Investor Brain

Saturday, March 29, 2008

A Timely Boon for Small Investors

WHEN THE MARKETS ARE MOVING RAPIDLY, WITH THE PRICE OF A stock changing every millisecond, how can you know whether you received the best available price when your trade was executed?

The Nasdaq Data Store has introduced a new program called Market Replay (https://data.nasdaq.com/MR.aspx) that might answer this key question. You can access a demo at the Website, although the program itself isn’t available yet. Eventually, online brokers and retail market-data providers will license this technology and begin offering it to their customers.

Claude Courbois, head of product development at Nasdaq/OMX Data Products, says that Market Replay was born out of a frustrating problem he has encountered as a small investor—executing an order, but finding that he has paid a price that appears to be higher than the current quote.

The question an investor asks himself when this occurs is uncomplicated: What the heck happened? But getting an answer isn’t easy.

The small investor doesn’t have the tools for retrieving quotes at an exact moment. If that person complained to Nasdaq and it agreed to help, Courbois relates, “we would have to pull quotes out of a database and rebuild the order book to figure out when something weird had happened. It was not a user-friendly experience.” He says that the Market Replay system is intended to give people confidence and understanding of the markets—not to catch brokers doing something bad.

To use Market Replay, you enter a stock symbol and a date, then the time you want to examine—for example, 10:15 a.m. The standard replay is 10 minutes of market time, but you can request an hour or a day. The pertinent data get pulled into the program in 10-minute increments; it can take some time to download the information if you try to get a long-time-span record of an actively traded issue. Currently, 2008 trading data for Nasdaq securities are available, and the Data Store is moving backward through 2007.

If the information for a requested date hasn’t yet been loaded, the customer will get a message stating, “We don’t have this data ready yet, but will have it tomorrow morning.”

When the replay is downloaded to your computer, you’ll get a list of available information under the “Replays” menu on the display’s left side. A vertical blue line in the middle of the screen denotes the time requested. A few minutes of additional data, showing earlier and later prices, will be displayed on either side. Users can move forward and backward to the exact time that the trade went through, and take a screen shot that captures the display. Hit “Play,” and you can watch the market move in real time. You can also pause it and play it backward.

The program can also do a time-span analysis by highlighting a range around the time of your transaction that will display the range of prices at the Nasdaq and other exchanges during the specified period. “It’s comforting to be able to prove to yourself that you’re getting the best price. It’s amazing how valuable information is, even if you know the system usually works,” says Courbois. “You can find times when a price is available for literally a millisecond; no way to see that unless you have access to this kind of data.”

By the end of March, Courbois says, the program will cover NYSE- and Amex-listed shares, too. It’s fascinating for a data junkie to be able to track market movements, like the craziness that erupts at the close of the trading day or the action when news hits.

The Data Store would like to work with brokers to create tracking numbers for transactions, similar to those UPS and FedEx use for packages. Customers would simply click on the number and get a replay of the transaction. “One of the biggest problems any broker has is educating customers so they understand why something happened,” Courbois concludes. “This product helps investors gain confidence in the markets.”

Published in Barron’s, March 24, 2008.

Friday, March 21, 2008

S&P Says CAPCO is OK

In the wake of the Bear Stearns collapse, industry analysts grew concerned over the financial stability of the Customer Assets Protection Company (CAPCO), which carries their excess SIPC coverage.  (Please See “Are You Covered If Your Broker Fails?” and “If Your Broker Goes Belly Up, Part II” for an in-depth explanation.)

Yesterday, Standard and Poor’s issued a rare bulletin in which they said that CAPCO is maintaining its A+/Stable rating in spite of the claims that may ensue in a post-Bear Stearns universe.  Of interest in their bulletin is the assertion that “In the event of an excess SIPC claim related to Bear Stearns, CAPCO should benefit from a guarantee provided by JP Morgan Chase for Bear Stearns’s obligations.  In addition, clients withdrawing funds from their personal accounts actually reduces CAPCO’s potential maximum loss.” (Italics are mine.)

As the S&P bulletin spells out, for an excess SIPC claim to occur, all of the following must happen: client assets must be found to be missing, lost or stolen, and customer property, SIPC advances, fidelity bond proceeds, if any, and distributions from the general estate of the member, if any, to customers are insufficient to satisfy customer account obligations. Neither SIPC nor excess SIPC cover a decline in the market value of a client’s investments.  Clearly the Bear Stearns collapse is not due to missing, lost or stolen customer assets. 

