Investor Brain

Saturday, April 07, 2007

Phighting Phishes and Pharmers

NEW YEAR’S VOWS TO GIVE UP STEALING apparently didn’t last long in 2007. More brokerage and international banks were subjected to popular forms of electronic pilfering in January than in any previous month monitored by the Anti-Phishing Working Group, an association devoted to eliminating identity theft and fraud.

APWG (http://www.antiphishing.org) says that in the first month of 2007, there were 29,930 reports of attempts to steal passwords or other important personal information from corporate customers, up more than 25% from December and up 5% above the previous record, set in June of last year. In all, 89% of the 135 corporate brands attacked were financial. One new wrinkle: Brazilian hackers are now using a kit—which was first employed in Russia—to break into Websites.

In researching our annual review of the best online brokers ("Tools of the Trade,” March 5), we queried firms about their security precautions. Since publishing that ranking, we’ve received several queries in search of more security information. We’re happy to provide it.

What are these scams? One of the most common is “phishing,” a scheme that uses a seemingly legitimate e-mail to deceive a recipient into thinking she’s communicating with a trusted company or government agency. The idea is to spoof the victim into disclosing sensitive financial information, like a Social Security or bank account number, that can be used to access her money.

In the case of some online brokerage or mutual-fund scams, an investor may be subject to “pharming,” a similar deception in which she’s lured into making transactions on a phony Website that looks like the home of a legitimate investment company. These sites typically ask for a lot more log-in information, including Social Security number and credit-card info, than a legitimate site to “verify” your identity.

If an e-mail or a Website looks fishy (or phishy), call your broker or bank to verify its legitimacy, or to report an attack.

Is online trading safe “from loss due to computer hacking,” as a reader asks?

Not totally. An advantage of any software-based broker is that clients don’t have to log into a Website, thus avoiding the possibility of stolen passwords. Even so, software-based brokers are as susceptible as browser-based systems when it comes to hacking, or “packet sniffing.”

PACKET SNIFFING SOUNDS LIKE SOMETHING A POSTAL inspector might do, but it’s actually a task for software or hardware that can log data going over a digital network. The intent is usually benign: to locate trouble spots or highlight attempted break-ins early on. But packet sniffers can also be used to analyze—and steal—the data, including passwords.

One way to thwart these scammers is to use a digital security ID card, which is the size of a credit card with a small numerical display. The number changes every minute or so, in sync with the broker’s system. A user logs in with her ID and password, and then types in the current number. This is known as “two-factor authentication.”

This system thwarts sniffers, because the second factor changes every minute—even if they sniff out the log-in number, it will be useless in 60 seconds. Several brokers make these cards available to clients, including E*Trade, Interactive Brokers and optionsXpress.

Most online brokerages offer repayment of any investor losses due to such thefts. For instance, E*Trade last year instituted a guarantee that covers any loss resulting from unauthorized use of its brokerage, banking, or lending services. Other firms reimbursing customers include Fidelity, TD Ameritrade, and WellsTrade. Firstrade this quarter will launch an Online Security Center, which will provide a written guarantee against losses sustained through online fraud.

Newer brokerages such as OptionsHouse, and older outfits like Scottrade and SiebertNET, which have recently revamped their systems, have implemented multilevel security protocols to prevent hackers from getting into their systems.

TradeKing will roll out new security shortly that includes a digital imprint stamped on every computer designated by the customer. Should an investor try to access an account from an unknown computer, he will be challenged with dynamically generated questions that must be answered before he’s permitted to enter a password.

The Securities and Exchange Commission has helpful information for online brokerage customers who think they may have had their identities compromised, at http://www.sec.gov/investor/pubs/onlinebrokerage.htm.

Published in Barron’s, April 2, 2007.

Saturday, March 17, 2007

Online Brokers' Hidden Gems

LAST WEEK BARRON’S RAN its 12th annual ranking of the best online brokers. Although we offered complete rankings of 29 software- and Web-browser-based services and discussed the seven leading firms in some depth, we had no choice but to leave sketches of some other worthy brokers on the cutting-room floor. Below are profiles of several that garnered 3½ or more out of five possible stars, and that merit your consideration.

CHOICETRADE, one of the two four-star brokers here (CyberTrader is the other), is a small firm that offers traders three distinct platforms. The one with the most features is BonTrade, which is designed to comply with Regulation NMS, the rule intended to assure more transparent and better market pricing, that started to go into effect last week. This platform boasts a Web-based audit panel demonstrating that an order received best execution.

BonTrade’s OptionVision tool lets the user graph actual volatility of an underlying stock against the implied volatility defined by market makers. Time frames are customizable, and the user can include a variety of strike prices. As a result, you can see when options are cheap, or when it might be best to sell. The BonTrade platform is $60 a month; ChoiceTrade clients also can choose a less expensive software platform, or use its Web-based system and pay per-transaction commissions.

CYBERTRADER, Schwab’s software offering for hyperactive traders, relaunched last year with more emphasis on ease of use. The platform still has dynamic streaming charts and other tools, but they can now be accessed from a “floating” menu that lets you move windows and dock them where you want. Chart-building is faster. A welcome new item is the Balance Bar, which customers can put anywhere on the screen for viewing real-time information like a daily P&L and margin balance.

