Investor Brain

Wednesday, February 28, 2007

Markets Made a Mess

The domino effect, set off when the Chinese markets took a dive, pushed the U.S. markets off a small cliff on February 27.  Volumes were way way up, and I started getting emails about online broker sites that were having problems.

So I popped into a bunch of the sites that I can still access, thanks to my online broker story.  I also fired up a few of the software programs that I have on my computer. 

Basically, the bigger the broker, the slower the site.  Most of the large brokers’ infrastructures can only allow a small fraction of their customer base to log on simultaneously.  I poked around Schwab.com, Etrade.com, TDAmeritrade, Fidelity, Scottrade, optionsXpress, OptionsHouse, TradeKing and thinkorswim’s website.  I looked at quotes, searched for a covered call to trade, and tried to enter an order. 

Of those, Schwab was running veerrrrrrrryyyy slllllloooooooooowwwwly, and actually tossed me out when I tried to enter an order.  When I tried to enter a covered call order on E*Trade, the option quote wouldn’t come up.  TD Ameritrade shifted to delayed quotes (instead of real-time), but I was able to enter an order.  Fidelity was sluggish but still let me enter an order.  OptionsHouse, TradeKing and optionsxpress seemed a little slower than they did last week, but they weren’t running glacially slow.  All three of those sites let me enter an order.  Thinkorswim was plugging along as though there was nothing extraordinary happening.

I brought up software from CyberTrader, MB Trading, Interactive Brokers and Terra Nova Trading.  Cyber was OK even though the web-based Schwab offerings (including Street Smart Pro) were slow.  The others looked fine too.  Quotes, especially NYSE, seemed to be loading slower than usual, but reports have since come in of exchanges being swamped, so the quote issue might not be endemic to the brokers.

I received a blurb from Keynote Systems that said, “Keynote, The Mobile and Internet Performance Authority™, observed significant performance slowdowns for some of the nation’s leading online stock trading sites, most likely triggered by an increased volume in stock selling due to growing concerns regarding economic slowdowns in the U.S. and China.

“Many of the nation’s most popular Web sites for stock trading took a performance hit in speed and availability according to Keynote’s online stock trading index, a leading index of online stock trading performance that measures the time it takes to conduct a stock site transaction from geographic locations across the U.S.

Sites on the index, including Ameritrade, Fidelity, Firstrade, Muriel Siebert, Schwab, ShareBuilder, TD Waterhouse and Wells Fargo, began slowing down beginning at 10:30 a.m. Pacific.”

Abelardo Gonzales, web performance manager at Keynote, says, “Keynote has never seen such significant slowdowns and limited availability among online trading sites since the index began in 2000.” Gonzales says that there was a 25% drop in the overall number of successful trades Keynote was able to carry out on the broker sites that comprise their index, which means it’s possible that upwards of 25% of investors attempting online trades between 1:30 p.m. and 4:30 p.m EST on Tuesday may not have been successful.

“I would imagine that this time was frustrating for online brokerage users,” he says.

By Wednesday morning, all the sites were back to normal, says Gonzales. 

Monday, February 26, 2007

GM Edits Their Stupid Ad

So there I was, watching the Oscars and speeding through the ads with the help of my TiVo remote, when I realized that the GM ad with the suicidal robot was on.

A rare move for me: hitting the reverse button to watch an ad.  This time, I’m glad I did.  GM took the suicidal moment out of the robot’s dream sequence (click here to see my earlier rant on the subject) and I didn’t think it hurt the ad that much. 

I was pleased to see that GM responded to the critics of the original ad, including The American Foundation for Suicide Prevention (AFSP); the Foundation and GM reached an agreement on February 9. 

Sometimes being the squeaky wheel is a Good Thing.

Saturday, February 24, 2007

How To Be An Award-Winning Online Broker -- the long version

A week from today, the 12th annual Barron’s review of online brokers will be published.  The print edition will have about 4 pages devoted to the story, while Barron’s Online will contain expanded coverage.  The print edition, due to space constraints, will have a very short description of the criteria that went into the ratings.  Here is the long version, which I hope will show up in its entirety on Barron’s Online. 

Though this description repeatedly makes use of the pronoun “We,” think of it as a Royal We, with Yours Truly as the Queen. 

My goal here on InvestorBrain is to allow site visitors to create their own ranking scheme, weighting the criteria that matter to them the most.  Anyone know a good programmer? 

We ranked both web-based brokers and software-based by the following measures.