We’re looking at a problem related to market value, which is due to some management choices that turned out to be inappropriate, rather than outright theft. 

Too bad there’s no insurance that protects against inappropriate choices.

Monday, March 17, 2008

13th Annual Review of Online Brokers Up at Barron's Online

Barron’s Online has revamped some of their policies, and some stories are available to non-subscribers after 3PM Eastern time on the date of publication.  What that means is that the review of online brokers can be read on their site now, even if you’re not a subscriber.

Here it is.  Page 6 spells out the rating system, and is not in the print edition.  Page 5 includes the sidebar critical of bank-based brokers.  There is a lot of content on pages 3 and 4 that did not appear in print, mainly descriptions of the brokers not in the top 10.  In short, the online version is about 30% longer than what ran in print. 

Making It Click: Annual Ranking
Of the Best Online Brokers

By THERESA W. CAREY

TURNING THE COMPLICATED INTO THE SIMPLE is a basic aim of online brokerage. It means bringing together the prices of everything from Nokia shares to options on South African gold to U.S. Treasury bonds on a single platform. It means simultaneously offering insights into Malaysian politics and Florida housing costs while organizing millions of electronic messages from global bourses for data, orders and transactions into information that investors can act on instantaneously.

Read the entire story here: Best Online Brokers

Saturday, March 15, 2008

What Online Brokers Are Doing To Keep Their Customers' Accounts Safe

HORROR STORIES ABOUND ABOUT ON-LINE BROKERAGE ACCOUNTS hacked by mysterious bad guys, and then emptied. The methods vary from simple—logging in and transferring cash to a thief’s account—to complex; say, rigging an investor’s computer to buy penny stocks being sold by a crook at hugely inflated values.

Online investors say that security is an increasingly important factor in selecting a broker, so we surveyed nearly two-dozen firms to see what they’re doing to keep their customers’ money safe.

As a quick and easy starting point, always be sure you see the letter “s,” as in “https,” preceding the Web address of a site at which you’re entering personal or sensitive information. The “s” is a standard indication that the site is secure. Another is the padlock icon in the lower right-hand corner of the browser window. Even so, these indicators can be duplicated by some very clever fraudsters.

ONE METHOD THAT BROKERS use to thwart troublemakers is a token that generates a series of numbers that change every minute or two. Clients use these momentary passwords to log in to their accounts. The password’s life span is too short for a hacker to steal it. This, however, requires customers to carry the token around with them, usually on a key ring or in a wallet.

James Burton, a senior vice president at Fidelity’s retail-brokerage unit, says his firm employs extensive physical, electronic and procedural security controls, regularly modifying them to meet changing technology threats. Fidelity’s encryption standards turn the data you send across your Internet connection into gobbledygook, unless the computer receiving the information can decode it. Fidelity.com, like many brokerage sites, will automatically log you off after a short period of inactivity, which is designed to prevent unauthorized access or keystrokes by either a co-worker or a mischievous household pet that wanders onto your keyboard.

Another ploy that crooks use is changing your account’s address so that future checks come to them, or rerouting online money transfers to their coffers. Most brokers now require added security for these kinds of changes. OptionsXpress, for instance, sends out a notice to both existing and new addresses when a customer requests a change.

TD Ameritrade is rolling out a two-factor authentication system that “remembers” the computer from which a client logs into its system. If the next log-in attempt comes from a different computer, the investor will need to provide more information. CEO Joe Moglia says, “Clients have free access to security software via our online security center (http://www.tdameritrade.com/security/securityTools/securityTools.html), which enables them to detect and remove threats like computer Trojans and to monitor for suspicious behavior.” (Trojans are viruslike programs that travel via the Internet.)

TradeKing employs an intriguing system to thwart keystroke loggers—who keep track of every keystroke you make. These thieves can use your keystrokes to divine your password and personal information. To prevent that, TradeKing has you enter your password on an on-screen keyboard, using your mouse to select the appropriate characters. If you don’t type your password, a keystroke logger can’t pick it up. TradeKing also asks you a series of challenge questions if your online behavior is deemed unusual.

