Investor Brain

Saturday, October 22, 2011

Collecting an Annuity is the Easy Part

These insurance products have big appeal for retirees and nervous investors, but you still can’t buy them without paperwork and phone calls.

Annuities have been on a roll lately because they promise protection from bad markets and offer guaranteed payouts, regardless of economic conditions. With so many people reaching retirement age, the appeal is understandable. A Barron’s June 20 cover story on the best annuities generated so much online discussion and inquiry, we decided to learn how intrepid electronic investors can research and purchase annuities.

What we found was disappointing.

Today’s online annuity market reminds me of the bond market of eight to 10 years ago: You can find tons of descriptions, and even use some evaluation tools to find an annuity that seems to meet your needs, but buying usually requires a chat with an advisor.

One reason for this is that annuities are, in essence, an insurance product, rather than a security, which means they fall under different regulations, many of which vary by state. Ian Lundahl, a senior analyst at consultant Corporate Insight (http://www.corporateinsight.com) who specializes in annuities and life insurance, says, “It’s going to be tough for a retail investor to set up and buy an annuity online without talking to a human.” Lundahl, whose firm specializes in financial-customer research, doesn’t believe that purchasing an annuity will become a fully online experience for at least another five years.

Lundahl notes that annuities can be a big-ticket item and says that they’ve gone through some “rough patches” with regulators worried about sales practices. As a result, insurers want to make sure that their advisor units are “prepared to answer questions and perform certain tasks that you can’t do online by yourself.” Regulators tend to focus most closely on whether a particular annuity is suitable for a particular investor, and that an investor has completely answered all of the required questions before signing up.

I MUST ADMIT TO some skepticism about these products. I watched some relatives deal with the bankruptcy of the insurance company that held their annuities back in the late 1980s. When I took a look at the contract they had signed, I saw a lot of fees and charges that had reduced their initial investment considerably.

As a baby boomer myself, with retirement looming a decade from now, I circle back to check out annuities every couple of years. But I’m put off by the hard sell, as well as the feeling that I can generate more income investing on my own. Frankly, I would be more likely to consider an annuity if I could complete all the steps online, avoiding the possibility of talking to an advisor who sounds like, well, an insurance salesman.

There is now a wide variety available; in our June feature, contributing editor Karen Hube found approximately 1,600 iterations of the product. Your choices include variable annuities, whose growth fluctuates based on the underlying investments, and fixed annuities, which are tied to a specific interest rate. Your payouts can begin immediately, or be deferred to a later date. You can also choose the length of time that the annuity will generate monthly income, and purchase riders to ensure that your heirs will receive payments after you’re gone.

ROBERT SCHAFFER, assistant vice president in the annuities division of USAA (http://www.usaa.com), says he understands my misgivings, but believes his firm’s products are straightforward and can help anyone who wants to guarantee a certain amount of income for life. Shaffer, a former Marine, explains that annuities originally were designed as bond substitutes because that market could be tough for retail buyers to negotiate.

USAA’s Website, open to active or retired military personnel and their families, allows users to calculate the size of an annuity, based on either the desired monthly payout or the sum available to invest. To purchase the annuity, however, you must call a representative.

USAA sells two flavors of fixed annuities: one that generates an immediate payout and one that defers the payout. For the former, an investor would deposit a lump sum immediately and start drawing a monthly check. For the latter, an investor would make regular investments and build up the account. There are simple-to-use tools on the USAA Website that guide a member through the process of figuring how much to invest.

Fidelity (http://www.fidelity.com) is one of the few online brokers that also gives customers access to annuities. Fidelity has its own suite of variable annuities that it packages and sells; customers who prefer to buy a fixed annuity are directed to a partner firm.

On the Fidelity site, clicking on “Investment Products” and then the “Annuities” tab directs you to a page with links to descriptions of the various Fidelity products, as well as a link to the site’s Income Strategy Evaluator. The latter requires either a Fidelity account or a free login that lets you play with the tool without opening an account. You answer questions regarding your assets, plans for savings in the future and the expenses you need to cover in retirement, and a personalized strategy is presented. The paperwork needed to open an annuity can be prefilled, based on data already stored on Fidelity’s site, but you still must print it all out, sign it, and send it in. Or you can telephone an advisor.

TIAA-CREF (http://www.tiaa-cref.org), best known as a pension provider for the education and medical professions, also offers individual annuity contracts. The contributions are made from after-tax income. It offers both fixed and variable annuities; availability depends on your state of residence. The firm offers a lot of tools for research and information online. An advisor handles the paperwork, though a client’s signature is required, says Jeremy Ragsdale, a managing director in the firm’s after-tax annuity group.

Vanguard (http://personal.vanguard.com) also has annuity resources on its Website, though they aren’t as developed as Fidelity’s. The Vanguard site works hard to convince you to move any existing deferred variable annuities you have to the fund giant to save on fees.

Other sites with helpful information for your annuity search are AXA Equitable (http://www.axa-equitable.com) and Jackson National (http://www.jackson.com/annuities).

But for now, at least, research is about as far as you can go online. 

Published in Barron’s, October 17, 2011

Saturday, October 01, 2011

Intuit Chief Launches Finance Site

Personal Capital site offers lots of tools, plus access to a real human being.

Back in the early days of online investing—say, 1996—amateur traders moved a little “play money” out of their full-service brokerage accounts to bet with. Everyone was a genius in the late 1990s, and do-it-yourself trading became all the rage.

The past decade has been more challenging, and some of these traders have decided to retreat and get more professional help. Many online brokers have added investing advice to their sites, to retain those clients.

While there are lots of resources online for investors who want to go it alone, those who want some personal help usually find a local advisor and establish a face-to-face relationship. In the past few years, however, we’ve seen sites such as Covestor (http://www.covestor.com) and Market Riders (http://www.marketriders.com), which help investors with asset allocation and innovative ways of getting advice and trading ideas ("From MoneyChimps to Bogleheads,” April 25).

Now there’s a new entrant, bringing an interesting twist on personal advice and investing help. Personal Capital (http://www.personalcapital.com), which was launched last week, has a familiar feel, but contains some new features at a reasonable cost. Most of its tools are free; if you choose to hire a personal advisor, you’ll pay a typical fee of less than 1% of your assets under management. It isn’t an online broker—it’s a new-wave investment-advisory service. You start by aggregating your online accounts, and you can use the free tools to see how your portfolio should be balanced. But the real purpose is to gently nudge you toward an investment advisor.

THE MANAGEMENT TEAM at Personal Capital includes CEO Bill Harris, who has been at the helm of two big online successes, Intuit and PayPal. Harris says his new venture is designed to serve the broad middle of the investing market, which he defines as those with $250,000 to $5 million in investable assets. Harris says, “Fundamentally, Personal Capital is a financial-services firm, infused with technology, not just a software platform.”

Harris has pulled together a team of senior executives that he describes as “financial-technology-innovation rock stars.” The team includes Rob Foregger, co-founder of EverBank, along with Jay Shah, formerly chief information officer of E-Loan, plus Jim Del Favero, the former group product manager for Quicken.

When you first visit the Personal Capital site, you tweak your security settings, then start importing financial information. You can import bank, investment, credit, mortgage and other accounts—essentially any financial account that you can access online. Security appears very strong for the entire site.

We took the measure of Personal Capital with a variety of test accounts that we use for our review of online brokers, and found that importing data was pretty easy.

Once the information is imported, Personal Capital’s “dashboard” feature shows you an easy-to-understand breakdown of your spending, your investment allocation, and the gainers and losers in your portfolio. This piece feels familiar if you’ve ever used Quicken, Mint, or even Yodlee. The dashboard cannot (yet) be customized, however.

The picture of your finances that it presents is well-designed. You’ll see your current asset allocation and also a comparison to a target allocation. This takes into account any mutual funds and exchange-traded funds that you hold.

For additional detail, including an estimate of all the fees that you’re paying for the mutual funds and ETFs in your portfolio, click on the “investing” tab. There, you can view your asset allocation, and see where you are over- or under-exposed. The investment-checkup feature encourages moving money out of mutual funds and into individual stocks or ETFs.

The feature that you won’t find on other consolidation sites is labeled “your advisor.” Personal Capital assigns a real human to your account! You can communicate with this person via a toll-free phone number, online chat or video conference. Says Harris: “We want users to engage with our advisors. We’re doing a lot to create a human bond without a physical presence.”

