In the Bargain Bin

IN OUR ANNUAL RANKING of online brokers ("Different Strokes for...,” March 6), six browser-based sites and three software-based sites earned less than four stars because of significant shortcomings, which include trade-execution problems, below-average design, loosely integrated research amenities, weak reporting or above-average costs. Even so, one of them may suit your needs, especially if you’re looking for rock-bottom commissions and can live with some of the shortcomings.

Browser-Based Brokers

TradeKing (http://www.tradeking.com) is the new kid on the block, offering very low prices ($4.95 for stock transactions, and $4.95 plus 65 cents per contract for options) and a slick Website. We also like the Probability Calculator, which gives TradeKing clients the ability to estimate the probability that a trading strategy will be successful. On the downside, you have to enter an additional password to place a trade, which seems to be an artifact left over from the late 1990s, and the order-routing technology is weak; it doesn’t get the best pricing. It’s the cheapest of the browser-based brokers, however, undercutting Ameritrade’s Izone by a nickel.

TradeKing’s CEO Rich Hagen contacted me after the article was published in Barron’s to say that the additional password is no longer necessary when placing a trade.  He also states that the order routing technology is in place, with the aim of getting customers the best price, but that he could not provide me with statistics backing that up since the company is so new.  We’ll keep an eye on TradeKing’s price improvement strategies as they develop a track record. 

Charles Schwab (http://www.schwab.com) has greatly improved its marketing, but the Website feels crowded, disjointed, and difficult to navigate. Schwab also fell considerably behind the pack in terms of trading technology this year, as customers can’t place trigger orders—orders that get automatically executed when a specific price or other target is reached—nor can they direct their orders.

Still, the site’s research capabilities are terrific, although they may not link easily to a customer’s portfolio holdings—you may have to do some spelunking through a series of tabs and tickers. Its stock picks also have been among the best of major brokerage firms ("Picking the Top Stockpickers,” Feb. 13). For investment neophytes looking to assemble a portfolio of mutual funds, Schwab’s research provides worthwhile guidance.

Balance and position reports are delayed for households with less than $100,000 in their accounts, and margin fees are on the high side. The firm recently stopped charging account-maintenance fees, and improved its portfolio-reporting capability—welcome news.

Ameritrade’s Izone (http://www.izone.com), another relative newcomer, was rolled out in early 2005 and ended up supplanting the late Freetrade. It’s cheap, but there’s no phone for customer service, as Izone is designed for those who are self-directed and self-sufficient. E-mail queries usually are answered promptly, however. In return for this no-frills approach, you get low commissions for stock trades—$5 for market or limit orders. There’s no online bond-trading capability, yet you get access to Ameritrade’s order-routing technology for stocks and options. Many Ameritrade tools are available—but at extra cost.

Wall Street*E (http://www.wallstreete.com) used to be one of our favorites, but the site has seen little updating in several years. We still like the prepopulated trade tickets and real-time account information, and the changes implemented last year for entering spread orders. The firm offers three levels of service, depending on how much your hand needs to be held. There are services for Spanish-speaking customers and for non-U.S. residents.

TD Waterhouse’s (http://www.tdwaterhouse.com) site has been cleaned up considerably this last year, and includes improved research and charting tools. It doesn’t offer smart- order routing or customer-defined order routing, however, and its options-transaction fees are on the high side. Margin rates are very high. We do like the new research layout; some of it can be viewed without logging into an account. TDW lets you access your account in many different ways—online, touch-tone, wireless, or by walking into one of its offices. The site will be rolled into the new TD Ameritrade later this year as the result of a merger of the two.

Firstrade (http://www.firstrade.com) has a promotion running through the end of April that gives new account holders 2.99% margin fees for 90 days. After that, they revert to their usual rates, which are currently in the middle of the pack. As with TD Waterhouse, Firstrade’s trading technology is weak, but its fees are much lower ($6.95 market and limit orders). Another plus for cheapskates: no extra fees to buy mutual funds online, provided you hold them at least six months. You can’t trade complex options online, but its bond and CD inventory is easy to search and trade. There are Chinese-language links available as well.

Software-Based Brokers

Here are three software-based offerings, two of which are from brokers that are primarily browser-based.

Power E*Trade (http://www.poweretrade.com) is a software application, but there also is a Web component. A recent redesign gives customers a complete view of their accounts, plus access to spiffy new charting tools. We like the Prepared Orders feature, which lets you create a list of up to 25 orders, which you can execute singly or all at once. There are some strange holes in the software platform, however, such as an inability to trade complex options. As with E*Trade’s regular offering, margin fees are high, while interest payable on cash balances is low.

ScottradeELITE (http://www.scottradeelite.com) offers a great introduction to software-based trading for the relatively active trader. But to run with the big dogs, it has to have better order-routing technology and the ability to trade complex options online. It’s got low barriers to entry compared with other software-based platforms, and could work out great for the newcomer to the field.

AB Watley (http://www.abwatley.com) lets users trade stocks and simple options online through its trading platform, but everything else must go through a live broker. Commissions range from $6.95 down to $1.95 per transaction depending on your trading volume. Watley definitely caters to active traders in OTC Bulletin Board and pink sheets, including Level II quotes for pink sheets. AB Watley also lets you access your account via a browser in case you’re away from your main computer.

Pairing Up and Bulking Up

Consolidation continues to be a major theme in the online-broker industry. Terra Nova Trading was thought by industry insiders to be on the block, and they were right.

RushTrade Securities announced that it has agreed to acquire 100% of the outstanding membership interests of Terra Nova Trading, which includes Market Wise Securities and Market Wise Stock Trading School. Both Rush and Terra Nova have been marketing themselves to day traders and hedge funds. According to a press release, the combined companies will have approximately 20,000 customer accounts and over $500 million in customer-account assets. Chris Doubek, Terra Nova’s president, says the rationale for the merger is to combine RushTrade’s proprietary trading software with Terra Nova’s back-end processing and clearing operation to create an entity that owns its own technology “from soup to nuts.”

Terra Nova now licenses Townsend Analytic’s RealTick software, which Doubek admits is “a little much” for the average retail investor. Doubek says that RushTrade’s trading platform offers about 70% of RealTicks’ functionality, but will be much less expensive to offer. It will continue to offer RealTick to its high-end customers.

Doubek adds that the combined firm plans to offer “very competitive” commissions, but will avoid the low end currently occupied by Interactive Brokers and MB Trading.

Posted by on 04/10 at 09:24 AM

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