Software-based brokers such as Terra Nova don’t transmit information via a Web browser; they employ other methods of security. Terra Nova utilizes Captcha technology, which prompts the customer to type in the letters displayed in a small picture, to eliminate spammers and counter other electronic contact attempts. It also maintains an intrusion-detection system on its Website and database servers, to identify any attempted contact that is suspect.

AT ANOTHER SOFTWARE-BASED BROKER, MB Trading, President David Lipsett says, “We use proprietary algorithms to prevent unauthorized trading within an account as well as databasing user-connection information to spot trading that does not fit into the client’s normal patterns.”

Just how many challenges are out there? Consider Siebert CEO Muriel Siebert’s response to our queries: “The layered security consists of firewalls, encryption, intrusion-detection sensing, network segmentation, translation, monitoring, antivirus, antispam, antispyware, internal software and hardware lockdowns, premise-level security, employee screening and other security methods.”

Be safe.

Thursday, March 06, 2008

Bacon's Media Guide is Garbage: A Rant

Bacon’s Media Guide, how do I hate thee?  Let me count the ways.

1.  Even after repeated requests over a number of years (dating back to at least 2001), my location is listed as New York.  That means my business line, which (like my business) is located in my house, starts ringing around 6AM.  I do not appreciate this.  For those of you who subscribe to Bacon’s, please note:  I am on the West coast.  That’s Pacific time.  Please don’t bug me before 8:30 or so Pacific time unless we have made specific arrangements otherwise. 

2.  Even after repeated requests over a number of years (dating back to at least 2001), Bacon’s lists my title as “Technology Editor, Barron’s.” I am NOT the technology editor.  I write the Electronic Investor column for Barron’s every other week, and also author the annual review of online brokers.  I contribute to a number of other publications, if their budget can accommodate my outrageous requests, and my focus is—and has been since 1991—financial technology.

I do not cover employment trends.  I do not write about toys during the holidays.  I avoid reviewing computers, printers ... hardware in general.  But the title Bacon’s has bestowed upon me, and which they REFUSE TO CORRECT, nets me all kinds of stuff that is way outside my bailiwick. 

3.  Companies send me books, gadgets, press releases, and countless emails based on the bad listing in Bacon’s.  This is a huge waste of resources all the way around.  I try to be polite to the PR people who have paid a bazillion dollars for their subscription to this faulty resource—it’s not their fault that Bacon’s has me listed wrong and refuses to correct it.  But it gets very difficult when I’m on deadline and a PR rep for a cell phone ring-tone creation software company, or the rep for the next version of Guitar Hero, calls me.  I don’t cover that stuff!  Much of it ends up in the Barron’s office in New York, which generates even MORE resource waste when a kindly person there boxes it all up and ships it to me in California. 

4.  My listing apparently leads some people to believe that I not only work in NY, but that I am a full-time employee of Barron’s.  I am a freelancer, which means I send stuff to Barron’s when it’s assigned, but other than that I have no contact with the gang in New York.  If you contact me about the latest and greatest gameware, or about a management change at some tech firm, not only will I not write about it, but I don’t know who would.  Don’t ask me.  I don’t know. 

Hey, why don’t you look through that copy of Bacon’s and figure it out?  What?  It’s out of date and isn’t helpful?  WHY are you PAYING for it then??

5.  I have begged, pleaded, threatened, cajoled, and generally harassed anyone I can find at Bacon’s to fix this thing.  I made my first request to fix my listing IN PERSON at a trade show.  I found the highest-ranking mucky-muck I could and asked her to make this correction.  Whenever they send me an “Update your listing” email, I update it ... and then my listing never changes.  The last time I talked with someone at Bacon’s, I asked them to just delete my listing completely and pretend I don’t exist. 

6.  Lots of my writer pals have said that their listing in Bacon’s is wrong, and they can’t get it fixed either.  I’m not taking their incompetence personally (though it’s tempting when the phone rings at 6AM).  Bacon’s is the journalistic equivalent of the Roach Motel ... we can get in, but we can’t get OUT.  Or corrected. 

7.  I have yet to get a contact that was generated by my Bacon’s listing that resulted in an article.  What the hell is wrong with these people??!?  Are they making more money by misrepresenting me? 

PR people, please ... if you’re using Bacon’s as a resource to guide you to media folks, do some homework.  There’s this cool thing on the Internet called a “search engine.” (My personal favorite is Vivisimo (http://www.vivisimo.com), but there are others you may have heard of like Google or Yahoo.) Type in the name of the journalist you’re considering contacting and read a few recent articles. 

