Investor Brain

Saturday, March 10, 2007

Tools of the Trade

VOLATILE MARKETS AND THE ELECTRONIC TOOLS to exploit them: What more can an online trader ask for?

Today, it’s possible to buy Swiss stocks or sell Japanese shares from your desktop; you can also go long oil, short a silver contract, trade a butterfly option on the S&P 500 or employ computer-generated algorithms to jump from stock to stock—all with the assurance of credible market prices and the confidence bred by customized research and analysis. And you can do it at a fraction of what it cost a few years ago.

In recent months, banking behemoths like Bank of America and Wells Fargo have offered free online trading to any customer who meets their balance threshold, while newcomers like OptionsHouse and TradeKing continue to chip away at commissions.

Deep, diverse product lines and declining prices highlight Barron’s 12th annual survey of the Best Online Brokers. New services and tools catering to futures, options and international investors are proliferating. Meanwhile, the average commission on a 500-share stock trade at the 29 brokerage firms we reviewed this year was $6.35, down more than 29% from the average of $8.25 a year ago. Costs for trading options have declined similarly.

With so many interesting alternatives, how did Barron’s choose? We divvied up our brokers into two camps—14 firms that are accessible through their own proprietary software and another 15 that you reach through Web browsers akin to those used for online banking.

Software-based systems traditionally have aimed at attracting more frequent traders seeking speed and an information edge, while the Web has a more mainstream appeal for the sometime trader.

Thinkorswim tops Barron’s 2007 list of software-based brokers for the second year in a row, earning 4 1/2 out of a possible five stars. And by the thinnest of margins, a new winner emerged in the Web-based broker category. TD Ameritrade (http://www.tdameritrade.com) nudged aside longtime champ optionsXpress (http://www.optionsXpress.com). Both won four stars, but TD Ameritrade had slightly higher points behind those stars.

Click here to see how the brokers stack up.

What does it take to make it to the top? Eight-year-old thinkorswim launched 12 software revisions in the past year, adding new tools and making its platform stabler. “It’s as close to bug-free as a program can be,” says the firm’s president Tom Sosnoff.

Much larger, publicly-held TD Ameritrade (ticker: AMTD) has risen via a very different business model. The firm is the result of a merger between Ameritrade and TD Waterhouse. A frequent acquirer since the Internet bust decimated the electronic-trading business, Ameritrade wisely adopted the best parts of its purchased platforms. Its newest hybrid utilizes the terrific research capabilities of TD Waterhouse and improves upon Ameritrade’s previous platform.

Barron’s doesn’t think commissions are the only measure of a broker’s worth, even if we’re not ready to agree with Sosnoff, who says of pricing, “We don’t care about that any more.”

We rated thinkorswim, TD Ameritrade and their brethren in eight categories, including the types of investments that can be traded online, the quality of screeners provided to help sort through stocks, options or funds, the consumer-friendliness of trading screens, overall ease-of-use and ability to be customized.

Table: How the Brokers Stack UpWe then took a hard look at the types of orders a trader can enter, and, for software-based brokers, delved further into trade automation, strategy creation, and formulations for commissions. We also compared the rates brokers pay for customers’ idle cash—an important consideration, now that short-term rates have risen. We assigned a point value ranging from zero to five for the eight criteria.

We then toted up the points for each of the browser-supported brokers.

Barron’s treated the software-based firms a little differently. For them, we created a weighted total by assigning varying degrees of importance to each measure, based on suggestions from more than 400 readers. For full details of our criteria (click here).

IN THE CASE OF THINKORSWIM, MANY OF the dozen upgrades were designed to allow its relatively sophisticated clientele to wring more out of their systems. “Our commitment [is] to apply cutting-edge technology to our trading platform and to raise our customers’ understanding of complex strategies with strong customer support and educational services,” says Sosnoff. In part, this has meant better order routing to market centers offering speedier execution and more price improvement. Thinkorswim has several ways to place trades. If you click on the offer in any quote display, an order-entry ticket pops up that will let you place a Buy order, while a Sell order comes up if you click on the bid. Either way, the ticket is filled in automatically with the stock symbol and your default transaction size.