The advisor team is in San Francisco. You can peruse the advisors’ biographies and, if you desire, call the firm to switch to one other than the individual originally assigned to you.

Should you choose to have your investments managed by a Personal Capital advisor, you will transfer funds to an account held at custodian Penson, or a bank account held at Everbank. Your advisor creates what the firm calls a “personal fund,” which is a collection of stocks and ETFs targeted to your needs. Personal Capital tends to avoid mutual funds, owing to their high management fees; you may find that you’re paying less for your investments after an overhaul.

Though the Website needs more customization features, it’s worth a visit to get a good overall picture of your finances. And if you feel that you need more assistance with your investment management, Personal Capital should be on your list of candidates.

BONDS FOR BOOMERS: Recognizing that the huge wave of baby boomers is breaking into retirement, Fidelity Investments (http://www.fidelity.com) has spruced up its fixed-income research center, found under the “research” tab on its Website. The goal is to help customers analyze and develop investing strategies for individual bonds, bond funds and certificates of deposit.

The opening screen of the fixed-income research center now offers a quick search tool, allowing you to scan through five types of bond inventory: Treasury, agency, municipal, investment-grade corporate and high-yield corporate. You can search bond funds and CDs with the same simple interface; a click on advanced search takes you to a much more detailed search engine.

The tweaked search-result screens can be sorted quickly by clicking on any column header, and the new layout is easier to read than its earlier incarnation. One nice touch is the ability to export a search result to a spreadsheet, letting you slice and dice the data to your heart’s content.

The Fidelity funds on the site are highlighted when they appear on a mutual-fund search result, but that’s to be expected. One odd result we’d like to see fixed: A mutual-fund search takes you out of the fixed-income research center, and it takes a few mouse clicks to get back. 

Published in Barron’s, September 26, 2011

Saturday, September 03, 2011

Hiccups in TD's Latest Acquisition

Help lines swamped after some customers have trouble signing on. And currency and futures traders encounter hurdles.

Back in January 2009, when TD Ameritrade announced that it was acquiring boutique brokerage thinkorswim, we wondered what the combined firm would look like. Would the amazing pace of innovation at thinkorswim slow? Would its trading tools be available to customers of TD Ameritrade (ticker: AMTD)? Would CEO Tom Sosnoff wear his beret in Omaha, Neb., at TD’s headquarters? And what would happen when the planned conversion from Penson’s clearing operation to TD’s finally took place?

We now have the answers. Thinkorswim (http://www.thinkorswim.com) continues to operate as a separate entity, but a large percentage of its technology is available to TD Ameritrade (http://www.tdameritrade.com) customers. The once relentless pace of updates to the downloadable software platform does appear to have slowed; after nine major updates in 2009, there were only five in 2010, and just one in 2011.

SOSNOFF, THINKORSWIM’S FORMER CEO, has left it to form a new venture, tastytrade (http://www.tastytrade.com). Its goal, he says, is “changing the entire financial media space.” In the near future, we’ll take a good long look at tastytrade, where Sosnoff and his beret can be seen almost daily.

And just this month, we found out what happens when clearing for thinkorswim customers switches from Penson Financial Services to TD Ameritrade’s self-clearing operation. (Clearing firms work with exchanges to confirm each trade placed by a brokerage customer, deliver securities and ensure that paperwork is in order. The clearing firm holds your equities if you don’t receive an actual stock certificate.)

We’ve covered quite a few consolidations among online brokerages. Some went extremely well, some were disasters.

Given the number of acquisitions made over the years by TD Ameritrade—the count is nine to 12, depending on whom you talk with at the firm—I had high hopes for the thinkorswim transition. But my mailbox and Twitter account (@twcarey) have been filling up with complaints about the thinkorswim clearing conversion. The most common lament starts like this: “My account is gone! I can’t log on at all!” This during a stretch of severe market fluctuations that already were causing a great deal of anxiety.

According to TD Ameritrade’s senior vice president of trading, Steve Quirk, the original date for the conversion was to be Aug. 26. But Penson, which handled clearing for thinkorswim, said that it could complete the switchover on Aug. 13.

Thinkorswim had just sent out an e-mail explaining that customers who had accounts with the same user IDs on both its platform and TD Ameritrade’s would need a different user ID to get to their thinkorswim account after the conversion.

In fact, on the thinkorswim home page, a pop-up notice warns that “as a result of the integration with TD Ameritrade, you may have had your thinkorswim user ID modified. Please check your e-mail or mail for details.” Quirk says that some clients didn’t see the e-mail notification, so they clogged the customer-support lines, leading to a delay in reaching a human—something that had been unusual at thinkorswim.

Another issue: TD Ameritrade’s self-clearing operation isn’t set up to handle transactions involving currencies or futures in the same account, which the thinkorswim platform handled seamlessly. A key to smooth trading in these markets is a good system to transfer cash within the account—a service that should soon be operational at TD. For now, though, customers still need separate accounts for their currency and futures trades, and must have ample cash available prior to placing an order.

QUIRK ACKNOWLEDGES THAT PUSHING up the date of the conversion 13 days might not have been the best thing to do. But he reports that the telephone wait times for customer support are back to normal.

Another customer complained that the training videos that used to be available on demand on the thinkorswim support site are now available only at set times. Quirk says that the compliance department at TD Ameritrade has decided that, for legal reasons, the firm cannot currently allow the videos to stream on demand. However, he adds: “We’re not done with that one yet.”

Was this the worst clearing transition in history? No, that distinction still goes to the HarrisDirect/E*Trade debacle in early 2006, which took weeks to clear up. At TD Ameritrade, the process could have gone more smoothly, but the problems were resolved relatively quickly. Life goes on. 

Published in Barron’s, August 29, 2011

Monday, August 15, 2011

A Perfect Time to Stress-Test Strategy

TradeStation integrates a powerful new technique for testing your trading theories in real markets.

If polishing up your theoretical trading models, rather than trading, was the most profitable use of your time in the last few weeks, TradeStation has just the product for you.

The sophisticated online broker last week integrated what it calls a Walk Forward Optimizer into its trading platform. Walk-forward analysis is a powerful technique that allows a trader to see how well a forecasting model works, by comparing its projections to historical data in a very precise manner.

TradeStation (http://www.tradestation.com), winner of Barron’s 2011 Online Broker Survey, acquired South Africa’s Technovest in June 2010, and hired its CEO, Wouter Oosthuizen, to bring the Internet-based financial technology he’d developed onto its latest downloadable platform, TradeStation 9.0. The Walk Forward Optimizer, or WFO, is designed to tell a trader whether his strategy will be reliable in practice. It automates a model-testing process that would be incredibly time-consuming if done manually. The Electronic Investor was given a late-beta demonstration of the tool courtesy of Oosthuizen, who is now a senior software engineer at TradeStation.

How does the WFO work? Let’s say you have 12 months of data on which you’d like to test your strategy. You might first focus solely on how your system works over the first four months of historical data, tweaking inputs, or parameters, to get the best possible result. These inputs might include anything, from a sharp move up, to insider transactions. You’d then “walk forward” to include a new month of data and see how your model works under the new conditions. Eventually, you’d progress through the whole 12 months, tweaking as you go. An actual walk-forward test would involve a lot more data, and multiple tests over the same set to get your trading model right.

The analysis calculates five sets of pass/fail evaluation criteria: overall profitability; correlation between in-sample (the development of your model) and out-of-sample (the actual test) data, which is also known as walk-forward efficiency; consistency of profits; distribution of profits; and maximum drawdown. Prior to running a WFO, the user decides on what the various thresholds are for passing or failing. Once that’s done, the WFO runs on multiple sets of data. It all gets done surprisingly quickly. Obviously, a “failed” reading means that strategy isn’t very robust and a “pass” means that it is. You can look at 3D graphs to help you analyze the results.

TradeStation has a video explaining this new feature on its QuickTips page.

The system can also do sensitivity analysis, which considers the effect of an individual parameter, say a moving-average crossover, on the model. By varying the weighting of a parameter, a trader can identify individual problems and evaluate the profitability of the model under different parameter weightings. It also provides distribution analysis that lets you display a variety of graphs comparing specific performance values against underlying market criteria. You can, for example, look at trades placed at specific times of day to see when the strategy is most successful.

This process can be highly technical; I didn’t run across most of the particulars until my second year of graduate work in econometrics. But you don’t have to understand all the nuts and bolts to be able to use this tool.

