Category Archives: industry news

Future of online trading: App stores for investing

It’s been a truism that the secret to runaway success in technology has PlatformLeadershipBookalways been in platform building.

I learned about the intricacies of building platform leadership from a book by the same name, “Platform Leadership” which I read during my MBA. The book by Gawer and Cusumano detailed how Cisco, Intel and Microsoft drove industry innovation by building a robust, standardized technology platform other leading-edge products could plug into.

The premise of the book was powerful: companies that could create products/services that served the center of a powerful ecosystem of ancillary items built on top of these products become extremely valuable.  Think Intel Inside and Microsoft’s dominance of the OS.  Presently, think of what Salesforce.com is doing with its platform as well as Apple’s iPhone App Store.  By creating a platform around which 3rd party developers are incentivized to design and build products, these companies have created something much more valuable and harder to displace than a mere product.  They’ve created a platform.

Investment field riddled with platforms

The investment field is riddled with platforms, too.  Bloomberg runs an empire based on an install-base of thousands of terminals in most of the leading investment institutions around the world.  You want to reach institutional investors with financial content? Gotta work through Bloomberg.  Yahoo Finance is the granddaddy of financial websites, far and away seeing more pageviews than any of its competitors.  You want to reach the retail investor, gotta get on Yahoo Finance.

Platforms provide necessary structure to certain markets.  In the investment field, platforms like Bloomberg and Yahoo Finance serve to

  • Aggregate content: investors don’t have to hunt down information by doing hundreds of Boolean searches on the Internet.  By serving as content aggregators, the platforms serve as a clearing house and central node to consumer info.
  • Establish an orderly market: Platforms create order by creating certain standards for their products and partners.  Bloomberg and Yahoo Finance established syndication guidelines via which partners must comply to be on the platform.
  • Create viable business models: It’s not clear to me that many investment research products could survive on a standalone basis.  Investors don’t like to pay for content and by aggregating pageviews on a single site, Yahoo Finance actually creates a viable business model for their partners and shares it out with them.
  • Consolidates usage to make single a jumpoff point to reach users: By consolidating the market, making it orderly and putting viable financial metrics behind it, finance platforms are the gateway to the users.  It’s too hard, complicated and expensive to reach investors directly.  These platforms act as market makers for the investment content bringing suppliers and customers together.

Online Brokerages as Investment Platform

While reviewing a recent product/service that E*Trade launched last week, I stumbled upon the realization that online brokerages are doing the exact same thing that Apple is doing around the iPhone.

In fact, it’s a HUGE misnomer to call these firms “online brokers”.  What were once merely online trading systems, companies like Ameritrade and E*Trade are actually now in the platform business.  As this evolution develops away from just trading toward the development of a true investment platform, these firms are creating something so much larger than just online trading or banking services.  I like the term “investment platform”.

Ameritrade’s Premier Partners

platformpartners

Check out what Ameritrade is doing with its partner platform.  This page lists a handful of 3rd party applications that run on top of Ameritrade for clients to receive trading alerts, Jim Cramer’s wisdom, ongoing advice about when to sell and some nifty charting.

None of these services are completely groundbreaking in and of themselves, but Ameritrade is establishing itself as the nucleus of the investment ecosystem.  By allowing developers to build tools and hook them up to Ameritrade’s API, the firm is concretizing its position as the investment platform of choice.

You want to reach investors?  Gotta get on the platform.

While the platform provider has an unbelievable amount of power, on the other hand, having a platform enables software/services developers to effectively reach the investor smack dab in the middle of the investment process — something heretofore impossible to do.  Look to see a lot of services develop around this ecosystem.

It’s like milk — for everyone

It’s a boon for Ameritrade — they can provide more services for their client base without developing them in-house.  It’s a boon for consumers because they no longer have to wait on their broker to provide new services.  It’s a boon for software developers because a move toward a platform puts them in business.

Maybe this was self-evident.  Maybe others understood that this evolution was unfolding right in front of us. In fact, both Ameritrade and E*Trade have allowed 3rd party financial advisors access to their platform, technology, services and clients for years.  Yet, I think this is a huge breakthrough in the understanding of what the future holds for these particular firms, their clients and technology development. It’s the financial industry’s equivalent of a mash-up.

Exciting.

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SkyGrid: Case study on ad-supported investment media

Is the elusive “Bloomberg for the masses” attainable?  Of course, most do-it-yourself investors cannot afford the cost of thousands of dollars per month for these expensive terminals.  But, what about making a platform free for subscribers and monetizing the platform via advertising?