Trade Experience: Working with a live account, we looked for a real-time quote displayed, and executed equity trades during market hours, making market buys and limit sales of a stock or an ETF. Following the market buy, we evaluated the execution and portfolio reports. We looked for pre-filled order tickets when selling out of the position.  After entering the limit-sell order, we examined the open-order reports and looked at ways for the trader to follow the progress of the order, as well as ways to adjust the limit price or cancel the order outright. We also placed options orders, taking a look at the complex options order-entry screens when available. We also examined the mutual-fund, bond, and (when available) futures, commodities and foreign exchange order-entry screens.

We made deliberate mistakes when entering orders to see if the broker’s system would catch them and warn of errors such as inadvertent short sales or a limit price entered that was well away from the market. 

We broke the points awarded into several sub-categories, such as quality of the trading screen, design of order-entry screens for stocks and other types of investments and accessibility of order-status reports. 

An overall score of 5 in trade experience means the order entry-and-execution process flowed easily from one step to the next, with real-time information available when needed. The pre-order real-time quote is displayed without the need for additional keystrokes.  For software-based brokers, 50% was added to this score for the weighted total, to emphasize the need for well-designed and informative order-entry screens when trading quickly.

Trading technology: The availability of price-improvement strategies and smart-order routing technology, and the absence of internalized orders and a reliance on payment for order flow are necessary to earn a 5 in this category. Brokers offering price improvement-a sale above the bid price, a buy below the offer-received a fraction of a point depending on the percentage of their 4th quarter transactions were price-improved, based on data they are required to supply to the SEC. A broker that internalizes order flow for more than 25% of nondirected orders, and/or routed orders to receive payment for order flow above the industry average loses up to a half point. 

We also looked at the range of order types available, such as trailing stops and conditional orders; the option for customers to route their own orders; the ability to customize trading screens; provisions to enter multiple orders on one screen; and the ability to create baskets of stocks.

As with trade experience, the overall technology category was also given an additional 50% weighting for software-based brokers.

Usability: How easy was it to navigate around the site? Does the layout of the site, or the program design, make sense and minimize the number of mouse clicks it takes to get from one place to another? The key theme in this category is ease of use. We also looked at the ability to personalize each broker’s site. For example, can the welcome screen be customized? Can portfolio-analysis reports be altered to show items of importance to the individual investor?  For software brokers, was the installation process smooth? 

A 5 in this category means the site was easy to use and well-designed, doesn’t bog down when moving from screen to screen, and can be tailored to show what the user wants to see. The weighting was reduced by 50% for software based brokers, as their users are likely to invest the time it will take to climb up the learning curve.

Range of Offerings: We awarded points for the range of investments that can be traded online, with partial points given for those that can be traded only offline. Since all the brokers allow you to trade stocks long and short, and most allow you to enter single-leg options orders online, we don’t award points for those transactions.  We asked brokers how many stocks, on average, their customers can sell short, and awarded up to ½ point based on their answer.  Complex options trading, mutual fund availability, the availability of futures, commodities and forex trading were also considered. A 5 in this category means you can execute all of these transactions online.

We reduced the weighting in this category by half for software-based brokers since frequent traders usually focus on equities and options, usually not caring whether mutual funds or bonds are available online.  Frequent traders are, however, interested in trend analysis capability, the ability to enter trades that will be executed automatically, the ability to develop a trading system and apply it, and whether the broker’s fees are assessed on a per-share basis rather than per-trade, so we looked for the presence of those features and added them in this category.

Research Amenities: This category measures the quality and accessibility of research, quotes and charting. The highest points in this category went to brokers giving exceptional research and quote services. We evaluated the research amenities available to those with over $100,000 in their accounts, or who traded 36 times a year or more.

We looked for research, news and charting linked to the customer’s portfolio and watch lists; the availability of third-party research and its integration with the rest of the site; and the availability of screeners, with special emphasis on options strategy screeners.  Brokers also won points for offering real-time streaming quotes at no additional cost, powerful charting capabilities, and Level II Nasdaq quote accessibility.

The weighting in this category was reduced by 50% for software-based brokers, based on reader comments, as many frequent traders indicate they use other tools for research.

Portfolio Analysis and Reports: The emphasis here is on clearly laid-out reports, updated in real time, showing current balances, positions and margin status. Portfolio-analysis reports, with links to news and research, as well as extensive transaction history, are most desirable.  We also favor systems that track the tax consequence of each trade and deliver thorough tax reports, including records of past transactions.  Real-time data and the ability to customize reports based on client needs are key to earning a high score in this category. 

The weighting in this category was reduced by 50% for software-based brokers, based on reader comments, as many frequent traders indicate they use other applications for analyzing portfolio performance.