Oosthuizen says, “We don’t know of any other broker that has walk-forward analysis incorporated into its platforms. We believe the TradeStation Walk Forward Optimizer is a real game-changer for strategy traders, offering the ultimate strategy-trading stress-testing tool.”

MARKETSMITH GOES MOBILE. The company, which produces an incredibly flexible stock screening and charting tool, gave Barron’s an exclusive look at its new iPhone and iPad apps. We reviewed MarketSmith’s browser-based service, which runs $999 annually, earlier this year ("Two New Ways to Make Money,” April 11, 2011). Subscribers can use any of these platforms for no additional fee.

We like the iPad app, which is best viewed in landscape mode; the iPhone version is just too cramped for our aging eyes. MarketSmith (http://www.marketsmith.com) is a graphics-intensive approach to analyzing stocks and mutual funds, blending technical and fundamental stock data as well as proprietary ratings and rankings. The graphs look great on the iPad.

Subscribers can search the universe of stocks and flag those of interest on the go, then review the list in more detail on their desktop. This is a “light” version of the desktop application, but it allows you to perform screens and view complex charts when you’re mobile, and perform more complicated analysis once you’re back at your home base.

The firm’s president, Scott O’Neill, notes that “when a market gaps up or, as mostly recently, gaps down, a mobile application that helps keep investors grounded in the facts is invaluable to their profitability and peace of mind.”

You can access a two-week trial version of MarketSmith, including the mobile apps, for $19.95. The trial offer also includes product coaching so you can learn how it works before paying for the full year. If you want to check it out without laying out any money, there is a free three-day trial available as well.

GETTING OUT BEFORE THE FALL. SmartStops (http://www.smartstops.net), a service that calculates stop-loss targets and generates signals for re-entering a position, just launched a feature called the Market Risk Barometer. It measures the risk posed by components of an index or industry against its recent risk history. It’s calculated by dividing the current percentage in an above-average risk state to the 100-day moving average for that industry or index. A value of 1 or higher indicates a risk higher than the 100-day moving average.

Not surprisingly, every industry and index tracked by the new barometer was well above 1.0 when we reviewed the new tool on Aug. 8. It was alarming. Ninety-seven percent of the Dow Industrials were considered “above average risk,” while the barometer measured a whopping 1.81. Ouch.

A WILD WEEK: Online brokerage giant TD Ameritrade reported some notable occurrences during the 635-point drop in the Dow on Aug. 8. The firm’s trading volume exceeded the records set in the flash crash; previous records were shattered for options and futures, and mobile usage surged 29% from the previous week. 

Published in Barron’s Online, August 11, 2011

Saturday, July 30, 2011

Trefis Now Available on E*Trade

Customers can tap into the novel research service that updates stock valuations based on changes in revenues and earnings. Plus, hedge fund Citadel turns up the heat on E*Trade management.

Investors who analyze fundamentals, by poring over a company’s balance sheet and income statement for clues to changes in its stock valuation, should take a look at Trefis. The firm provides a quick view of what a company does to earn its money, and whether it’s worth its current price.

Trefis (http://www.trefis.com) opened in 2010, and this month has partnered with E*Trade (http://www.etrade.com), integrating its basic service into the online broker’s Website. Christopher Larkin, a senior vice president of retail trading and client services at E*Trade, says, “Trefis is going to help our customers understand how a company’s product impacts the stock price.” Larkin says E*Trade emphasizes the importance of understanding the drivers of a stock price, and believes that Trefis (see “DIY Value Analysis,” Aug. 16, 2010) is a great educational resource.

Trefis tracks technology, media, telecom, consumer, retail, automotive, financial services and energy companies, and plans to expand to other industries such as pharmaceuticals, biotechnology and industrials. It also intends to cover companies listed on non-U.S. exchanges. It currently models the stock prices of 187 U.S. companies.

A Trefis-generated graphic will appear in the right-hand column of the display when an E*Trade customer looks at a company the research outfit covers. This snapshot also shows some fundamental data, a small chart, and news headlines for the stock.

Larkin says, “Customers are demanding more ways to interact with data, and we think Trefis did a good job from a visual standpoint.” If, for example, you want a quote for Apple (ticker: AAPL), Trefis’ graphic displays the stock price its model calculates, along with the percentage that each of the firm’s product lines contributes to that price. For Apple, Trefis estimates a stock value of $510 per share, which is about 32% higher than last Wednesday’s close. Its model calculates that almost 54% of Apple’s market value is driven by iPhone sales, and about 12% from the iPad.

The model components, developed by a team of MIT Sloan School of Management grads, can be explored by clicking on the graphic and playing around with the assumptions that have been built in by Trefis analysts. You can change price and marketshare forecasts for product lines, and see how that affects the stock-price estimate.

The Trefis share price is a combination of forecasts for a company’s products and other revenue sources. The forecasts calculate future revenues, costs and cash profits, the latter of which is discounted to the present using common Wall Street valuation methodologies.

Trefis updates its models at least every quarter, when earnings are announced, and revises its thinking along the way. It also updates whenever there is a meaningful event, such as a merger, acquisition, divestiture or product launch.

You can access this information from Trefis’ Website if you aren’t an E*Trade customer; a basic membership is free. In addition, you can play with the model on E*Trade’s Website without logging in.

As a data junkie and student of econometrics, I had a great time experimenting with the Trefis forecasting models. They’re very interactive and can help an investor who might not have the time to slice and dice annual reports and Securities and Exchange Commission filings to get a look under the hood of publicly traded firms.

If you want more, including access to the Trefis community so you can trade modeling ideas and see what others are predicting, you can subscribe to Trefis Pro for $14.95 per month, or $149 per year. There is a free two-week trial available for the Pro service, although you do have to enter your credit-card number to qualify.

E*TRADE IN PLAY? The online broker last week got attention for other reasons. Chicago hedge-fund Citadel, which owns nearly 10% of E*Trade Financial (ETFC), disclosed it was unhappy with the firm’s performance and management, and would like it to consider selling itself, among other options.

DO IT YOURSELF: TradeKing just launched TradeKing API, a set of technical-programming instructions that allows you to write your own trading application, or app, that ties into your account. It can also bring in applications and Websites from other developers to customize the appearance and functionality of your brokerage experience.

While an API (application-programming interface) allows you to create your own system, it’s more likely that developers and technology partners will create apps that can customize your trading environment. TradeKing refers to the launch as “a whole new avenue to deliver greater choice for the firm’s more than 250,000 clients,” but it’s also a way to bring data and content to the customers who want it.

Most third-party applications that tie into other brokers (among them E*Trade, Interactive Brokers, MB Trading, TradeStation, TD Ameritrade and OptionsHouse—see “Here Come the Third-Party Apps,” Aug. 9, 2010) require an additional fee. For instance, trading-automation service CoolTrade (http://www.cool-trade.com), which can execute trades via all brokers mentioned here, costs $3,990 per year for a subscription.

LIGHTSPEED BUYS SOME OPTIONS: Lightspeed Financial, which focuses on professional retail traders and institutions, has expanded its options-trading technology by buying Chicago-based Greenmoor Financial Group. Greenmoor (http://www.gfgtrading.com) publishes Green Trader, its proprietary front-end trading technology. The system includes an order-execution and management module that provides both simple and complex option execution. The Green Trader suite also includes tools that assist customers in identifying trading opportunities using client-specific parameters. Its Trading Opportunities Software, or TOS, includes algorithms that can identify market movers and changing market conditions.

Lightspeed (http://www.lightspeed.com) will offer the Green Trader front-end to clients, and also acquire Greenmoor’s registered broker-dealer business, Greenmoor Financial. Lightspeed mostly focuses on trading stocks, but CEO Stephen Ehrlich recognizes the opportunity to boost his customers’ options-trading. Ehrlich says: “Our existing customers are increasingly turning to this burgeoning asset class to enhance their trading strategies—whether it’s to hedge a position or to generate income. As such, we are committed to expanding our footprint in this important segment of the market.”

Published in Barron’s, July 25, 2011

Saturday, July 16, 2011

Clearing Up Cost-Basis Confusion

New IRS rules for cost-basis reporting are here. That means headaches, and opportunities for brokerages that can automate the task.

The first phase of the IRS’ revised cost-basis reporting rules—requiring brokers and investment managers to report not only the total proceeds from an investment sale, but also the amount paid for it—is under way, and is already prompting some rethinking. Since our readers have identified the tax switch as a key concern, we thought it was a good time to describe what’s up. But first, a little background.

