Monday, May 09, 2005

Back to the Future

Much has changed in computers and investing since this column began 10 years ago

A SPECIAL DAY SLIPPED PAST US a few weeks ago—the tenth anniversary of the “Electronic Investor” column: It was on March 27, 1995, that our initial attempt to shed some light on financial software and online services aimed at individual investors appeared. In that column, we reviewed WealthBuilder 4.0 for Windows, a collection of financial-management tools to help investors choose, implement and monitor effective investment strategies, which was essentially a financial-news search engine coupled to an asset allocation model.

It cost about $30 per month to supply the user with portfolio-linked news clipped from Money magazine, Reuters, Dow Jones (including Barron’s) and some investment newsletters. At that time, it evoked a certain “gee whiz!” response, along with some complaints about its propensity to crash, requiring additional manual data entry.

A couple of months later, the column compared the big three online services at that time, and what they offered for investors. We figured that it would cost around $25 to $40 per month to subscribe to either America Online, CompuServe or Prodigy, and pull together quotes, news, and discussion forums.

That was before the before the World Wide Web stretched so wide.

“One of these days, the Internet will blossom into the ultimate financial tool, offering an amazing array of information and services at almost inconsequential cost. Then, anyone with a PC, a modem and a phone will be able to use the Internet to dig up investment ideas, research them, share findings with other investors, even buy the securities and track their performance. In fact, to a surprising degree, you can do most of those things right now.”

So wrote Eric J. Savitz, now one of Barron’s West Coast editors, in this column on June 26, 1995. And the rest, as they say, is history. Now, however, broadband connections via cable or digital-subscriber lines are supplanting dial-up modems.

Later that summer of ‘95, the column delved into quote services, finding some that cost around $200 per month for real-time data—and that fee didn’t include the hardware necessary for tapping into the satellite feeds. The big-name players in the real-time data world were hooking people up through satellites, coaxial cable and FM antennae.

Over the ensuing 12 months, a technological revolution shook up the ranks of data suppliers as several of them moved to the Internet, allowing data-hungry traders to use their modems and PCs to get the information they need. By mid-1996, it was possible to find free delayed quotes, but real-time data still came at a price.

We reviewed online brokers for the first time in May, 1996 (see below), taking a look at 12 online brokers and ranking them based on criteria such as ease of use, depth of offerings and services provided. Our first winner was Lombard Institutional Brokerage, a San Francisco based subsidiary of Thomas F. White. One of its key attributes was the display of the stock’s real-time price prior to placing an order. Other brokers would display a delayed quote on the trade-confirmation screen, which was a little late, especially for those entering limit orders.

Following several acquisitions and spinoffs, Lombard no longer exists, except as a shadow of its original award-winning implementation, buried within Harrisdirect’s online brokerage.

The lowest commissions charged in April 1996 were $14.95 for market orders and $19.95 for limit orders at E*Trade’s then-brand-new Website. In May 1996, however, a brokerage called eBroker, which was the predecessor of Ameritrade, busted out with a $12 commission. At that time, E*Trade’s chief executive was quoted as saying, “A commission of under $10 for a routine trade isn’t out of the question in the near future.”

How far we’ve come since then.

Real-time data is, for the most part, free. Online commissions are at an all-time low even as technology offers retail investors the tools that pros could only dream of 10 years back. There are free sites that allow you to put together the information and recommendations for which WealthBuilder once charged $30 per month. The ubiquitous nature of Internet access means there are thousands of sites that appeal to investors; our job here at The Electronic Investor is to steer you to the sites that provide meaningful, timely and relatively unbiased information.

Online brokers tend to roll out their big upgrades in January and February, just in time for our annual review. Our most recent roundup of online brokers features 30 offerings, nearly triple the number of our first review.

Following that initial review of online brokers, we delved into the world of payment for order flow, and explained why some brokers could execute trades at such low commissions. Since then, between regulations and the sound of customers voting with their feet, a much lower percentage of broker revenue is generated by payment for order flow.

Reader interest in the topics presented in this column resulted in a doubling of its frequency-to every other week-in 1998. As of January 2001, the column appeared in every issue of Barron’s. Now, of course, it’s still published weekly. As the universe of investing tools expands, I remain fascinated by the topics we cover in this column, and continue to enjoy digging up the gems. Given my extremely limited attention span, that’s close to a miracle.

Online Broker News

Speaking of tools that are now available to retail traders that were once solely the domain of the pros, how about algorithmic trading? There are several software based brokerages that allow you access to trading tools such as conditional orders and time slicing, but recently ChoiceTrade’s high-end platform, Choice-Trader Select, put institutional trading tools at the fingertips of the retail trader.

Algorithmic trading really only makes sense for those who are executing large block orders, such as hedge funds and institutional traders, but there’s a small group of retail traders who can make use of these tools. To tap into the professional tools, a trader using ChoiceTrader Select chooses the “CSFB route” when placing an order. Traders can choose between six tactics including time- and volume- weighted average pricing and nine execution styles from patient to aggressive.

You can also choose start time and end time for the block trade, as well as volume goals. Audio alerts can be set when executions occur. There are six models available that can control the average price you pay per share, or show just a fraction of the order to the open market, or route the order to the best pool of liquidity.

The client can watch as the executions are occurring and cancel anytime. John Pal De Vito, president of Bon Trade Solutions, the software developer behind ChoiceTrade’s ChoiceTrader Select platform says, “You’re not locked in from start to end. Nobody has given this kind of buy-side institutional trading power to retail traders that we know.” E*Trade’s Power E*Trade Pro is now compatible with the Mac OS X operating system. That’s not a bad move for

E*Trade to make, given that Apple Computer reported a 43% increase in the number of personal computers it sold during the first quarter of 2005 from a year earlier. (Another blast from Electronic Investor’s past: “MacOrphaned in a PC World? Good software is still available for Apple users, as publishers do Windows,” Oct. 30, 1995. The more things change )

PowerE*Trade Pro for Mac is targeted to active traders in this growing market, and doubles the number of software-based trading platforms for Mac users. The other one is thinkorswim’s Java-based trading system, which earned 4ยต stars in our annual review of online brokers ("Speed or Comfort?” March 7, 2005.)

Are you wondering how the international equity exchanges work? Interactive Brokers recently added succinct, yet informative, descriptions of exchanges around the world in their “Education” menu at http://www.interactivebrokers.com. Roll your cursor over the “Education” tab, then choose “World Exchanges” from the dropdown list.

Through IB’s Universal platform, customers can trade equities, exchange-traded funds, options, futures, foreign exchange and bonds on global markets from a single account in a single currency. Keeping an eye on the evolution of those markets, and how they interconnect, is a priority for IB. Their commentary covers 17 North American exchanges, eight European exchanges, and six Asian exchanges. It’s definitely worth a look if you’re at all interested in trading international equities.

Published in Barron’s May 9, 2005

Posted by twcarey on 05/09 at 01:25 PM
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