That’s exactly what SkyGrid is attempting.  Until recently, SkyGrid charged $6000 per seat/year for a flash interface that allows users to track financial news on stocks and sectors they’re interested in.  In April, the company, which raised $11M in April from top venture firms, transitioned away from a premium model to a completely free model.  SkyGrid has made free accounts available to New Rules of Investing readers.  If you’re interested, go here to sign up for a free account: http://www.skygrid.com/reg/?id=8x89a9e3

The Service

skygrid_home

SkyGrid users log in to their accounts over the web via their browsers.  Once in, users are greeted with the only human-arranged editorial component on the platform: the day’s top or breaking financial stories.

SkyGrid produces a user-defined customizable news-stream.  Users of the system can customize SkyGrid to continuously stream stories about stocks in their portfolios.  SkyGrid compiles this content based on what the company described as a complex, multi-step process that includes:

  • crawling/scraping data/headlines from feeds in real time
  • validating reputation (link structure, click volumes) to weed out only content appropriate for a high-end user, like a hedge fund manager
  • testing if the content is important/impactful  for investors (Steve Jobs = important for Apple),
  • applying sentiment indicators (green if the content is positive, red if it’s not) via semantic analysis developed by computational linguists (something the firm says is very different from keyword analysis)
  • real time clustering (grouping various articles around similar themes)

The upshot is that users get a vertical stream of  headlines which they can click through to read the entire article.

Pros:

  • The system works really quickly and it appears to be eerily on target with its content.
  • I found very few articles streaming by that weren’t interesting or important for shareholders.
  • I believe this comes from good science, programming, user interface and tying it all together, a focus on investors.  SkyGrid has developed this for investor use and investor use only and it shows.
  • It even follows Twitter streams where more and more investment content is being shared

Cons:

  • This may be another case of coming to a knife fight with a gun or a solution looking for a problem.  I found the amount of information hard to digest.  As an hedge fund analyst, I was paid to discover profitable investments.  Does actually having this amount of information make me better at that?  I’m not convinced.

Building News Streamsskygrid_portfolio

Because SkyGrid is a smart, content aggregator built with investors in mind (as opposed to some of their competitors that are merely trying to sell to investors), SkyGrid has some interesting functionality when it comes to customization of news streams.

  • Uploading tickers of portfolio: for institutional investors monitoring lots of stocks, the ability to upload a list of tickers makes it really easy to set up
  • Sector analysis: I like what SkyGrid has done here.  Instead of using old-hack sectoror industry number/jargon, SkyGrid allows investors to monitor sectors the way they think about investing in them.  So, no “information retrieval” for “web portals” or “hardware components” for “consumer electronics”.  This isn’t trivial and is quite useful.

Pros:

  • customizing a news stream is really easy on SkyGrid.
  • upload function is really helpful for professionals or retail investors monitoring a lot of positions
  • sector tools approach industry analysis the way investors do, not like the Dewey Decimal system does
  • Good filter system gives users ability to tune out blogs, mainstream media, news wires, etc.

Cons:

  • I’d like more help here with idea generation.  For many investors, they know exactly what they want to monitor.  Others need help.  Maybe pre-seeded news streams with commonly held stocks could help.  Or maybe seeing celebrity investors’ news streams could help prod users for ideas.  I think more work here will help many retail investors as well as professionals who are less web-savvy.
  • While the filtering provided allows investors to tune out certain types of sources, it would be more interesting to filter out specific sources.  Maybe I’m interested in TechCrunch.  Or maybe I’m not.  I’d like to be able to decide as I go to amplify or drown out certain sources.

Social components

There are a few important components built-in on SkyGrid that connects the platform to the greater whitespace of social networks:

  1. Each of the streaming headlines can be easily posted to social networks like Twitter, adding to the virality of the platform, though it’s unclear to me if there are any beneficial network effects for users by having additional users on the platform (it’s clearly good for SkyGrid’s marketing and distrubition).
  2. The customizable news-stream can be shared out with others, much in the way content aggregator, Alltop allows users to create my.alltop.com (see my.alltop.com/zackmiller, as an example)
  3. Users can rate that they like certain articles.  These articles are then tagged so users can revisit them.  At the aggregate level, there is even some rudimentary ranking of top favorited items.

Pros:

  • Basic sharing functionality outside of the SkyGrid platform onto social networks.