The initial phase went into effect at the start of this year, covering stocks purchased after Jan. 1. For 2012, brokers will have to report similar information to the IRS about mutual-fund sales and, in 2013, the program will be expanded to options and fixed-income. Any position opened prior to Jan 1, 2011, is subject to the previous rules: You have to voluntarily report the cost basis on your tax returns.

Scivantage (http://www.scivantage.com), publishers of Maxit cost-basis reporting systems, is one of the software providers working with online brokers to keep track of transactions and other factors that affect cost-basis calculation. On its behalf, Celent, a research and consulting firm, published a report entitled, “Cost Basis Reporting: Where Are We Now?” in late June. A copy is available at http://info.scivantage.com/CostBasis-ReportingCelentReport6-2011-Download.html.

The report says many brokers may have panicked in trying to meet the IRS mandate. Isabella Fonseca, research director of wealth management at Celent and co-author of the study, says the regulations, “were significantly more complicated than firms had anticipated. The rush to meet the government’s requirements has led to short-term solutions and a second round of long-term selections.”

The 1099-Bs investors receive from brokers early in 2012 will have a slightly different look, and the Celent report points out the likely fallout: “…firms are likely to experience an influx of inquiries from clients. Questions may include why some security types are showing [up], but others are not (as a result of later compliance dates for different securities).” In other words: a headache for brokers as they comfort their bewildered customers.

There is a silver lining for brokers that get it right. The ability to help customers manage the tax consequences of a trade can be a terrific benefit. Though some features—such as short-term versus long-term after-tax comparison, tax-lot harvesting, pre-trade tax analysis, and pre-trade wash sale identification and analysis—may not seem to be of critical importance right away, in the long run they are exactly the ones that will keep investors happy.

The free downloadable reportpoints readers to the Scivantage suite, of course. But it also paints an interesting picture of the current reporting conundrum.

The main issue, in our opinion, will be identifying wash sales—the sale of an investment at a loss, followed by the purchase of a similar investment within 30 days—through multiple accounts. The IRS doesn’t care whether you sold a stock at a loss in your Schwab account, then bought the same stock again two weeks later in your E*Trade account. If you do that, you cannot count the loss on the initial sale against your capital gains.

Right now, identifying cross-broker wash sales takes an eagle eye. We’ll bring any automated solutions to your attention.

SCOTTRADE (http://www.scottrade.com) is launching its mobile trading app, and we got a sneak peek at a pre-release iPhone version. (Android and BlackBerry versions should be released simultaneously.)

The app is wrapped in the color I think of as “Scottrade purple”; those familiar with the firm’s Website will be comfortable immediately. Four icons at the top of the screen that let you switch between trading, account data, and research, plus a quick tap to return you to your Home view. The Home page displays market data and has links to real-time news.

You can trade stocks, exchange-traded funds and simple options, and enter some conditional orders as well. There is no complex options trading, though you can set up a one-triggers-another order.

The app brings real-time account and market data to your mobile device, including simple graphs that allow you to change the time frame. Lists of gainers and losers are in the “Markets” section of the Research tab. You can set up a watchlist, and view fundamental data on a stock as well.

There’s no mutual-fund trading in the app, but that’s not a function most investors need on a real-time basis anyway. 

Published in Barron’s, July 11, 2011. 

Saturday, July 02, 2011

Traveling to Europe at Lightspeed

The professional trading site expands abroad, while E*Trade, TD Ameritrade and Fidelity win mobile honors. And an interesting new iPad app from Interactive Brokers.

Lightspeed Trading, an online broker aimed at professional traders and smaller hedge funds, has been on a buying spree. The most recent acquisition, its sixth in the last five years, is the Irish unit of Lime Brokerage International. This purchase gives the firm entrée to all of Europe.

"We think there’s a growing appetite of active traders in Europe who want access to the most liquid markets in the world,” says Stephen Ehrlich, Lightspeed’s CEO. The initial phase of the acquisition will allow European customers to trade in the U.S. markets.

Ehrlich reports that his firm gets about 1,000 requests a month from European traders, and is pleased that Lightspeed (http://www.lightspeed.com) will soon be able to fulfill that apparent need. The second phase of the integration would allow U.S. traders to trade European markets; Ehrlich expects that to happen in the latter half of 2012 or early 2013. “Having the broker/dealer license in place gets us started, and gives us credibility in those markets,” Ehrlich says.

Most of its previous purchases have been aimed at acquiring technology, but Lightspeed’s geographic expansion is a very timely one, based on our soundings. When we recently asked the trading community what areas of retail investing would grow fastest over the next 10-15 years, several pointed to international markets ("A Crystal Ball for Online Trading,” June 6).

Lightspeed expects to differ from internationally focused outfits such as Interactive Brokers (http://www.interactivebrokers.com) with technology as well as competitive pricing. Because it lacked the appropriate broker/dealer license, Lightspeed wasn’t able to market itself in Europe. Now it can.

One key aspect to the purchase is Lime’s “passport” license that allows it to operate all over Europe. Once the regulatory hurdles have been cleared, Ehrlich expects to tap into the large pool of local financial technology talent. The Irish subsidiary of Lime (http://www.limebrokerage.com) is currently dormant, so Lightspeed will be restarting the business from scratch.

ANOTHER FAVORED TREND was mobile applications. Corporate Insight (http://www.corporateinsight.com), which provides competitive intelligence to the financial-services industry, recently published a report entitled “Money on the Move: Mobile Finance Review 2011.” We were given a peek at the report; a summary is available from Corporate Insight’s Website.

The analysts at Corporate Insight talked with 100 financial executives who are clients. More than two-thirds of the respondents said that mobile financial apps have had a “somewhat positive” or “very positive” impact on their firm’s business. Of interest to readers of this column: “Every executive we surveyed believes that their firm will have an improved mobile offering in the next 12 months as they continue to develop new platforms and features.”

The report notes that the fastest-growing area for mobile financial apps is the iPad. In May alone, Merrill Lynch/BofA, Chase and Vanguard have all launched new apps for that platform. Mobile capture of check images also began that month for Fidelity and Schwab customers. Corporate Insight lists E*Trade, TD Ameritrade and Fidelity as leaders in offering mobile apps to their self-directed clients.

COMBINING BOTH FOREIGN and mobile interests, Interactive Brokers has translated its Traders Workstation (TWS) application to the iPad. The international broker launched an iPhone app, iTWS, in 2010, but the new version isn’t just a photo-enlarged version. It’s a much easier implementation of the TWS than you can get on your computer, and really takes advantage of the iPad’s available real estate. You can see streaming quotes and charts, place trades, and monitor your account on iTWS.

IB’s market scanners are also built into iTWS, which you can run or edit from the device. For example, you can check out the most active stocks in Europe or Asia. Trade alerts can be customized so that you are notified of executed trades that originated from your desktop as well as your iPad.

If you create a “paper trading” account with IB, which lets you test the features of applications without placing real trades, you can also check out iTWS without risking any of your cash. The iPad app does force you to log out of the desktop application, so you can only have one device logged into your account at a time. This may be inconvenient, but it’s a good security measure. The app will log you out after 10 minutes of inactivity as well.

Not all of the dozens of order types available on the software platform can be used from iTWS, so this version is not going to replace the computer-based TWS. If your account contains more than 50 positions, you’ll only be able to see the top 50. 

Published in Barron’s, June 27, 2011. 

Saturday, June 11, 2011

A Crystal Ball for Online Trading

Online brokers predict traders will place buy and sell orders from almost anywhere on everything from the weather to world events. Puts on DNA cloning?

Ten or 15 years ago, it would have been difficult to fathom the range of products that retail investors can trade today. Back in the 1990s, few brokers allowed short selling, and none had yet enabled complex options trading. Fixed-income transactions took place over the phone.

So we challenged the trading community to predict what the retail investor would be able to trade in the next 10-15 years.

Steve Quirk, executive vice president of TD Ameritrade, believes that mobile trading will become the norm. He foresees mobile applications that allow you to trade with gestures rather than by pushing buttons, and relieves you of the need to sit down at a desk.

Quirk also believes there will be options that won’t require an assignment of stock upon expiration. In other words, traders will be able to bet on the direction of a stock price without having to buy or sell the underlying stock. He notes that most traders of weekly options aren’t interested in holding the stock–they’re simply using an alternate method of going long or short on a particular position.

