin Dodson, director of the firm’s online financial services. (A video overview is available at Scottrade’s “On-The-Go Training” page at http://www.scottrade.com/MediaContent/WebCast.asp.)

INTERACTIVE BROKERS (http://www.interactivebrokers.com) is offering information of a different sort. It reports that its U.S. stock executions were 0.35 of a cent per share better than the overall industry’s during the second half of 2007. The results were part of a study performed for IB by research outfit Transaction Auditing Group (TAG). TAG also found that the online broker executed orders in an average of 0.9 seconds, more than six times faster than the industry’s 5.6 seconds. The analysis included all market orders totaling less than 10,000 shares.

According to Steve Sanders, vice president, the SEC allows firms to count any price improvement—even a hundredth of a penny—as an improved trade. “We try to measure how much better or worse you do than the NBBO,” he says. (NBBO refers to an SEC rule stating that a broker must guarantee the national best bid and offer prices available to customers buying or selling shares). The industry price generally “disimproves” on the NBBO price, says Sanders, adding, “So the 35 cents per hundred shares we’re improving changes the average. The rest of the industry disimproves 25 cents per hundred shares.”

Sanders says that most brokers internalize orders, then improve them a tiny amount so they can report that a high percentage of their trades receive price improvement. “What we’re doing is publishing the net price improvement and net price disimprovement,” he explains. The formula IB uses is posted on its Website at http://individuals.interactivebrokers.com/en/p.php?f=smartRouting&ib_entity=llc.

BLACKBERRY ADDICTS, rejoice. There are two new items for you to fiddle with. E*Trade (http://www.etrade.com) has announced E*Trade Mobile Pro, which enables secure transactions, free real-time streaming stock and options quotes and the ability to place some conditional as well as standard market and limit orders. BlackBerry aficionados also will be able to view live watchlists and portfolios, and transfer between bank and brokerage accounts.

The new platform, which should run on most BlackBerry models sold in the past 18 months (including Curve, Pearl, 8800 and others running BlackBerry Device Software 4.1 or higher) will be made available to all E*Trade Securities customers for free by July 1. Mobile Pro currently is being beta-tested by select customers.

Forex traders with BlackBerries can use broker FX Solutions’ (http://www.fxsolutions.com) mobile platform, GTS Mobile, to securely log in to their accounts, place trades and monitor positions around the clock. GTS Mobile is available free to FX Solutions customers and works with a wide variety of Internet-enabled mobile devices. The firm recommends that you contact your mobile provider for information on data fees and roaming charges.

Are you trading on-the-go? It looks as if the new 3G iPhone will unleash another round of mobile-trading possibilities. We’d love to know about your experience—or concerns if you’re holding back—at electronicinvestor@yahoo.com

Published in Barron’s, June 23, 2008.

Saturday, June 14, 2008

Logging on to a Trading Nightmare

CUSTOMERS OF JUST2TRADE (http://www.just2trade.com) and other small brokerage firms recently got the nasty surprise many have feared: They logged on to their accounts to discover that they couldn’t trade or withdraw funds.

It turned out that North American Clearing, which provided clearing services for several dozen small to midsize broker-dealers, had been shut down for lack of capital. A few days later, the Securities and Exchange Commission charged several top NACI officers with fraud, including misuse of client funds to hide severe financial problems, and other securities violations, and froze all of the funds at the Longwood, Fla., firm. The SEC appointed a receiver to see if he can make good on money owed customers without resorting to more time-consuming measures.

Failures of clearing firms—which work with exchanges to confirm each trade, deliver securities and ensure that paperwork is in order—are unusual because these companies generally don’t take much market risk. NACI, however, wasn’t taking market risk; it was using customer funds to cover daily operations, the SEC charges. Investors have grown more worried about potential disruptions as credit problems have hit brokers hard, the markets have wobbled and Bear Stearns had to be bailed out. On Dec. 17 and 31, we wrote a two-part series on the topic, “Are You Covered if Your Broker Fails?”

In the case of NACI, account holders were allowed to place closing trades, but couldn’t withdraw funds or open new positions. Just2Trade President Fuad Ahmed says he offered to buy out NACI, but without success. Ahmed says that he and co-workers worked through the Memorial Day holiday to transfer manually his most active customers to another brokerage owned by Just2Trade’s parent firm, LowTrades (http://www.lowtrades.com), which clears through a separate firm. By late last week, Ahmed said that he’d struck a deal with a clearing outfit, Legent, and that Just2Trade’s other clients should be able to trade again by Monday, June 9.

“I did not imagine this could happen to a clearing firm,” Ahmed says. He emphasizes that his clients’ assets are secure, but the legal restrictions thanks to NACI’s alleged crimes make it impossible for these investors to access their holdings.

THE SEC-APPOINTED RECEIVER, Atlanta-based attorney Peter Anderson, had this to say: “I have empathy for these clients and have to protect them, but there has to be a process. We have to do something that protects everyone, not just the big accounts or the frequent traders.” Anderson estimates that more than 13,000 accounts are affected, mostly with what he describes as third- and fourth-tier broker-dealers that allow customers to trade actively.

A notice on NACI’s Website says Anderson is trying to figure out whether customers’ funds and securities are adequately protected and whether NACI is a going concern. Anderson says that, if an orderly transfer of accounts to a new clearing firm can’t happen in a reasonable time, “The alternative is to pick up the phone and call SIPC [the Securities Investment Protection Corp.] and hand them the keys.” SIPC is a federally mandated entity funded by broker-dealers that covers up to $500,000 of stocks, options and bonds per account.