Cons:

  • There don’t seem to be any (easy to find, at least) internal social components.  I’d like more insight into others’ news streams.  That voyeurism works well for me and on the web in general.  We’re seeing portfolio peeking in expert investing communities, like Covestor.
  • analytics: I can’t put my finger on it exactly but there is probably some interesting stuff to be done here with meta information that would be useful for investors.  I’d like to see some data (ie., 76% of articles on Apple are normally positive, today shows only 25% — maybe the beginning of a turn in sentiment)

New Rules of Investing Overall Ratingraiders-sword_l

UsabilityPass +

SkyGrid does everything it purports to do.  It’s a great user experience to have an ongoing conversation stream of all the stocks and sectors in one’s portfolio. The filters are great — read only that content that’s pertinent to a shareholder.  The rest is just noise and SkyGrid tunes it out.

New Rules Meter:    Pass-

This is a level of how Web 2.0 the site actually is.  The site scrapes and analyzes content really well but doesn’t do a great job of sharing/producing content withing its own 4 walls.  Unlike Twitter, which combines both external content and commentary on top of it, SkyGrid seems a pretty static environment at this point.  Because we’re dealing with financial information, this could certainly be by design but it would be interesting to create some type of network effect, where users can also create content and share.

Needs Fulfillment: Questionable

It’s here that I struggle.  SkyGrid does what it does quite well.  I’m just not convinced anyone really NEEDS it.  Combine a chintzy Yahoo Finance with StockTwits and a good blog aggregator like Google Reader and how much do you really miss?  SkyGrid is another program that demands attention.  I like to keep a separate window open on a separate screen from where I’m looking just to let it scroll — much in the same way I use the Twitter client, TweetDeck.  I like it but just not sure how ultimately valuable this is.  It’s like half-listening into a conference call or letting CNBC play in the background.

That’s just me — what do you think?  What are your perspectives on SkyGrid?

I’m going to use a future post to delve into the business model — turning an institutional-grade investment platform into an ad-supported thin client.  Stay tuned.

SkyGrid has made free accounts available to New Rules of Investing readers.  If you’re interested, go here to sign up for a free account: http://www.skygrid.com/reg/?id=8x89a9e3

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WSJ is wrong about the future of investment research

Very interesting article yesterday at the Wall Street Journal.  Entitled, “Stock-Research Reform to Die“, the article describes what’s happened in the wake of Eliot Spitzer’s landmark settlement against Wall Street brokers in 2003.

StockResearchUnderusedByRetailBrokerageAccording to the WSJ, this settlement was part of a wider Wall Street wrist-slap against ingrained culture that issued “overly optimistic stock research in order to win investment banking business.”

One of the results of the settlement required major brokerage houses to spend $460+ million on independent stock research for their clients.

The WSJ’s conclusion: six years later and almost no clients are using independent research.

At Credit Suisse, which has mostly institutional clients, the number of times retail clients accessed independent research from the firm’s Web site ranged from 16 during the third year of the settlement to 110 the first year.

At the old Salomon Smith Barney — now part of Morgan Stanley’s Morgan Stanley Smith Barney — its roughly 4 million retail households accessed about 12,000 reports each month. Less than 2% of Goldman Sachs Group Inc.’s Private Wealth Management clients likely downloaded a report each month, according to data from the public reports.

The WSJ mentions 3 reasons why investors haven’t taken up independent research at their broker:

  1. investors rely upon their brokers to act as a screen:  While 11% of brokers consumed independent research at least occasionally, they typically don’t send independent research out to clients.
  2. investors don’t rely as heavily on stock research today as they used to: “In the late 1990s, a positive report from a hot analyst could send a stock soaring. That effect is more muted today.”
  3. structural changes away from brokers to advisors: Commission-based business is old-school.  It’s been replaced by fee-based professionals acting as advisors.  There is less emphasis on trading at the retail level and less need for this type of research.  Combined with chinese walls going up between brokerage and investment banking, banks are cutting back on research teams as research becomes harder to monetize without the tie-in with banking.