Help and Customer Access: What happens when you decide you don’t want to go it alone? We sized up online help such as live-chat capability, user guides and frequently-asked-question files. Offline help was assessed by making calls to customer service, and based on the brokers’ reports of the average time spent on hold when a customer calls in. We also evaluated the availability of investing and trading education, both online and offline.  The ability to visit a broker in person, to place touchtone trades, or to place an order over the phone with a broker also factored in to this category. 

A factor added to this category this year is the rates a broker paid for a customer’s cash. 
This category also takes stock of brokers’ wireless-trading access.  The weighting in this category was reduced by 50% for software-based brokers since our frequent-trading readers emphasize costs and technology over hand-holding.

Costs: We looked at commissions for stock and options trades and margin interest rates, assigning higher points to lower costs. Stock commissions are the biggest factor here; this year we added mutual fund transaction fees to the rating as well.  We also looked at the cost of trading 10 options contracts; margin interest rates on balances of $25,000 to $50,000; charges for small or inactive accounts; and platform charges for software-based brokers.

A 5 in this category could be earned by a broker with very low stock and mutual fund commissions, of under $8.00 for 10 options contracts, margin interest rates below 7.5% and no account-maintenance fees. For the frequent traders who use software-based brokers, costs are even more important, so we doubled the weighting.

While each service was ultimately given an overall score reflecting all eight measures, those totals alone may not point to the right broker for you. If you’re interested in a few particular aspects of online trading, such as the best executions at the cheapest price, and don’t care so much about the availability mutual funds or bonds, consult the scores for those categories and find your own personal five-star broker.

Saturday, February 17, 2007

Tax Software for Serious Investors

FREQUENT TRADERS WHO DO THEIR OWN taxes are either control freaks (my category) or very comfortable with the ins and outs of tax accounting. Crazy is another possibility. In any case, do-it-yourselfers of all types need tax software—either packaged or online.

Any tax program should be able to deal with income and deductions, but the serious investor needs to compile an accurate Schedule D, covering all transactions. There’s no shortage of software alternatives. Sorting through them—particularly the jumble you see in stores—is the problem.

The two big players are TurboTax, from Intuit, and TaxCut, from H&R Block. Both offer long lists of software, plus a menu of online tax-prep choices, which you access via your Web browser.

We looked at TurboTax’s Premier Investments ($74.95) and TaxCut’s Premium Federal+State+e-file ($59.95). We also evaluated online site CompleteTax (http://www.completetax.com), published by CCH, a tax-preparation outfit.

One big benefit of TurboTax is its link to financial-service providers, letting you import your investment data—if your broker is on its list. Fidelity, Schwab and E*Trade transactions can be accessed this way, but customers of brokerages devoted to active traders, such as Schwab’s CyberTrader, TradeStation and Interactive Brokers, will have to enter data manually or find some other way to fetch it. TurboTax’s import list hasn’t caught up with rapid industry consolidation, either—TD Ameritrade, for instance, isn’t listed, though its component parts, Ameritrade and TD Waterhouse, are.

TurboTax also let me import a W-2 from a large employer; this one was prepared by the employer-sponsored payroll site of Fidelity (a separate unit of the mutual-fund giant). If your employer’s payroll software cooperates with TurboTax, the form can be pulled in easily if you have a user-ID and password. Be sure to check the imported figures against the W-2 mailed to you. TaxCut users have to enter their W-2s manually.

BasisPro is a new twist in TurboTax this year. It allows you to figure out the historical cost basis of an investment, which is especially helpful if you’ve sold a long-time stock or mutual-fund holding. For example, if you sold 600 shares of Hewlett-Packard (ticker: HPQ) stock last year that you purchased in 1996, your cost could be attributed to some old HP (HWP) shares that have split twice, or legacy stock from HP acquisitions like Compaq. BasisPro looks all that up for you and figures out your cost basis.

The BasisPro feature requires a connection to the Web, and unfortunately makes you re-enter the information you just typed into TurboTax. Perhaps a future version will eliminate the extra keystrokes. Even so, it’s a welcome feature.

TaxCut has vastly improved its interview process, now focusing on data flow rather than the income tax form itself, making it much easier to use. Still, it lacks the huge number of automatic imports that TurboTax has. However, if you use Microsoft Money or Intuit’s Quicken, or any other program that can create Tax Exchange Format (.txf) files, you can still grab the appropriate transactions.

TaxCut includes one federal and state e-file per package; if you file multiple returns from one copy you will pay another $15.95 for additional e-files. We like TaxCut’s advice on the tax ramifications of life changes like marriage or retirement.

CompleteTax has a simple, clean interface, and the price ($25.95 for a federal return, $12.95 for each state return) includes e-filing. Users of GainsKeeper, to which many online brokers link customers for gain/loss reporting, are the most likely to benefit from this program. CompleteTax can only import data from Gains-Keeper files; everything else has to be entered manually.

