Saturday, June 16, 2012

What's the News in Online Trading?

A financial video outfit gives TD Ameritrade customers free access to previously paid-only site. A new online broker, aimed at basket trading of stocks, moves out of its beta test.

Two unusual electronic-trading specialists took important steps to prepare for their future in recent days.

Tastytrade, a video financial network dreamed up by thinkorswim brokerage founder Tom Sosnoff, linked up with TD Ameritrade, allowing the big firm’s customers free access to the previously paid-only site. Motif Investing, a new online brokerage founded by Microsoft alumni, launched out of its beta test mode. Other than drawing attention at the same time, these two firms have little in common.

SOSNOFF’S MISSION IN LIFE is to show traders how to make money by focusing on probabilities and strategies that can shift the odds in their favor. He believes that traditional financial-news organizations mostly sell fear of failure, while his fledgling outfit emphasizes opportunity. “We make crazy fun of fear,” says Sosnoff.

Now about a year old, tastytrade’s mostly witty content streams live over the firm’s Website and is also available via iTunes, Apple TV, and Roku. It provides about six hours a day of programming and plans to add much more. Its biggest offering, “Get Tasted,” runs four hours each day. Sosnoff and Chicago Board of Trade veteran Tony Battista co-host the show, which featured an appearance by The Electronic Investor in mid-May. (If you’ve got 21 minutes to kill you can see my appearance at tastytrade.com/#/videos/120522_INT.)

Because Sosnoff and Battista highlight the probability of a trade turning profitable, they talk a lot about the time value of a trade, too. “I’ve been doing a lot of ranting recently because I’ve been on a kick about the analysts and writers not putting definition around their predictions,” Sosnoff says. “We want to tell people what the odds are of a price event happening. We are right there with our viewers while they’re trading.”

Coming soon: a show aimed at middle- and high-school students, called “Chasing Warren.” The co-hosts are 12 years old, and understand options trading. I expect to learn a few new tricks from them.

Sosnoff, who sold his sophisticated online brokerage to TD Ameritrade, recently adopted a new pricing strategy that relies in part on the big broker. TD Ameritrade customers can watch all of the tastytrade content free through May 2014 on either its Trade Architect or thinkorswim trading platform. Everyone else has to pay $90 a month. That’s a big shift from the previous policy of charging $90 a year. TD Ameritrade customers can hardly afford not to check out tastytrade.

MOTIF INVESTING (motifinvesting.com) posted its own recent news. The broker has updated the concept of basket trading of stocks. CEO and co-founder Hardeep Walia says that the big idea behind the firm is allowing investors to trade on their own big ideas. Other brokers allow clients to trade baskets of stocks—there’s ING Direct, which operates under the name sharebuilder.com), as well as FOLIOfn (folioinvesting.com), but Motif’s approach differs.

When you trade a basket of stocks, you invest a particular dollar amount in a bunch of stocks simultaneously. The basket can be weighted using a variety of methods, such as the market capitalization of the companies in which you’re investing. You’ll wind up with a varying number of shares of each of the stocks, usually including some fractions of shares. That allows investors or traders to spread out their risk.

Walia, who worked previously at Microsoft, believes that mutual funds and even exchange-traded funds create costs that leach away potential profits. Motif is set up so that you can create your own ETF designed around a particular idea. For example, one of the newly launched motifs is called “Lots of Likes,” and focuses on companies that have a wide following on Facebook and Twitter. You can search the available motifs by clicking on “Explore Motifs,” and selecting from industries, type of idea, one-year returns, or daily percentage price change. There are more than 50 motifs in the current catalog, and each is described in detail if you click on “How We Built This.”

These motifs are made up of as many as 30 stocks, drawn from an internally developed index of up to 100 stocks per industry. Customers can change the weighting within a motif using slider bars, then take a look at a graph that shows how the motif performed against the overall market. The revisions you make to a motif, such as substituting one company for another, or changing the weighting of a stock, are reflected in real time. “Try doing that with an ETF,” laughs Walia.

Opening an account is a multi-day process, including setting up an Automated Clearing House service for transferring cash. Trades are placed in dollar amounts with a minimum of $250 per transaction. When you buy a motif, a market order is generated and you spread that dollar amount among the stocks in the motif, and end up owning fractional shares of each company.

Chief compliance officer Connie Kuhl, an E*Trade alumna, explains that Motif holds the remaining fractional shares. “We have a set of smart algorithms that keeps the costs of trading down,” says Kuhl.

Commissions are $9.95 for each motif, whether you use it as originally designed or customized; placing a trade for an individual stock such as closing one position within a motif, is $4.95. This pricing compares favorably with subscriptions charged by FOLIOfn and ShareBulding for trading stock baskets. Motif is allowing customers to trade without commission for June.

The Website is nicely laid out, and very simple to use. Walia says that the firm will add the ability to harvest tax losses later this year for $4.95 per motif; a function to rebalance motifs will also be available but the pricing hasn’t been set. Though there is not yet a native mobile app, it’s very easy to use via mobile browser on an iPad.

I do have some reservations about this idea, though I believe it will appeal to investors—not traders—who would like more control over their investment than an ETF allows. The biggest problem, as I see it, is the inability to offset your costs of trading using options, since it’s rare to buy enough shares of one stock to be able to trade a derivatives contract. One advantage of trading ETFs is that most have options available. Motif might be a good place to invest a fraction of your portfolio, though the product line is too narrow to consider it for a large portion.

Options fan and video star Sosnoff offers his own review: “If you can’t lower your cost basis or you can’t reduce your capital requirements then it doesn’t make any sense in today’s world. This would have been a great product in 1990.” Don’t look for Walia on tastytrade anytime soon. 

Published in Barron’s, June 11, 2012. 

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