For tech support, thinkorswim customers can use a built-in screen-capture program that takes a picture of the part of the program causing a problem, and sends it to the customer-support staff via live chat.

The software program also offers tax-accounting tools that match trades and send the output to any file format, and its platform is flexible enough to allow easy customization. What’s more, the broker has joined some of its competitors in offering a Web-based platform, with almost all of the bells and whistles of the software offering.

Despite Sosnoff’s comments about pricing, thinkorswim’s commission schedule is reasonable—an order for 500 shares of stock is $7.50, and 10 options contracts are $12.95. Clients can also make three free mutual-fund trades per month—including those that other brokers charge for. Thinkorswim’s interest rates on cash are on the high side, and its margin fees are on the low side. Customer service is excellent.

Repeat-winner thinkorswim continued to reign supreme. However, Interactive Brokers and MB Trading both earned the same number of stars—4.5—from Barron’s this year. And there are lots of other candidates worthy of your consideration.

AMERITRADE’S WEB-BROWSER system is tackling some of the same issues. Its proprietary order-routing technology can discern whether you’re entering a Buy or Sell, the size, and whether it’s a limit or market order, among other things—and compares the order to the prevailing market price. If the order is marketable, it goes through a host of market centers to fine-tune how the trade will be executed. This super-smart router tries to get the best available price in the market. A few bucks on 1,000 shares might not sound like much, but the savings add up quickly if you trade frequently.

For more active traders, TD Ameritrade’s Streamer Suite Console offers numerous customizable real-time data and charts. You can set up 50 watch lists, with as many as 35 symbols per list, and switch between them quickly using a drop-down menu. You can add technical studies to charts, and even trade from the quote or chart pages. The site offers excellent screeners, and recently added contingent orders (allowing you to make multiple automatic moves, based on various price changes or relationships) to its entry screens. We were impressed by the ETF [exchange-traded fund] center, powered by Wall Street on Demand.

TD Ameritrade’s commissions and other costs are middle-of-the-pack, but easy to understand. The firm charges $9.99 for any stock order, and its options commissions are $17.49 for 10 contracts. Margin rates are on the high side, but it’s possible to move cash into a sweep account that pays close to 4.5%.

AMONG THE SOFTWARE-BASED systems, Interactive Brokers and MB Trading trail thinkorswim on points but still merit 4 1/2 stars. Four-star software brokers include TradeStation, Fidelity’s Active Trader, ChoiceTrade, Schwab’s CyberTrader and E*Trade Pro. All deserve serious consideration.

Interactive Brokers, for example, has the best international offerings, many futures choices and low fees. This last year, it added access to Swedish, Japanese, and Hong Kong stocks, along with floor-traded CME and CBOT futures, NYMEX physical energy futures and soft commodity futures, and CBOT electronic agricultural futures. Penny-priced options are available not only for 13 underlying symbols being tested, but for all equity options using the firm’s well-regarded proprietary technology.

Pricing is low, and extends to margin fees, which are the lowest among the brokers surveyed this year. Interactive’s rates on cash are among the highest, making it an obvious choice for the cost-conscious. It, too, has a new Web-based platform.

MB Trading recently started offering direct access to foreign-exchange and electronic communication network technology, making it a good choice for currencies. David Lipsett, executive VP, says, “We have leveled the playing field in a previously inefficient marketplace.” MB’s forex platform has 28 currency pairs.

Options traders can create just about any multileg strategy they want at MB. The quote screen displays the option chain, showing all calls and puts for the expiration dates desired. The order action section can then be adjusted to allow an initial stock or option leg, plus up to five more legs. A smart order router gets price improvement on nearly half of all options orders, a very high rate.

Fees are low, and customer service is great.