All of the affected accounts are insured by SIPC for the $500,000, including a $100,000 claim for cash. In addition, NACI has excess SIPC insurance up to $30 million in aggregate, with a per-customer limit of $7.5 million. Obviously, the excess SIPC coverage won’t go far if a lot of $7.5 million accounts are affected.

SIPC President Stephen Harbeck says his group is willing to wait until other avenues are explored because they might give customers control of their accounts sooner than if they had to follow a complex statutory regime.

“I know that the people who are looking at the possible ways to solve this problem have the customers’ best interest at heart,” says Harbeck. “If they can’t solve the problem, it may well end up in our laps, but it would be better if it got settled.” Harbeck says that SIPC prefers a solution that doesn’t get it involved; it can take 30 days—or more—if the receiver is unable to find a clearing firm that is ready, willing and able to take these accounts.

Without a clearing firm, SIPC would have to clear the affected accounts one by one—a tedious process. “That’s the last resort we have, and it’s not a procedure anyone looks forward to,” Harbeck says.

What can you do if you’re one of the 13,000 accounts affected by this action? Unfortunately, just wait till the SEC and receiver allow a transfer to a different—and they hope stronger—clearing firm.

Published in Barron’s, June 9, 2008

Sunday, June 01, 2008

Progressing From Bear to Where?

THE BEAR MARKET HAS GIVEN WAY TO AN UNCERTAIN MARKET, according to recent surveys from three online brokers who put their information-gathering skills to much different purposes.

At TradeKing, rising market volatility means trimmer household budgets and more options trading. For Schwab, heightened uncertainty underscores the need for investor education. And over at E*Trade, the slide in stock prices last summer and this past winter argues for more investment in bonds.

TradeKing’s late-April online survey (http://www.tradeking.com) of 3,000 equities and options traders showed bearish sentiment receding. Just 23.9% said they were either “bearish” or “very bearish,” down from 48.3% in January. At the same time, 46% of those surveyed had a “neutral/not sure” outlook for the next three months, the highest uncertainty level in four quarters.

TradeKing’s active-investing respondents said they are reacting to market volatility by adjusting investment strategies and considering more foreign plays, as well as reducing their personal energy costs and household budgets. Those who expect to receive the economic-stimulus tax rebate said they’ll use it to pay down debt (credit card, mortgage, student loans and such), or invest further.

Shortly after releasing the survey results, TradeKing reported it would be among the first online brokers to allow customers to trade fixed-return options, which allow an investor to bet on whether a stock’s price will be above or below a set level on the date the option expires. TradeKing offers two types of FROs—Finish High and Finish Low—on 20 stocks and exchange-traded funds, with plans to add more. The fixed return is $100 per contract; your total return depends on how much you paid for the contract. Because they’re thinly traded at present, the bid/ask spreads are very wide.

If you buy a Finish High FRO, you’re hoping it will have a higher price on the date of expiration than the strike price. Let’s say you buy a Finish High FRO for Intel (ticker: INTC), with a July strike price of $25. You’ll get $100 per contract if Intel’s volume-weighted average price for trades placed on the date of expiration is $25.01 or higher. (You don’t get anything extra if the stock goes beyond $25.01—to $50, for instance.) If the average price is $25 or less, you get nothing, and lose the premium paid. On a Finish Low FRO, you’re betting that the price will be $24.99 or less.

FROs settle differently from regular options. If you’re in the money on the expiration date, you have $100 per contract, cash, deposited in your account. There’s no physical settlement. Background info, quotes, and educational material are available at http://www.amex.com. On the menu bar on the left side of the screen, click on Options, then Product Information, and finally, Fixed Return Options.

IN SCHWAB’S (http://www.schwab.com) survey of active traders, released in mid-May, 76% of the 500 respondents said they expect the Standard & Poor’s 500 to rise or trade sideways in the next six months. Four out of 10 said they now trade options regularly. Of that group, 95% expect to maintain or increase their options trading in the next six months.

Because of the growing popularity of options, trader education—especially about complex multi-leg strategies—has become more important. Some 75% of those using options said they do so to generate income or hedge risk. Speculation was cited by a minority as the leading reason to trade options.

E*TRADE (http://www.etrade.com) used the opportunity of a revamped bond platform to ask clients about fixed income. Most (58%) said they think fixed income is more important in volatile times. Yet they also betrayed ambivalence about bonds. Only two-thirds of respondents actually own them. (Like eating more fiber, it’s nice in theory, but not much fun in practice.)

Bond pricing isn’t easy to understand. A majority of E*Trade’s survey respondents preferred agency pricing, which is a per-bond fee similar to a per-transaction commission for stocks and options. The usual method of trading bonds now involves principal pricing, in which the bond’s price includes a dealer’s mark-up, which is not immediately obvious to the buyer. (Fidelity has switched to agency pricing.)

E*Trade’s revised bond center, with inventory supplied by BondDesk, has a clean layout and includes a lot of key tools on the initial page. You can search among about 30,000 corporates, munis, Treasuries, agency bonds, certificates of deposit, and program notes (bonds available directly from a corporate issuer at par) using the Quick Search, which sorts by maturity date. Advanced Search sorts by yield, price or other criteria.

Treasuries trade without a commission, while other bonds incur a $1-per-transaction fee. Because of differing availability and other factors, it can be tough to compare a bond from one broker with a similar one from another. But the prices displayed in E*Trade’s bond center don’t seem out of line with other brokers’. The upgrade is a welcome addition.

Published in Barron’s, May 26, 2008