Sean Belka, president of Fidelity’s Center for Applied Technology, mostly sees today’s big trends like mobile access expanding. Fidelity’s recent launch of an iPhone app that allows you to deposit a check into your account by taking a photo of it is a prime example, he says. Schwab launched a similar app on June 1.

Touch and gesture-based interfaces will become more prevalent, according to Belka. “The whole area of the keyboard and mouse will give way to other methods of access,” he says. Beyond that, Belka believes that retail investors will have more access to international markets and to alternate asset classes like commodities. “In 10-20 years, people will be able to develop more-diversified portfolios, and be able to access them in ways we can’t imagine yet.”

Brian Bachelier, Scottrade’s manager of options trading, projects says that “the future of trading will offer the retail client a ‘blended analysis’ of fundamental, technical, psychological and social analytic tools.” Steve Sanders of Interactive Brokers says, “My personal opinion is that the question will not be what will we be trading–but rather where will we be trading? The world is becoming less U.S.-centric and traders and investors will increasingly want to cheaply take advantage of opportunities anywhere around the globe.”

The future will be full of exchange-traded funds, says Mike Scanlin, CEO of Born To Sell, which helps investors find covered-call opportunities. He sees continued expansion into a variety of niches. “ETFs make it easy to bet on currencies, commodities, geographies, interest rates and industry sectors. They trade like stock so there are no weird permissions, settlement rules, or restrictions on when you can buy or sell.”

Offering a different perspective, Louis L. Straney of Santa Fe, N.M.-based Securities Fraud Research (http://www.securitiesfraudresearch.org) thinks that investors, despite the advances in technology, have a growing need for direct contact with a well-trained advisor at a well-supervised financial-services firm. “The first firm that recognizes that investors have lost confidence in the supermarket approach with commoditized products and services and builds a new model, will sweep the table,” Straney says.

Straney does agree with others that derivatives contracts will be launched that allow traders to speculate on everything from the weather to acts of war. “A trader might be able to go long Hamas, short al Qaeda, buy puts on DNA cloning, straddle the government of Libya or put on a Mossad time spread,” he says. “Where there is volatility, uncertainty, and the likelihood of disruption, derivative contracts soon develop.”

More education will be needed to operate in such a world. Recognia, which licenses its research tools to online brokers for use by their customers, recently surveyed the clients of two U.S.-based online brokers as well as one in the Far East. Education rated highly as the key to making profitable decisions. Recognia’s president, Peter Ashton, says what the survey showed was that very few online brokerage customers are happy with their brokers’ decision-making tools. Over a third of those surveyed wanted to learn new trading strategies, while nearly a quarter hoped to delve deeper into technical analysis. Another 18% were most interested in learning new ways to manage risk.

Survey respondents preferred Webinars and online videos, so Recognia has partnered with Martin Pring, an author, educator and analyst, to put together a program to address some of these concerns. It will offer video, slides and charts to its online-broker customers, who can then make them available to their clients. Expect to see this content in the fall of 2011.

Published in Barron’s, June 6, 2011. 

Saturday, May 28, 2011

Clearing Firm Rattles Investors

Penson, which clears trades for many online brokers, reveals it holds illiquid bonds tied to a former director. Investors needn’t panic, but they should closely monitor the company’s response.

A recent research note from Sandler O’Neill analyst Richard Repetto set traders’ and investors’ nerves on edge when he detailed clearing-outfit Penson Worldwide’s revelation that it held $42.6 million of possibly illiquid bonds issued by a horse-racing-track operator linked to a Penson director. Much ink and many pixels have been spilled discussing what the company’s extremely belated regulatory disclosure means. The immediate effect was clear: Within days, the company’s stock-market value was nearly halved, to about $3.12 a share. And the director resigned.

The news prompted us to look again at our annual review of online brokers ("Making the Right Connection,” March 14). Quite a few of them clear their trades through Penson (ticker: PNSN). The firm specializes in clearing derivatives transactions, so it was no surprise to see options heavy-hitters like eOption, OptionsHouse, thinkorswim, TradeKing and tradeMonster on its customer list. (Thinkorswim has not yet been completely folded into the TD Ameritrade clearing operation; its separate customer base still clears its transactions at Penson.) Also on the client list: A.B. Watley, ChoiceTrade, Cobra Trading, Lightspeed Trading, MB Trading, SogoTrade, SpeedTrader, TradingBlock and Zecco.

We also got lots of e-mails from readers asking, in essence, “What will happen to my money if Penson collapses?” One wrote that he was closing an account at a firm that cleared through Penson, and thanked me for the table in our annual review that gave him ideas on where to transfer assets (see “Barron’s 2011 Online Broker Review: How the Brokers Stack Up").

Penson has maintained that the bond position won’t have any meaningful effect. In an e-mail via Penson’s public-relations office, Vice Chairman Daniel P. Son explained that the “situation occurred as a result of an expansion of our disclosure in our most recent Form 10-Q about certain receivables where the collateral had reduced liquidity. Unfortunately, we believe, investors misunderstood some of the information.” Son said that Penson will recover those receivables without a loss, but even if a loss did happen, there would be no impact on the firm’s ability to clear trades, since the funds involved are separate from Penson’s regulatory capital. However, Penson CEO Phil Pendergraft said later at an investor conference that the company could have a “material” loss after writing down the loan. He said he still expects Penson to post a profit this year.

SHOULD YOU WORRY IF YOUR broker clears through Penson? You should watch how Penson responds to this mess, but there’s no need to move money based on its current financial position. It takes a near-perfect storm, including a major market drop and a lot of trading on margin, to force a clearing operation out of business. We witnessed a failure in mid-2008, when North American Clearing went under, tangling trades for its brokerage clients and their customers for a month. That doesn’t seem to be the case here.

Even if the illiquid investment bled into Penson’s regulatory capital, there is insurance through the Securities Investor Protection Corp. (SIPC), a federally mandated entity funded by broker-dealers, that covers up to $500,000 of stocks, options and bonds per account. Futures contracts, commodities and currencies are among the assets ineligible for coverage. Most brokers carry additional insurance, called excess SIPC coverage, that insures assets above the $500,000 ceiling. Check out the SIPC Website (http://www.sipc.org) to learn more.

If you are not borrowing money from your broker by using margin, or shorting stock, your trades don’t make it onto the clearing firm’s books. If you are using margin, then the clearing firm has collateral from you on the other side of its balance sheet, in case there’s a problem. Penson’s role in a transaction is to process trades electronically for its broker clients, and to make sure that the appropriate funds are in the right place at the right time.

Several executives of online brokers who clear through Penson spoke with us on the condition that their names not be used. The general reaction was that the disclosure of the illiquid loan was a public-relations disaster rather than a sign of impending financial doom.

One said that Penson’s business will be fine, but that its management has a lot to answer for. “They should disclose every security on their books to regain confidence. They should fire everyone running it, and start over with new management,” fumes the brokerage official. (Penson director Thomas R. Johnson resigned his board post on May 12. Johnson is chief executive of Call Now, which manages the Texas race track for the company that issued the bonds. Call Now was also an early investor in Penson.)

AN OFFICIAL AT ANOTHER BROKER says that regulators at the Securities and Exchange Commission and the Financial Industry Regulatory Authority “are all over this.” If Penson were to try to hide something from the regulators, “they’ll get a nice orange jumpsuit to wear for a few years.” Although he’s disappointed with the firm, the executive notes that Penson easily meets all regulatory standards. At a firm geared to active options traders, a senior manager compares clearing firms to waiters: “If they do a good job, you never think of them.” Penson has more than $100 million in excess regulatory capital, according to Vice Chairman Son.

This same official points out Penson’s technology for clearing derivative and futures trades is “way ahead of everyone else.” The company, he notes, serves not just brokerage firms but hedge funds and proprietary trading firms.

Most important for Penson, none of these executives were about to pull the plug on their clearing relationship with the firm, and few of their customers have made any noises about moving their accounts. One brokerage official said that if his firm saw customers leaving due to their clearing operation, then it would have to reassess the relationship. Changing clearing firms is a huge, time-consuming undertaking.

It appears to me that moving an account away from a brokerage that clears through Penson just because of this disclosure would be a major time-sink, without much return. However, I do believe that some house-cleaning is needed—quickly—at Penson, and that it should discuss its practices and its services with brokerage customers. No doubt, Penson’s rivals already are reaching out to many of these brokers. 

Published in Barron’s, May 23, 2011. 

Saturday, May 14, 2011

Day Trade and Keep Your Day Job

A new online brokerage firm, DittoTrade, lets you mimic the trades of professionals—and get the same prices they do.