TD Ameritrade took top honors this year in a very tight race with longtime champ optionsXpress. Barron’s evaluated the brokers on eight criteria, taking into account everything from trading processes to ease-of-use to costs to research.

LONG-TIME WEB-BASED favorite optionsXpress (http://www.optionsXpress.com) may have fallen back a fraction in this year’s ranking, but it merits four stars, as do three other Web-based brokers: Fidelity Investments, SiebertNet, and fledgling TradeKing. Wells Fargo’s online brokerage, with three stars, beats out Bank of America’s, which merited 2 1/2, in a battle of big banks promoting free trading.

As its name suggests, optionsXpress offers tools focused on options, but it also aids other sorts of trading opportunities. Screeners, strategizers and pricing calculators all help sort through options and excellent educational information is available.

There weren’t a lot of obvious changes to the site last year because the firm was focused on converting to self-clearing, which gives it more flexibility in routing orders, can help keep costs down and facilitates customized reporting. President David Kalt says self-clearing will be the firm’s engine for future improvements.

Still, the firm did introduce a universal account, allowing clients to trade all their asset classes under one umbrella and integrate a futures-trading platform into its site It also added a feature called Chart Patterns, permitting clients to find stocks that fit the technical trends they’ve specified.

Fidelity, which supports both a Web browser and a software system, has tools for customers who don’t venture into the stock market very often, as well as souped-up goodies for frequent traders.

Both the Website and the software have pre-condition features to let investors set conditions for buying or selling. One welcome enhancement is real-time balance and margin information. Fidelity’s Open Bond Market site was also enhanced, giving customers access to an expanded fixed-income inventory.

Muriel Siebert & Co.’s SiebertNet is in the midst of an overhaul. We were given access to the platform that will be introduced this month, and our rankings are based on this updated offering. The site has all the tax-reporting tools we’ve rated highly in the past, plus added trading functionality and options analytics. The options Strategy Builder automatically calculates debit/credit amounts, maximum gain, loss and breakeven points.

Multileg options strategies can be selected; a click on the Trade button leads you to a prepopulated order ticket. Siebert continues to offer a high level of account protection, a choice of high-yield money funds, and personalized service.

TradeKing says that it made 52 site enhancements in its first 52 weeks in business, and hasn’t stopped. You can’t trade anything exotic here, beyond the usual stocks, options, mutual funds and bonds, but rates are low and there are a lot of great tools.

We like the Profit + Loss Calculator, which enables members to chart the profit and loss potential of trades, and the check-box format for building multileg options strategies. The enhancements made to the technical-analysis offerings, and the wealth of educational material available are also key.

AS IMPRESSIVE AS MANY ONLINE-BROKERAGE products are today, the business still has its flaws, as was evident in last Tuesday’s major market meltdown. Some investors found their broker sites at best slow and at worst completely unable to handle trades amid record volume (see Barron’s Online for more). And no matter how great the tools, online trading isn’t worth the expense if the broker—and the trader—don’t bother with education. The “trade-now” mentality that many brokers encourage should be resisted.

And there’s one caveat about Barron’s rankings: The brokers with the highest-point totals aren’t always the best choices for you.

If, for instance, you don’t care so much about availability of mutual funds or bonds, but are keen to know about the best execution at the cheapest price, consult the scores for those categories and find your own personal five-star broker.

Whether you’re choosing a new broker or evaluating your current one, there are more changes coming this year. Prices, say most execs, can come down a bit further even if they don’t drop as steeply as in recent years. And the kind of consolidation that brought TD Waterhouse and Ameritrade together is likely to continue, with the possibility of at least one more big deal in 2007.

Everyone should expect to be asked for more information when requesting a cash transfer or to place an order that’s outside their usual pattern: Security on financial transactions is going to tighten further. E*Trade has already added a cash-transfer security measure that requires a customer to wait for an e-mail with a unique confirmation number.

Over time, software- and Web-based brokers may start to look more alike. Brokers of both types need to grow and, increasingly, they’re stepping onto one another’s turf. Because all of these platforms are improving so rapidly, individual traders have one sure bet: It won’t be long until they have access to tools that only professionals use today.

