Saturday, September 25, 2010

Futures Are the New Options

Online brokers are pushing further into futures trading—and taking retail investors with them.

JUST PAST THE TURN OF the millennium, retail investors began to trade options using tools and platforms from online brokers. It caught on. More recently, a few brokers introduced futures trading to the small investor. Now nearly half of the firms in Barron’s 2010 review of online brokers allow futures trading. There’s more to come.

TD Ameritrade (http://www.tdameritrade.com) last month launched futures and spot foreign-exchange trading through its thinkorswim platform. And trademonster (http://www.trademonster.com), the focus of our attention this week, has just joined the fray.

“Futures as an asset class is becoming more and more accepted and recognized, understood and used, particularly by active traders,” explains trademonster CEO Wade Cooperman. “People who understand options are looking for additional vehicles for their portfolios,” he says.

Futures, which allow traders to speculate on the prices of everything from pork bellies to orange juice to currencies as well as the level of housing starts, is a highly regulated business. Because they allow more liberal use of margin, and therefore more leverage, they can be more risky. In the past, investors who wanted to trade in futures either had to open an account with a specialized broker or have multiple accounts with a single broker that offered futures as well as other types of securities. The idea was to keep futures separate, as a precaution.

Since you can be more leveraged on margin, you can generate larger profits. Conversely, you can lose more, too; trading on margin also creates interest expense for you. As TD Ameritrade’s Website cautions, “This allows for strong potential returns, but can also result in significant losses.”

ANOTHER CONSIDERATION: Commodities are not covered by Securities Investor Protection Corp. insurance, the way stocks and bonds are, should a dealer go bankrupt. All funds have to be separated from the firm’s capital, which is why most brokers require customers to open separate accounts. Trademonster’s futures trading platform requires an account unconnected to your equity account. You must also log in to a different Website, though the firm plans to integrate the platforms in the near future.

When you sign up for a futures account at trademonster you’ll see three trading platforms: a Web-based browser version, a mobile app, and a downloadable desktop software application. The latter is the group’s Lamborghini, offering real-time quotes, profit and loss calculations, and a variety of advanced-order types. The mobile version runs on the iPhone, iPod Touch, TMobile G1, MyTouch, Verizon Droid and Palm Pre.

You can register for a two-week trial of a simulator version of any of these platforms. We glanced at the Web and mobile apps, but focused on the downloadable software version. Trademonster customers have access to all the electronically traded contracts at the Chicago Mercantile Exchange; a list can be found on the firm’s Website. Trademonster’s futures platform is called T4; it was written by a third party and has been adapted to look more like the firm’s stock and options trading platform.

Commissions run $1.50 per contract for either side of a transaction, plus exchange fees and a levy of 50 cents per contract for the platform. The platform itself requires a minimum charge of $25 per month; if you generate more commissions than that, the $25 is waived. Charting and news feeds increase the platform fee to $200 per month.

A new feature, liveAction, has also joined trademonster’s stock and option platform. It’s an interesting scanner that looks over real-time options activity, including volatility metrics. Most options-oriented scanners monitor measures such as unusual activity, trading volume, or changes in premium, and are often run on delayed or overnight data.

But liveAction’s calculations are based on a couple of databases that stream live data all day long, tick by tick. The database tracks whether contracts were traded on the bid, the ask, or in between. There are dozens of volatility scans. For instance they can compare this month’s volatility to the volatility of a contract that expires two or three months from now. You can also scan for changes in premium to see what options traders believe will happen to the stock price in the future.

At present, the scans are pre-set, and you can select the one you want from a drop-down menu. The top stocks that fit the scan, up to 50, are displayed sorted on key value, but you can click on another column and change the sort order. If you click on a particular symbol, you will see information specific to that particular contract, and you can also place a trade. This new tool has been nicely integrated into the workflow of the trademonster platform. There is no added charge for liveAction.

Published in Barron’s, September 20, 2010. 

Posted by twcarey on 09/25 at 10:10 AM
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