A new online broker is opening with an interesting twist. Aside from the usual online features, DittoTrade lets you buy and sell right alongside an experienced trader.

DittoTrade’s CEO, Joseph Fox, has prior experience operating an online brokerage firm—he was a founder of Web Street Securities, which was a top-rated broker in Barron’s annual ranking back in the late 1990s and was acquired by E*Trade (ticker: ETFC) in 2001. Fox decided during 2008’s financial meltdown that he wanted to go back into the business, mainly because he believed individual traders were getting clobbered by institutional traders using algorithms and high-frequency techniques.

His fledgling firm (http://www.dittotrade.com) opened its virtual doors in a beta test last October, but will soon be more visible, thanks to a new marketing campaign (and, no doubt, articles like this one). Fox says the idea is to let average investors, who usually have better things to do than stare at a computer screen, benefit from the skills of people who are in the market every day.

Upon logging in, you are presented with a standard-looking account balance page with streaming quotes. The “Trading Pit” is where customers can place orders on their own; like tradeMonster, when you enter a position on DittoTrade, you are encouraged to set a stop-loss and a profit target. Things start to differ, however, if you connect to a Master Trader.

THE MASTER TRADER LINK takes you to a dashboard that shows the stocks your chosen trader is monitoring. Most of the master traders attach notes to each symbol on this watch list, which often includes their thinking about a particular stock, along with an explanation of price entry and exit points. There are two ways to join into a master trader’s transactions: Full Throttle, which means you take part in every transaction entered by the master trader, or Participation Mode, which means you pick which stocks you want to trade from the master trader’s watch list.

You can also define in advance how you want to take part. You can choose from Share for Share (trade the same number of shares as your master trader), Percent for Percent (trade the same percentage of your total account as your master) or Max Loss Per Trade (set an amount you’re willing to lose should the stock price hit its stop-loss). The DittoTrade engine calculates these measures for you, and bundles your transactions together with those of the master and all of his other minions. Everyone gets the same price at the time of execution, which distinguishes DittoTrade not only from traditional online sites but from those offering other trade-mirroring technologies.

Once you’ve opened a position, you can either follow the master trader to close the position, or close it on your own. You can also detach the position from the master trader’s dashboard and hold it separately.

Some Barron’s readers may be wondering how they can become master traders. Fox says his brokerage is actively seeking more masters, and also is looking for those with international trading expertise. You can reach him at jfox@dittotrade.com . Master traders typically charge a subscription fee to their followers, and they control which DittoTrade customers are allowed to “ditto” their transactions. You can also develop a “friends and family” following. That means you aren’t publicly visible like a master trader, but your nephew or mother-in-law can trade with you.

San Diego-based Andy Lindloff of todaytrader.com is one of the existing master traders. DittoTrade clients can follow Lindloff for $99 per month for Full Throttle access, or they can sign up to be alerted when he makes a trade, for $49 per month. If you choose the alert system, you can make the trade on your own, but it won’t go through in a bundle with Lindloff’s orders.

Last year, the New York Times featured Lindloff in a story about the death of day trading, which brought him to Fox’s attention. Now Lindloff and his partner, Steve Gomez, are on board with DittoTrade. They generate approximately 30 transactions per month with their trading system, and customers can also watch Lindloff trade in real time using GoToMeeting, the screen-sharing program for conferencing.

Lindloff, a discretionary trader eschewing algorithms, and Gomez have posted a 28.5% gain over the past six months on DittoTrade, at http://www.todaytrader.com/performance/. He says he enjoys working as a DittoTrade Master Trader: “I think it’s a great idea if you find someone—maybe me, maybe your cousin—who is keeping an eye on your stocks and protecting you in the market. If you don’t have time, find somebody who is watching the market full-time.”

DittoTrade has a logo that Fox calls “the molecule,” which he would eventually like to see festooned on many financial Websites. It would let individuals just click on the molecule and start trading alongside their favorite bloggers and professional traders on DittoTrade. Each transaction is $4.95 for stocks and an additional 50 cents per contract for options. Margin fees are a relatively low 4.95%.

Though this site is still a little wet behind its virtual ears, it looks like a good idea worth further exploration and development. It would be worth considering if you’re a portfolio manager placing trades for your customers, or if you’re managing family accounts. Right now, all you can trade on the site are stocks and options—no mutual funds, penny stocks or foreign ordinaries.

FIDELITY OPENS UP ACTIVE TRADER: Last month, Fidelity (http://www.fidelity.com) announced it would allow free access for 90 days to its advanced trading platforms to new customers opening an account with $50,000 or more, or to existing clients transferring at least $50,000 into an account. This campaign is called “Go PRO,” and the details can be found at http://www.fidelity.com/goprooffer.

Historically, these are services only available to those who trade more than 120 times per year.

FREE ETFS AT FIRSTRADE: Ten exchange-traded funds (ETFs) can be traded commission-free at Firstrade (http://www.firstrade.com). Firstrade President and CEO John Liu says, “The 10 ETFs we selected for commission-free trading are designed to allow clients to quickly and easily build a strong foundation for a diversified portfolio.”

The list includes three bond funds, several blend funds, a commodity fund and a diversified emerging-markets fund. If you’re trading off the free list, commissions are $6.95 per transaction.

Published in Barron’s, May 9, 2011

Saturday, May 07, 2011

Hot Tools for TD Clients

TD Ameritrade creates a “bridge” between the sophisticated trading site it acquired and its own, more mainstream site. Barron’s sneak peek.

When TD Ameritrade bought innovative, tool-laden thinkorswim two years ago, we wondered how its technology would find its way into the big broker’s traditional site. The initial link-up was straightforward: TD Ameritrade clients could just plug into the entire thinkorswim platform, lock, stock and barrel.

But many mainstream TD Ameritrade customers were overwhelmed by the intense experience offered by the sophisticated thinkorswim platform (http://www.thinkorswim.com). Just getting started on the site, which won Barron’s annual ranking of online brokers a number of times, can be intimidating for a newcomer. (For more on corporate acquisitions of our perennial favorites, you’ll have to read to the bottom of this column). We were given a preview of a “bridge” application, Trade Architect, during our most recent review ("Making the Right Connection,” March 14), and, last week, we were given a more in-depth look at TD Ameritrade’s attempt to bring together the two sites. Trade Architect will have its official launch this week, after recently giving select customers a chance to try out the application.

TD Ameritrade Vice President Steve Quirk explains that the firm is trying to meet clients’ interest in “boiling down” the “wealth of information” that was being provided to make a trading decision.

The combination offers a terrific mix of the fundamental analysis that’s a staple of the TD Ameritrade platform, as well as the vast array of technical tools thinkorswim has featured. Trade Architect can be customized to client needs pretty easily, and should go a long way toward introducing less-experienced electronic investors to more dazzling analytical techniques.

Trade Architect is a Flash-based application, so it will run on any computer (including Macs). The application won’t yet run on an iPad, thanks to Apple’s long tiff with Flash publisher Adobe, but Quirk assures us that it looks great on a Motorola Xoom. You can trade stocks, options, exchange-traded funds and mutual funds on Trade Architect.

There is nothing to download as long as you have the latest Flash plug-in on your computer, and best of all, unlike Schwab and Fidelity’s frequent-trader applications, no hoops to jump through to qualify to use Trade Architect. Anyone with a TD Ameritrade account will be able to use the platform as soon as it’s enabled for their account, at no additional fee. What’s more, all of your watch lists and positions are consistent among the various Websites and applications, so if you create one on any of the various TD Ameritrade platforms, including mobile, it will be there when you use Trade Architect, too.

The default opening screen—to which you can return at any time by clicking on the “Today” box on the menu bar—brings you real-time video from CNBC, a snapshot of your account balances, your watch lists, the “Heat Map” (a graphical representation of market moves and volumes), quote detail and real-time news. You can scroll through additional layouts or create your own by clicking on the “Setup” tab. When you set up your own, you are prompted to name it, and that name then displays on the menu bar, making it easy to find.

Fundamental data, such as earnings and various key financial ratios, are integrated throughout, so you don’t have to switch back to TD Ameritrade’s familiar green-border site to find something. If a symbol on your watch list has a number in parentheses next to it, then you know that there is current news pending for that company.