Just wanted to chime in with a couple of comments:

  • I agree that full-service brokerage clients rely upon their brokers to act as screens.  That’s why they pay them and why they work with an advisor.  The vast majority of clients do not know how to read research or want to be bothered.  They want a quick synopsis why they should own a particular stock and for that, the broker acts as a type of well-heeled Cliffs Notes.
  • Maybe investors weren’t even aware that independent research was an option?  Do they know why it’s important?  Are investors aware of the biases which still exist in sell-side research?
  • Why depend on the guilt party to distribute the cure to the sickness?  That’s nuts.
  • Totally disagree with the fact that investors don’t rely on research. I would say that it’s more accurate to say that given historical conflicts of interests, investors no longer trust institutional research.  Given the gaping void left by Wall Street and the rise of financial bloggers and aggregation sites like SeekingAlpha,  many investors are actually consuming more research on more companies than ever.  We’re in a Renaissance/Gold Run/Bull Market for investment content — it’s institutional research that’s not finding its footing.
  • It’s hard for brokers today. Without an edge in research or asymmetrical information, it’s hard to push stocks and get paid for it.  That’s why many brokers have become mere wolves-in-sheeps-clothing: they’re still brokers but get paid as advisors.  We’re also seeing the emergence of true financial fiduciaries who work extremely hard for their fees and performance for clients, in up and down markets.   These advisors are doing real research or hiring people who do and they’re the ones consuming the research, not clients.
  • I think we’re seeing the investment field changing so quickly before our eyes.  On one hand, we’re seeing investors go boutique and sign up with independent financial advisors.  This is like more full-service than full-service.  On the other hand, we’re seeing investors retake the reins of their portfolios and managing things on their own — classic DIY investing online.  There is also a middle ground of investors who want more control but also want professional advice to support them along the way.  Regardless of the model, someone is consuming research, whether it’s the client or the advisor.
  • We need new business models to foster more independent research to fill the gap left by Wall St.’s void.  Tools to rate accuracy and trust-worthiness.  Performance.  From individual positions in a portfolio to the dynamics of portfolio management in general.

Interesting to see that most of the firms polled in the WSJ article were not planning on continuing distributing independent research.  Some have jettisoned research while others are bolstering their efforts.  That still leaves a tremendous opportunity out there for anyone who can provide actionable advice to the majority of investors out there.

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E*Trade further blurs lines between full-service and DIY investing

Full(er) Service and DIY Investing: Investor Fork in the Road

There is no doubt we are witnessing a wholesale exodus of assets out of full-service brokers like Merrill Lynch and Smith Barney. These assets seem to be finding two very different types of homes:

  1. boutique investment advisory houses: Built by brokers/advisors who themselves have defected from the large wirehouses, these firms take service and advice very seriously. In some sense, they’re a further move into full-service. They are competing head-on with traditional brokerages by upping the ante on technology, service and investment advice.  Investors who feel slighted by their advisor and want the extra hand-holding find this model really attractive.  It’s interesting to note that many of these firms are being founded/built by traditional brokers evolving to this model.
  2. online brokerages: Firms like E*Trade and Ameritrade are taking the bulk of this business.  In the wake of the financial tsunami, some investors are looking to take back investment decisions and don’t want to pay someone else for underperformance.  Proof of this is in capital flowing to online brokerages.  E*Trade reported that it had net new accounts of almost 30,000 in the first quarter of 2009 with $3.5 billion in net new customer assets.

I’ve written about the emergent trend towards high end investment advisors and how traditional stock brokers are resurrecting themselves and building smaller, nimbler firms with their billion-dollar books of business.  I’ve spent less time discussing how online brokers are luring assets.

Online Advisoretrade_onlineadvisor

I had the opportunity last night to have a guided demo of a recently-launched E*Trade product, Online Advisor, with E*Trade’s Liat Rorer, VP of Investment Products.  Online Advisor, developed as part of E*Trade’s newly-minted Investor Resource Center, is a nifty little financial planner-in-a-box.

In a quick and easy 4-step process, Online Advisor: Continue reading

WSJ: Navigating online personal finance sites

I’m not particularly a fan of these Mainstream Media (MSM) overviews of Internet tools.  I find, more often than not, that they’re typically short on analysis and don’t help investors really navigate what’s really out there, why these tools are important, and how investors are successfully using them.

This short video piece (2:45) ran late last week on the Wall Street Journal’s website (sorry, couldn’t get the video to embed for some reason).  It’s a cursory overview of some sites focused on personal finance (Mint, Wesabe) with the perspective of more people wanting/needing to take control over their finances and investments in light of the recent financial tsunami.  The interviewee is Shelly Banjo, Dow Jones Newswire’s reporter on wealth management.