Schwab’s Website has added new tools providing nearly real-time reports of gains and losses for those with more than $100,000 in household accounts. (Investors with less get 20-minute-delayed quotes.) But some positions don’t show up on a P&L until the day after a trade. Frankly, this reporting tool, though improved, still asks too much of the user.

E*TRADE has been busy. After folding BrownCo and HarrisDirect customers into its platform, the acquisitive firm launched futures and global stock trading. Clients looking for advice about their investments can run the Intelligent Investing Optimizer, which makes recommendations based on responses to eight profile questions. Another new tool we like is the Risk Analyzer: It lets you weigh your investment choices’ possible risks and rewards against your objectives.

Research and reporting are very well done on all E*Trade platforms.

The broker’s active investor software program, E*Trade Pro, now has enhanced charting and new technical studies. The charting application also lets you enter an order by double-clicking on a price. Plans are in the works for technical screening and backtesting. By the end of March, Nasdaq TotalView, which offers detailed price and order information on the exchange’s stocks, will be included in the Pro platform.

OPTIONSHOUSE is shiny and new (see “Signs of a Bull Market: New Brokers"), and doing a lot of things right. The brokerage is built on data from its parent company, market maker Peak6. A new tool as of a couple of weeks ago is the Risk Viewer, which has three tabs (P&L, Greeks and Market Exposure) that show portfolio risk by industry, by expiration or by symbol. The firm added mutual funds just last week. From what we’ve seen, you can expect a lot of interesting technology from this site.

SCOTTRADE launched its new quote and research section, free to customers, in mid-February. These offerings doubled the amount of research available, including additional news feeds and an ETF center. No matter where you are in the Quotes and Research area, if you hover over a ticker symbol you get a small graph, a real-time quote, and links to trading. Customer service is good. This is a solid brokerage for the cost-conscious, long-term investor. It would jump in our ratings if it added some advanced order types, and more customizable features and tools for trading complex options.

For more active traders, the firm offers ScottradeELITE, its software platform. This is an easy-to-use streaming platform that’s not as daunting as others.

Another plus, amid all the annoying changes caused by consolidating brokers, Scottrade says it has no plans to go public or sell out. That alone makes it a good bet for electronic traders.

Published in Barron’s, March 12, 2007

Saturday, March 10, 2007

Online Stress Test

WHEN STOCK MARKETS everywhere took a big hit last Tuesday, volume on the New York Stock Exchange nearly doubled its typical level, topping 4 billion shares for the first time ever. We thought that offered the perfect opportunity to see how some of the online brokers reviewed here coped with extremely traffic.

In short, the bigger the broker, the slower the site.

Most large brokers’ infrastructure can only allow a small fraction of their customer base to log on at one time. I poked around Schwab.com, Etrade.com, TDAmeritrade, Fidelity, Scottrade, optionsXpress, OptionsHouse, TradeKing and thinkorswim’s Websites. I looked at quotes, searched for a covered call to trade, and tried to enter an order.

Schwab was running extremely slowly, and actually tossed me out when I attempted to enter an order. When I sought to enter a covered call order on E*Trade, the option quote wouldn’t come up. TD Ameritrade shifted to delayed quotes (instead of real-time), but I was able to enter an order. Fidelity was sluggish yet it too let me enter an order. Although they seemed a little slower than they did the previous week, OptionsHouse, TradeKing and optionsxpress weren’t running at glacially slow speeds All three let me enter an order. Thinkorswim was plugging along as though there was nothing extraordinary happening.

I brought up software from Schwab’s CyberTrader, MB Trading, Interactive Brokers and Terra Nova Trading. Cyber was OK even though the web-based Schwab offerings (including Street Smart Pro) were slow. The others looked fine, too. Quotes, especially from the NYSE, seemed to be loading more slowly than usual, but subsequent reports have said the exchanges were swamped, so the problem might not have been endemic to the brokers.

Keynote Systems, which tests sites for loading speed, observed significant performance slowdowns for some of the nation’s leading online stock trading sites. According to their tests, many of the most popular Web sites suffered speed and availability hits. Keynote’s stock trading performance tool measures the time it takes to conduct a stock transaction from 10 geographic locations across the U.S.

Sites included in the Keynote web performance index like Ameritrade, Fidelity, Firstrade, Muriel Siebert, Schwab, ShareBuilder, TD Waterhouse and Wells Fargo, began slowing down Tuesday at 10:30 a.m. Pacific. Many of the sites took up to two times the normal time to complete an online trade, which is a big deal during a huge selloff. On a typical day, Keynote takes an average of 10-15 seconds to log into a broker’s site, get a quote, execute a transaction, and log out. While the markets went haywire, these measurements increased to 20-25 seconds, and up to one minute in some cases.

Abelardo Gonzalez, web performance manager at Keynote, says, “Keynote has never seen such significant slowdowns and limited availability among online trading sites since the index began in 2000.” Gonzales says that there was a 25% drop in the overall number of successful trades his firm was able to undertake on the broker sites that make up the firm’s index. That means it’s possible that upwards of 25% of investors attempting online trades between 1:30 p.m. and 4:30 p.m EST may not have been successful.

“I would imagine that this time was frustrating for online brokerage users,” he says.

By Wednesday morning, all the sites were back to normal, says Gonzales.

Published in Barron’s, March 5, 2007.