Published in Barron’s, March 5, 2007

Saturday, March 03, 2007

The Envelope, Please

EVERY YEAR AT THIS TIME, customers of online brokerages take note of an unusual phenomenon: the arrival of new tools and upgraded services. It doesn’t seem like a random event. Some suspect it’s related to the approach of Barron’s annual ranking of the brokers—a little like the last-minute primping that precedes the Oscars.

Whatever the reason, here are some of the big changes that just happened to roll out in February.

E*TRADE (http://www.etrade.com) launched a Global Trading platform on Feb. 20. The goal of the new platform is to give U.S.-based customers access to six foreign markets, and give them the opportunity trade in multiple currencies as well. The six markets in the platform’s debut are Canada, Hong Kong, the U.K., France, Germany and Japan. Ultimately, E*Trade plans to give customers access to 42 exchanges.

Says Michael Curcio, a managing director at E*Trade Financial, “With European stocks making huge gains, investors are seeking opportunities abroad, as evidenced by the $150 billion investors pumped into international stock mutual funds in 2006. We see continued momentum around international investing as a result.”

A customer has to create another account with E*Trade to access the new platform, but it’s designed to be linked to the dollar-based accounts. Customers can trade funds into the global account from a U.S. account, then buy the currency desired for an international transaction.

WELLSTRADE, Wells Fargo Bank’s online brokerage (http://www.wellsfargo.com), announced on Feb. 13 that it would widen its free trading program to include clients who have $25,000 and up in their relationship accounts. Previously, the minimum was $250,000. Any combination of brokerage, deposit accounts, home equity and car loans, or even 10% of a mortgage counts toward the minimum. Those who qualify are allowed 100 free trades per year for stocks and no-load mutual funds.

To qualify for 100 free online trades, customers link their WellsTrade account to a Wells Fargo Portfolio Management Account. This package combines all banking and brokerage-account information into a single statement for easier management.

“You don’t have to be a millionaire to be treated like one,” says Rachel Perkel, senior vice president of brokerage-client solutions at Wells Fargo Investments. “When a client has a broad relationship with us, they have a single sign-on at WF.com and can easily move money between bank and brokerage.”

THINKORSWIM (http://www.thinkorswim.com), last year’s co-winner in the software-based brokers ranking, has released 12 software upgrades in the last year, says president Tom Sosnoff. The most recent in late January includes an upgrade to charting functionality, plus ways to bypass corporate firewalls when logging in to the thinkorswim servers. The platform now features a live audio broadcast that goes on throughout the day, in which one of the firm’s top traders talks about various opportunities.

Among the new features are expanded beta-weighting tools, as well as volatility models, which can help options traders find profitable trades. “We have eliminated virtually every vendor component dependency, so we’re producing all our software in-house. We’ve introduced industry firsts such as streaming audio, integrated education and theoretical pricing tools,” says Sosnoff. The firm has also rolled out an improved Web-based platform that includes 300 enhancements.

MB TRADING (http://www.mbtrading.com), last year’s other software winner, has started offering direct access to foreign-exchange and electronic-communication network technology. “This introduces new customers to MBT and offers existing customers new opportunities,” says David Lipsett, executive vice president. Lipsett also says that the firm catered in the past to active traders but has begun focusing on occasional participants, offering them improved technology and better support than they’ve typically received.

TD AMERITRADE (http://www.tdameritrade.com) just announced enhanced order types, including those of a contingent variety—meaning that a client is able to, say, automatically buy a stock when it hits a certain level and then sell it at a pre-arranged price, with many variants. Customers can expect enhanced bond offerings, as well as improvements to its active-trader tools.

SO WHO ARE the best online brokers? Check back next week.