One solution for traders with reams of taxable transactions is TradeLog (http://www.armencomp.com/tradelog/), published by Armen Computing. We like TradeLog for active stock and options traders. It does a much better job of tracking options transactions than Quicken or Money, and it’s a good tool for short-sellers. TradeLog can also help you track futures transactions, which aren’t specifically addressed in other programs.

TradeLog offers five versions, keyed to transaction volume. TradeLog 200, which covers up to 200 trades, is $69. The top-of-the-line GTT TradeLog, which handles unlimited transactions and is aimed at those needing mark-to-market accounting, is $349. GTT TradeLog is also supported by Green Trader Tax (http://www.greentradertax.com), which provides tax advice for frequent traders.

Published in Barrons, February 12, 2007.

Monday, February 12, 2007

Spambots Find InvestorBrain

One of life’s major annoyances has hit my little site with a vengeance.  Spammers promoting various drugs and x-rated websites have, for some reason, decided that InvestorBrain is a great place to promote their wares. 

So what they do is comment on my posts, and fill up the “Referrers” page.  I will have to go through a software upgrade to get rid of these guys, which I won’t have time to do until after the big Online Broker story is in print (on March 3, in case you’re wondering). 

I delete their comments, and close the posts to further comments, as soon as I find them.  I apologize if this has caused any inconvenience to my small cadre of faithful readers, and plan to clean it up as soon as I can. 

Thursday, February 08, 2007

GM Runs a Stupid Ad

OK, I’ll admit it, I didn’t watch the Super Bowl.  It’s been a few years since my local team (San Francisco 49ers) was anywhere near it, and to be honest, my interest level in professional football has diminished over time.

But I was alerted this morning by a friend of mine, Mary Ojakian, about a truly stupid ad that General Motors ran during the game.  They are currently featuring the ad on their website.  In it, a despondent robot, which (who?) has been laid off due to making a mistake during production, jumps off a bridge during a dream sequence. 

Mary and her husband Vic’s son, Adam, committed suicide a few years ago at the age of 21.  He was despondent over his grades, from what the family has been able to piece together from his last months.  His death rocked our community and inspired Mary and Vic to get involved with a variety of suicide prevention activities.  I’ve been a supporter of their work, as suicide has been a scourge in our community for several years now. 

So to see this ad, and GM’s response to the furor—“GM officials said they won’t pull or change the ad. It’s ‘a story of GM’s commitment to quality It is not intended to offend anyone,’ spokeswoman Ryndee Carney said.”—makes me wonder whether the people who put these ads together have souls.

The American Foundation for Suicide Prevention (AFSP) has asked GM to pull the ad.  Click here for their statement.

According to the ASFP, suicide is a major public health problem that has claimed the lives of over 300,000 people in the United States over the past 10 years—with approximately one million suicide attempts each year—taking an enormous toll on families, friends, classmates, co-workers and communities. More than 90 percent of people who die by suicide have a diagnosable, treatable mental disorder and are suffering. Suicide is currently the fourth leading cause of death among adults aged 18-65 and the third leading cause of death among youth aged 15-24.

Research has also shown that graphic, sensationalized or romanticized descriptions of suicide deaths in any medium can contribute to suicide contagion, popularly referred to as “copycat” suicides.

In spite of all that, GM thinks that having a robot dream about suicide somehow indicates that everyone who works on their cars is committed to quality.  I don’t get it. 

I’m in the market for a new car nowadays—time to replace that old Mom car at last—and this ad helps me remove GM cars from the list. 

Tuesday, February 06, 2007

It's That Time of Year Again

Yes, folks, it’s February, which means I am in the throes of putting together the 2007 survey of online brokers for Barron’s.  The article will run in the March 5, 2007 issue, which will be on newsstands (and online at Barrons.com) on March 3.

This is our 12th in-depth look at the industry.  This year, the stakes look incredibly high, thanks to the big uptick in online transactions.  Options trades are up 40% (2006 vs. 2005) and most brokers are looking for a piece of that action.  Some blame the upswing on baby boomers getting more active, planning for their retirement.  Others blame it on the 4-year-old bull market, but that’s a case of trying to figure out which is the tail and which is the dog, and who is wagging whom.

The surveys are out, and I’m spending my days talking to a lot of different people in the industry.  And here’s a deep, dark secret: I’m having a lot of fun.  I am not a masochist, and wouldn’t keep doing this story every year if I wasn’t enjoying the process. 

This weekend, my Barron’s column will focus on tax software for investors.  I have also set up a new computer, finally retiring the one I bought in 2002, which is 75 in dog years. 

Back to work!