Any layout with quote detail is also festooned with relatively large “Buy” and “Sell” buttons that are impossible to miss. Clicking on the “Buy” opens an order-entry ticket at the bottom of the screen, which is prefilled with the ticker symbol, your default order size, and the asking price entered as a limit order; clicking on “Sell” enters the bid price. The trade ticket’s design is consistent across platforms, so there’s no shock when placing your first order on Trade Architect.

If you enter an options order, a chart displaying the last six months’ price movement appears. The historical area of the price chart that would have proved profitable for this order over time is shaded in green, which gives you a quick view of the strategy you’re considering. There are many more in-depth options-trading tools on the thinkorswim platform, of course, but Trade Architect contains some good basics that should get you comfortable with the more complex capabilities of the thinkorswim package, should you decide to use it someday.

As in most 1.0 versions of trading platforms, there are some missing pieces. PaperMoney, thinkorswim’s trading simulator, is not yet available in Trade Architect, but it should be soon. The charting application, while easy to use, only has about 10% of the 350-plus technical indicators found on the thinkorswim platform. In addition, futures- and foreign-exchange-trading integration will not happen until the firm completes a conversion of its securities clearing operation over the summer. More research tools will be added to the platform as it matures.

AS WE NOTED AT THE OUTSET, the purchase of an innovative company like thinkorswim by a big, established online broker is more the rule than the exception these days.

In late March, Schwab picked up optionsxpress (http://www.optionsXpress.com), which had gotten multiple awards from us in its specialty, dating back to the early part of the last decade. Although we’ve been assured that optionsXpress will continue to operate as a separate broker-dealer, we expect to see much of its technology find its way onto the Schwab platform.

And just a couple of weeks ago, Tokyo’s Monex Group announced that it will buy this year’s Barron’s victor, TradeStation (http://www.tradestation.com).

Monex’s CEO, Oki Matsumoto, noted in the firm’s news release that the Japanese online broker was buying “an award-winning platform” in TradeStation. The deal is expected to close in the third quarter. In this case, we expect to see the U.S. firm continue to operate independently, but anticipate more international trading opportunities will arise on its site before long.

In the meantime, you might want to pay attention to Barron’s list of 2011 online-brokerage winners, coming out next March. They will not only offer excellent trading platforms, but possibly a good pre-acquisition trade as well. 

Published in Barron’s, May 2, 2011

Saturday, April 16, 2011

Two New Ways to Make Money

MarketSmith is a remarkably flexible stock-charting and screening application, and Born To Sell gives covered call traders some great ideas.

Two new tools came to our attention recently, and they are both worth a look. The first, MarketSmith, is a remarkably flexible stock-charting and screening application, and the second, Born To Sell, gives covered-call traders some great ideas.

You may be familiar with the MarketSmith (http://www.marketsmith.com) product line if you’ve ever accessed Daily Graphs or Daily Graphs Online, founded by William J. O’Neil, the money manager who created Investor’s Business Daily. Daily Graphs started out in dead-tree form in 1972, then went online in 1998. In 2002, the service added mutual-fund and options data. Subscriptions are $999 a year, or $112.25 a month. Renamed MarketSmith last fall, the company is now run by O’Neil’s son, Scott.

Scott O’Neil says that his firm spent “an incredible amount of time designing the layout and scaling to make sure that each chart is representative of that particular security.” The design is extremely elegant, as all the components are accessible from a single screen. MarketSmith is intended to cover the entire research process behind making a trade, starting with idea generation, managing ideas and then analyzing them.

The tool runs in Microsoft Silverlight and launches from most popular browsers. We ran it on Firefox, Chrome and Internet Explorer; it behaved best on the last.

The central tool is, of course, a price/volume chart, but other capabilities are available through tools that slide in and out from the four sides of the chart. A screening tool slides out from the left side, and you manage all your watch lists through a tool at the bottom. There is a panel on the right side that provides related information, such as criteria from investing gurus. The tools slide open over the chart you’re viewing, then slide back when you’re done with them. There’s no digging through menus to find a particular tool in this very modern interface.

You can choose from over 200 data points in the screener, including the usual suspects in fundamental and technical analysis. You can set up your own screen, which is then saved for you, or go to the MarketSmith stock screens that match the style and approach of various investing legends such as Warren Buffett, Martin Zweig, Peter Lynch and Benjamin Graham.

The list panel, located at the bottom of the chart, is the program’s hub. This is where you store the results of your screens, so that you can go through them more completely. As you run a screen, you can drag and drop your ideas onto a watch list. The lists are displayed in a table with column headings that are customizable with any of the 200-plus data fields in the system.

The charts can be displayed as daily, weekly, monthly and one-minute intervals. One intriguing feature that sent me on a walk through history is the “Change Date” box, which lets you set the date for any individual stock back to 1962 (when available). You also can look at movements in the Dow Jones Industrial Average back to 1900.

While viewing a chart, you can slide out the panel on the right and find information on institutional ownership or see how the company’s industry is performing. There is also a news feed on the right panel. Options data are also included, though the options analysis isn’t very deep.

There is also a community you can join to get feedback or to share screens. In the blogs area, you can mark up a chart and share it with others in the community. You have to be a MarketSmith member to post or read the blogs. A feature I would like is the ability to link a MarketSmith membership to your online brokerage account, which would avoid a fair amount of manual data entry.

MarketSmith is pricey, but has excellent tools in a well-designed interface. It’s worth a trial, at the very least.

FOR COVERED-CALL WRITERS, the site BornToSell (http://www.borntosell.com) offers a customizable screener that searches through approximately 150,000 available transactions and displays the results in an easy-to-read table.

The basic search screen uses slider bars to set your options criteria, including expiration date, whether they are in, at or out of the money and the price of the underlying stock. The screen’s results display instantly, with visual cues, such as earnings dates, highlighted in red if they will occur prior to expiration.

Advanced filters let you see market capitalization, the price of the option and the industry. You can also exclude various stocks. The results are ranked by the transaction’s annual return and will definitely generate some ideas for you.

Born To Sell analyzes only covered calls, but is a terrific tool for those who generate income by selling calls against existing positions. After a two-week free trial, subscriptions run $499.95 per year, $149.95 quarterly or $59.95 monthly. Check it out.

Published in Barron’s, April 11, 2011

Saturday, April 02, 2011

OptionsXpress Gives Schwab a Leg Up

The smaller firm will bring better options tools and the possibility of integrated futures trading.

Charles Schwab’s $1 billion offer last week for midsize optionsXpress seems like a good move for the online-brokerage giant. The all-stock deal should allow Schwab to update the options tools on its Website and to integrate futures trading, helping it stay relevant in a very competitive technology race. The firm is choosing to buy the technology rather than build it, and also gets the chance to absorb optionsXpress’ nearly 400,000 accounts.

Charles Schwab’s (http://www.schwab.com; ticker: SCHW) recently released StreetSmart Edge platform, available only to frequent traders, is a huge improvement over the firm’s Website when it comes to researching and trading options (see “A Peek at Schwab’s New Trading Site,” Barron’s Electronic Investor, Dec. 20, 2010). However, the Street-Smart Edge tools aren’t incorporated into the Web platform.

OptionsXpress (http://www.optionsxpress.com) was a pioneer in bringing options-strategy searches to the retail trader, and rose to prominence on the strength of its tools. More recently, optionsXpress customers have been able to trade futures as well as stocks, options, mutual funds and bonds; this trading technology will be a welcome addition to the Schwab suite. Currently, Schwab customers have to open a separate account with the firm’s Lind-Waldock affiliate if they want to trade futures, which we’ve regarded as a pain. Schwab officials emphasize there will be no changes in the optionsXpress platform.

In Barron’s recent ranking of online brokers, optionsXpress garnered four stars out of a possible five, while Schwab merited 3½ ("Making the Right Connection,” March 14).

Unlike after many recent mergers, optionsXpress customers could see their trading costs drop once the firms are merged. Currently, Schwab charges $8.95 for stock transactions, $1 less than optionsXpress.

Although a group of optionsXpress (OXPS) stockholders, hoping to increase the price, has filed suit to block the sale, I would be surprised if this deal didn’t go through. The two firms appear to be following in the footsteps of TD Ameritrade’s (http://www.tdameritrade.com) takeover of one of our electronic favorites, thinkorswim. The latter was allowed to maintain a separate identity, although that could change later, when the clearing operations merge.