Does it appear that your product falls within this person’s general range?  If not, save yourself some time, and save the journalist a 6AM phone call. 

To great fanfare, Bacon’s put out a press release a couple of years ago saying that they’re now “monitoring blogs” and are including that sort of information in their database as well.  Fabulous.  Maybe they’ll pick up my rant and fix my damn listing! 

Saturday, March 01, 2008

Online Brokers Prep for Big Game

SPRING TRAINING IS UNDERWAY FOR ONLINE BROKERS—and every firm can still dream about victory as Barron’s annual review approaches in a few weeks. Here are some of the most intriguing lineup changes.

AT THINKORSWIM (http://www.thinkorswim.com), the focus is on enhancing customer experience, according to president Tom Sosnoff. The firm added CNBC Plus live, an online version of the TV broadcast—streaming and commercial-free—delivered to its software trading platform with market news and analysis at no additional charge. ThinkScript, a language customers can use to code and back-test their own proprietary indicators, was also added to the platform, along with forex trading in 123 currency pairs.

For investors on the go, thinkorswim has a new wireless trading platform for BlackBerrys and other mobile devices called thinkMicro. (Do you detect a pattern in the firm’s product names?) A set of trading gadgets called thinkPod can be linked to Websites such as those for news, and allows you to place trades without having to be logged into the thinkorswim software or Web application. Sosnoff and his firm have launched a quarterly magazine, thinkMoney, “which mixes advanced trading articles with our feeble attempts at satire.”

OPTIONSXPRESS (http://www.optionsxpress.com) is coming off an important year in which its founder, David Kalt, moved on. CEO David Fisher, who took the reins last October, says the firm’s “culture of persistent innovation” continues. OptionsXpress was among the first retail brokerages and the only Web-based online broker to offer portfolio margining, which bases margin requirements on the sum of an investor’s positions, including options, rather than individual holdings. Other firms offering portfolio margining ("New Options for Traders,” Oct. 30, 2006) are software-based and focus on very frequent traders.

“To ensure that we would be first to market with portfolio margin and that the integration would be seamless, we built all of the functionality in-house,” says Fisher.

Another goal achieved: integration of XpressTrade’s futures platform. ("Out of the Pit: Futures Go Online”, Jan. 14) “Our customers can now trade futures side-by-side with securities on a state-of-the-art platform,” Fisher says.

E*TRADE (http://www.etrade.com) added some muscle to its Web-based trading platform as well as to E*Trade Pro, its software-based platform for frequent traders. A big change was the addition of E*Trade’s Global Trading Platform, which provides U.S.-based retail investors the ability to trade stocks online in six foreign markets in local currencies. The new Global Trading Platform also features free real-time international quotes for the six markets (Canada, France, Germany, Hong Kong, Japan and the U.K.), and a redesigned customizable “Global Markets” page with free company-specific research from Reuters for the relevant markets.

E*Trade also expanded its roster of research tools, such as a redesigned online research center, with new features and links including intraday commentary and blogs from Seeking Alpha; enhanced market and news pages; daily trading ideas from MarketHistory.com and E*Trade’s “Most Popular” (a daily list of the 10 most frequently viewed symbols by E*Trade customers); and other news. Still more new goodies include MarketEdge, Second Opinion reports, an integrated and extremely spiffy stock screener, and a redesigned mutual-fund and ETF research center.

Customers of E*Trade Pro can now see every market maker involved in a given stock with free access to TotalView and OpenView data through the Market Depth window. A graph and a momentum bar provide traders with visuals of what they used to have to conceptualize themselves with Level 2 data. Also included: a suite of powerful new tools for options re- search—streaming Greek options chains, expanded market data and customizable inputs for calculations. For the last of these, a user can access the new Options Model Setup window to customize how analytics are calculated by choosing a pricing model (Black-Scholes or Binomial), statistical volatility, interest rate and more.

ROOKIE OPTIONSHOUSE (http://www.options-house.com), which launched in January 2007, introduced Virtual Trading, giving customers the opportunity to practice trading with all the site’s tools and capabilities—without risking their own money. On deck for this year are advanced order types, tax optimization and reporting tools from Maxit, and a new stock-screening tool.

We’ll just have to wait and see who the winners are.

Published in Barron’s, March 3, 2007.