Pick Your Own Online Stock Sherpa

Working Title:  Beat the Cheat

A FEW WEEKS AGO, a stock-market trading contest run by TheStreet.com was found to be compromised—i.e., some participants were cheating. So the game, called “Beat the Street,” was cancelled and the prize money withheld. The provider of market news and commentary then started up another round of the game on June 13 (beat.thestreet.com), throwing in the original $100,000 prize money to create a grand prize of $150,000 for the second tourney. TheStreet.com also said it had added new safeguards that would make it impossible to trick the results this time around.

Cheating in a trading game? It’s like finding out that the apple pie was made with crackers. Stock-picking tournaments, which Barron’s also runs, are great ways to learn about high-risk trading strategies without losing any of your own money. But they’re no fun when your rivals have found holes in the contest’s rules that give them an unfair advantage.

I came in second in an investing game a few years ago, and enjoyed the rush of competition immensely. It was also educational to see what other contestants were doing, and to learn from their successes and failures.

Several online-brokerage sites allow traders using real money to give others a peek at their strategies. TradeKing (http://www.tradeking.com) customers, for instance, can set themselves up as “Certified Traders” and the firm will publish their actual transactions on the site’s “Community” section. However, the certified trades include only those executed at TradeKing, so customers trading with other brokers can show only a portion of their activity.

ENTER COVESTOR (http://www.covestor.com), which opened its virtual doors on June 5. Covestor is designed to enable individual investors to view the portfolio allocations of others—and to follow in the path of those who enjoy successful outcomes.

Stock-picking games like those run by TheStreet.com display fantasy trades, but at Covestor you see real trades, documented by brokerage records. Members’ names don’t have to be displayed for all the world to see, but to sign up for an account, they must provide proof of identity and upload brokerage statements to verify their actual holdings.

Rikki Tahta, co-founder and chairman of Covestor, explains: “We all know people who are managing their own money, and doing a great job. Our research shows there are tens of thousands of unsung heroes and millions of others who would be keen to invest alongside them.”

After an account is created, Covestor logs that member’s trades and holdings—using a secure link into his or her brokerage account, or accounts. The link is provided by Yodlee, an account consolidator that we’ve written about many times. Those who don’t want to link their brokerage accounts can enter their transactions manually. Covestor checks these entries periodically against paper brokerage records to assure accuracy. Other members, or “followers,” can then track the real-time investments of those who share their investment goals.

All of the participants can opt to publish their real names or remain anonymous by selecting screen names. It might be hard to give much credence to the financial acumen of “bigdaddy69,” so it would be a good idea to pick a moniker that doesn’t scream goofiness. Actual trade sizes are not disclosed, merely the item purchased and the price.

Covestor could give a marketing push to some small investment managers by publicizing their picks, but it would be difficult to calculate an actual portfolio return without knowing the size of a particular investment.

Should you become a Covestor member, each time you execute a trade you will be invited to give the rationale for your move. Covestor will then build you an auditable, time-stamped record of your decision-making and will track your returns.

Within a year, says co-founder Perry Blacher, members will be able to sign up to follow the trades of their favorite Covestor Sherpas. That will entail a fee for what is now a free service. And here’s where it gets more interesting. Covestor plans to partner with several online brokers that eventually will allow members to sign on with high-performance money managers of their choosing. These guides will essentially run separately managed accounts for their followers. This service also will require a fee, most of which will flow to the adviser, thus rewarding those who have created the biggest online following.

Blacher says that a verified track record will start with the existing holdings in your account. Owing to the rollout of these additional services in a year or less, it pays to sign up relatively soon to start creating a successful track record, he notes. The firm is also still working out some regulatory issues.

We’ll check back on Covestor in a few months to see if it’s taken off.

ONLINE-BROKER NEWS: Advanced Chart Patterns are now available to all optionsXpress (http://www.optionsxpress.com) customers, allowing them to search for bullish, bearish and other trends among thousands of securities, using real-time data. Investors can access 36 technical trends from the familiar, such as Double Bottoms, Head and Shoulders, Moving Average Crossovers and Breakouts, to the more esoteric, such as Bearish Symmetrical, Continuation Triangle or Descending Continuation Triangle. The charting-pattern software is provided by Recognia.

COMING SOON: A series of regulatory initiatives designed to modernize and strengthen the National Market System for equity securities, brought to you by the Securities and Exchange Commission, is due to be implemented for 250 stocks (100 NYSE, 100 Nasdaq, 50 Amex) on July 9. Full compliance with the Regulation National Market System (Reg NMS) is scheduled for Aug. 20.

Most of the changes won’t be visible to the retail trader’s eye, but trading centers have been extremely busy getting ready over the past couple of years. They are required to make a serious effort to avoid executing trades at prices inferior to protected quotes displayed by other trading centers, which means trades ought to execute at the best price available when your order was entered.

Quite a few market centers are setting up “dark pools,” or inventories of stock to be sold outside the NMS. How will this affect you? It should not be of much significance to the smaller retail trader, but we’ll let you know if that changes.

Posted by on 06/30 at 04:57 PM

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