Published in Barron’s, February 26, 2007

Saturday, February 17, 2007

Tax Software for Serious Investors

FREQUENT TRADERS WHO DO THEIR OWN taxes are either control freaks (my category) or very comfortable with the ins and outs of tax accounting. Crazy is another possibility. In any case, do-it-yourselfers of all types need tax software—either packaged or online.

Any tax program should be able to deal with income and deductions, but the serious investor needs to compile an accurate Schedule D, covering all transactions. There’s no shortage of software alternatives. Sorting through them—particularly the jumble you see in stores—is the problem.

The two big players are TurboTax, from Intuit, and TaxCut, from H&R Block. Both offer long lists of software, plus a menu of online tax-prep choices, which you access via your Web browser.

We looked at TurboTax’s Premier Investments ($74.95) and TaxCut’s Premium Federal+State+e-file ($59.95). We also evaluated online site CompleteTax (http://www.completetax.com), published by CCH, a tax-preparation outfit.

One big benefit of TurboTax is its link to financial-service providers, letting you import your investment data—if your broker is on its list. Fidelity, Schwab and E*Trade transactions can be accessed this way, but customers of brokerages devoted to active traders, such as Schwab’s CyberTrader, TradeStation and Interactive Brokers, will have to enter data manually or find some other way to fetch it. TurboTax’s import list hasn’t caught up with rapid industry consolidation, either—TD Ameritrade, for instance, isn’t listed, though its component parts, Ameritrade and TD Waterhouse, are.

TurboTax also let me import a W-2 from a large employer; this one was prepared by the employer-sponsored payroll site of Fidelity (a separate unit of the mutual-fund giant). If your employer’s payroll software cooperates with TurboTax, the form can be pulled in easily if you have a user-ID and password. Be sure to check the imported figures against the W-2 mailed to you. TaxCut users have to enter their W-2s manually.

BasisPro is a new twist in TurboTax this year. It allows you to figure out the historical cost basis of an investment, which is especially helpful if you’ve sold a long-time stock or mutual-fund holding. For example, if you sold 600 shares of Hewlett-Packard (ticker: HPQ) stock last year that you purchased in 1996, your cost could be attributed to some old HP (HWP) shares that have split twice, or legacy stock from HP acquisitions like Compaq. BasisPro looks all that up for you and figures out your cost basis.

The BasisPro feature requires a connection to the Web, and unfortunately makes you re-enter the information you just typed into TurboTax. Perhaps a future version will eliminate the extra keystrokes. Even so, it’s a welcome feature.

TaxCut has vastly improved its interview process, now focusing on data flow rather than the income tax form itself, making it much easier to use. Still, it lacks the huge number of automatic imports that TurboTax has. However, if you use Microsoft Money or Intuit’s Quicken, or any other program that can create Tax Exchange Format (.txf) files, you can still grab the appropriate transactions.

TaxCut includes one federal and state e-file per package; if you file multiple returns from one copy you will pay another $15.95 for additional e-files. We like TaxCut’s advice on the tax ramifications of life changes like marriage or retirement.

CompleteTax has a simple, clean interface, and the price ($25.95 for a federal return, $12.95 for each state return) includes e-filing. Users of GainsKeeper, to which many online brokers link customers for gain/loss reporting, are the most likely to benefit from this program. CompleteTax can only import data from Gains-Keeper files; everything else has to be entered manually.

One solution for traders with reams of taxable transactions is TradeLog (http://www.armencomp.com/tradelog/), published by Armen Computing. We like TradeLog for active stock and options traders. It does a much better job of tracking options transactions than Quicken or Money, and it’s a good tool for short-sellers. TradeLog can also help you track futures transactions, which aren’t specifically addressed in other programs.

TradeLog offers five versions, keyed to transaction volume. TradeLog 200, which covers up to 200 trades, is $69. The top-of-the-line GTT TradeLog, which handles unlimited transactions and is aimed at those needing mark-to-market accounting, is $349. GTT TradeLog is also supported by Green Trader Tax (http://www.greentradertax.com), which provides tax advice for frequent traders.

Published in Barrons, February 12, 2007.