If you’re an optionsXpress customer (not stockholder), what are your concerns about this takeover, if any? If you already have accounts at both Schwab and options-Xpress, which one do you prefer? Let us know at electronicinvestor@yahoo.com
.
A FREE IPHONE APP called Chaikin Power Tools was just launched. It provides trading signals on approximately 5,000 stocks. The app lets you set up your own watch list or select from a built-in industry list. If you pick, for example, conglomerates, you’ll see recent prices (20 minutes delayed) for the companies in the group, plus a proprietary Power Gauge which gives you a bullish (green), bearish (red) or neutral (yellow) signal. Clicking on a gauge provides additional detail, plus the ability to view a graph and see some basic information about the company. It’s free, and it’s fun. Check it out.

IN OUR RECENT READER MAIL was an inquiry about how to synthesize various financial Websites when seeking information on a particular company. We were tipped to the site http://stocks.overthefalls.com, which brings together pages from 14 different financial sites such as Yahoo! Finance, Seeking Alpha and Zacks for a chosen ticker symbol.

The service is free, and offers a very stripped-down interface. You type a ticker into the search box, click on the “Go” button, and wait a few seconds—how many depends on the speed of your Web connection. The content from each of the sites can be seen by clicking on the appropriate box on the left margin.

You’ll be introduced to some Websites, such as StockTA and J3, that you might not have seen before. StockTA offers technical analysis of stock-price movements, while J3 gives you a breakdown of a stock’s institutional ownership. If you don’t want to bother loading content from one of the sites built into the search, you can uncheck the box with the word “enabled” to the right. That can cut the time it takes to make the pages ready to view.

It’s a little bit buggy, however. I found that I had to close the browser window and reload overthefalls to get a different ticker symbol to load correctly. In addition, most of the ticker symbols I checked out eventually loaded the Seeking Alpha page—if I didn’t click on anything. Still, it’s an interesting little tool, and you can’t beat the price.

SEVERAL READERS HAVE ASKED if there’s a Website that can help them find preferred stocks, as they attempt to generate more income from their portfolio. One resource is the Preferreds Online site (http://www.epreferreds.com, which is run by the same group that publishes Bonds Online (http://www.bondsonline.com).

One intriguing feature of this site is the Relative Value Indicator, which shows whether the stock you’re mulling is cheap or pricey when compared with similar kinds of stocks. The site also shows historical credit ratings of the companies issuing the preferred stock. It’s a subscription service that will set you back anywhere from $10.49 for a one-day pass to $445 per year.

If you’re on a budget while looking for added income, check out Quantum Online (http://www.quantumonline.com), which isn’t as pretty as Preferred Online but is considerably less expensive. Actually, it’s free; however, the publisher is happy to accept contributions. To use the site, you have to sign up for a free log-in; it can take several hours for your password to arrive.

Upon logging in, you can search for securities related to a particular company by name or by ticker symbol. You can see the company’s current credit ratings, which are supplied by Moody’s and Standard & Poor’s. One resource I found helpful was an article entitled “What Income Investors Should Know.” It provided insights on what happens to preferred stocks in bankruptcy, what a redemption or call date is, and why some issues trade on the Over-the-Counter Bulletin Board, more commonly known as the “pink sheets.”

You can find lists of real-estate investment trusts, closed-end funds, limited partnerships, royalty trusts and a variety of other securities. As mentioned, it isn’t going to win any beauty contests, but it contains excellent data for income investors—and, once again, the price is right.

Published in Barron’s, 3/28/2011. 

Saturday, March 19, 2011

Making the Right Connection (2011 Online Broker Review)

After swerving between shocking growth as a toddler and a serious mood disorder as an adolescent, online trading is on the verge of a stable maturity. Today it appeals both to hyperactive traders and long-term coupon clippers, to stock and bondholders and foreign-exchange specialists, as well as to those willing to pay up for the latest gadgetry and those just trying to save a few bucks in commissions. Its ranks include asset-management giants like Fidelity and tightly focused specialists with names like TradeMonster.

It’s a big change since 1996, when Barron’s first reviewed online brokers. The top-rated firm that year was Lombard Online Brokerage, which morphed into Discover Brokerage a couple of years later before being purchased by Harris Bank. We were impressed with Lombard’s real-time quotes and account updates, a rarity at the time. Where are they now? HarrisDirect, Lombard’s descendent, closed down and was snapped up by E*Trade.

For our 16th survey we thought we’d try to do something a little different to reflect a more diverse marketplace of brokers and investors. We focused more on helping our readers figure out whether a brokerage is the right home for part—or all—of their portfolio. (Don’t worry, you can still find our favorites on the following pages.) From what we know, Barron’s readers tend to have a portfolio topping $1 million and trade on average 42 times a year; they also have several brokerage accounts. We’ve tried to keep that audience in mind in providing information.

Please click here to read the entire article and view the tables:  http://online.barrons.com/article/SB50001424052970203523604576188781715729822.html

Saturday, March 12, 2011

New Tools to Help Manage Risk

In preparation for our 16th annual review of online brokers, to be published March 14, we have spent the past few months investigating new services and tools from 24 firms. Four brokers we are studying are new to our review process.

So, what’s new this year? For one thing, brokers are offering more tools to help investors manage their risk. Several have also introduced money-management services, taking another step toward full-service brokerage capability. Notable among them is Charles Schwab (http://www.schwab.com), which acquired Windward Investment Management (now called Windhaven Investment Management), an advisory firm that managed nearly $4 billion in three broadly diversified portfolios invested primarily in ETF, or exchange-traded-fund securities. In March Schwab customers will be given access to these portfolios, at an additional fee that has yet to be disclosed.

Schwab (ticker: SCHW) is also offering five new Pimco-managed Municipal Bond Ladder separately managed accounts, expanding its fixed-income offerings. These are designed for people seeking tax-advantaged assets and income generation, particularly retirees.

E*Trade (http://www.etrade.com) also made a move into the managed-accounts arena, launching Managed Investment Portfolios, which offers one-on-one professional portfolio management of ETFs and mutual funds, with a minimum investment of $25,000. Another service, Unified Managed Accounts, is for clients with assets of $250,000 or more. This is a professionally managed wrap account that includes stocks, mutual funds and ETFs. E*Trade’s (ETFC) fees for this are based on the amount of money under management.

MANY BROKERAGES HAVE STEPPED up their efforts to court active stock and options traders. There has been a major push to offer additional tools for options traders, including education offerings to make newbies more comfortable.

Fidelity (http://www.fidelity.com) enhanced its options trading with additional research, including expanded volatility data. The site also includes the ability to model the profit or loss potential of an option strategy before placing a trade.

At tradeMonster (http://www.trademonster.com), more than 100 scanners were rolled out in a new LiveAction tool, which enables users to scan the universe of available options based on volatility, unusual activity, and fundamental and technical data.

Many brokers are launching new customizable trading platforms that open in a browser and can run on any computer. In the past, a user had to download a huge file and install a software platform to get this capability, and few of those programs ran on non-Windows systems. The new Web-based platforms are, for the most part, much better trading tools, and can be customized to fit your trading style.

A brand new brokerage firm, gxTrader (http://www.gxtrader.com), opened its virtual doors in late February. It won’t be included in the brokerage review because it is too new, but the trading platform might interest those who like a visual analysis tool.

GxTrader’s software, Visual Trader, comes from Nirvana Systems, and is version 8.0 of that analysis tool. It has trading capabilities built in. Getting started was somewhat difficult, as the program, which runs only on Windows, is a 70-megabyte download. It calls on several Microsoft Visual Basic libraries, which must also be downloaded. Once the program is installed, you’ll have to download another huge file to access the necessary historical data. In all, the process takes about an hour.

Visual Trader is designed to show movement and changes in momentum across a sea of trading opportunities. It displays a three-dimensional map that can be rotated and flipped. Industries are represented by circular disks, and individual stocks by cylinders. The color, width and height of each cylinder is generated by price changes and trading volume. A thick, tall, green cylinder would indicate a stock that is trending upward in price on heavy volume. A skinny red cylinder would represent a stock declining in price on thin volume. Clicking on a cylinder produces a graph of the stock’s price and volume changes over time. Click on the small “T” on the graph, and a trade ticket opens.

As of now only stocks, ETFs and options can be traded online at gxTrader; you must call a broker to trade mutual funds and bonds. Commissions are a half-cent per share, with no minimum, so a trade of 500 shares will set you back $2.50. Options commissions are 85 cents per contract. You’ll pay $99 monthly for the software, though that fee is waived if you trade more than 10,000 shares per month. 

Published in Barron’s, March 7, 2011.