A couple of sites are mentioned explicitly.  Simplifi, a site that helps investors build their own financial plans, is mentioned as a good resource for do-it-yourself investors.   Covestor, a tool that allows investors to see what others are actually doing with their investment money, is cited as an important site “so you don’t have to take advice from some financial advisor trying to sell you something”.

Frustrating to see MSM’s  quick gloss-over of security and privacy issues.  When asked about security with some of these sites, Banjo responds, “It’s OK.  These sites have to be secure so people will use them.  So, they’re OK.”  In a way, she’s right.  No one would use these systems if there was a likelihood that his entire financial history and net worth made its way online.  Security is an important issue — I don’t think it’s enough to reason-away security issues.  Be sure to check security/privacy policies of any site you may consider using for online investing/personal finance.

Anyway, also check out Banjo’s “The Best Online Tools for Personal Finance” that ran in today’s WSJ.

Piggybacking investing gurus just got easier

AlphaClone is probably the best research platform out there for investors looking to recreate, or “clone”, portfolios developed by leading hedge fund and mutual fund managers.

money-laundry-with-water-reflection-effectAlphaClone is Mebane Faber’s online foray that implements much of the research he recently published in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. It’s a good read and AlphaClone has Faber’s extremely-well researched homework embedded in its pixels.

AlphaClone has now taken its platform one-step further and partnered with Folio Investing to make it even easier for investors to implement the piggyback approach by allowing:

investors to buy an entire portfolio of securities at once with one transaction, and have any dollar amount automatically distributed at the proper percentage weights across all of the stocks in the portfolio.

You can see the Folios for portfolios like the Tiger Cubs and Berkshire Hathaway here.

AlphaClone also launched a clone for a portfolio designed by the popular investment blog, MarketFolly as well.

According to AlphaClone:

Marketfolly’s prefered clone from its new group is the Top 3 Holdings clone which is up 15% year-to-date and has returned 20% annualized since 2000 (yes 20%).(5/29/09).

Not too shabby.  AlphaClone is moving further into this space and will be launching more clone groups developed by stock bloggers.  This is another important way to bring transparency to the financial blogosphere and bring quantification to some of the leading voices out there.

More Resources:

New usability study reveals IR websites score really low

Jakob Nielsen has been writing about web usability since time immemorial (or at least, 1996).  I frequently recommend anyone thinking about writing for the Web, sending marketing emails or designing websites to sign up for his weekly alertbox at useit.com (For another oldie, yet goodie, I typically include a suggestion to check out Philip and Alex’s Guide to Web Publishing, as well).

Nielsen’s Nielsen Norman Group conducts usability reviews and puts on conferences for a variety of different fields.  So, it’s when Nielsen comments on Investor Relation websites, I take note.  You should, too.

In a post today, entitled Investor Relations (IR) on Corporate Websites, Nielsen reveals the results of usability studies his firm conducted on 52 different company websites (there are some very recognizable names in this list).

For the study, Nielsen looked at 4 types of users (3 professional, 1 non-professional):

  1. institutional investors
  2. financial analysts
  3. journalists
  4. individual investors

The Usablility Guru’s takeaways for most IR websites?

  • professionals don’t rely on a company’s own website for financials: As a professional investor, I rarely surf to a corporate website to retrieve data.  That I get from Bloomberg, Reuters, CapIQ or even, Yahoo Finance.  I do use corporate websites to access company presentations (see next point) or for small caps with little other information accessible publicly.
  • professionals do like company spin in as much as it weaves an investment story or thesis: Most financial data is easily available through other aggregated sources which allow investors to run quick calculations or valuation analysis.  Instead, professional investors use corporate IR sites to get a gut-check on the company, browse recent presentation.  Here, institutional investors are looking for context, not data.
  • individuals actually read very little text on IR websites: Using eyeball tracking studies, Nielsen concluded that individual investors don’t actually read all that much online.  This jives with Nielsen’s thesis that web users in general have different consumption habits when it comes to information.
  • PDFs may be an easy way to post content but stink because they were developed for print: PDFs allow corporations to easily post financial communications to the web but because they were developed for print, the format requires readers to flip through the document aimlessly.  People don’t read this way online.
  • webcasts gaining popularity but suffer from being too long and a lack of descriptive information regarding their contents: More and more companies are using a video format to post financial communication but according to Nielsen, “[users] like shorter videos to get a sense of who the executives are through facial expressions, tone of voice, body language, and so on.”
  • PowerPoint still works!: Although developed as an offline presentation method, users are still receptive to downloading and reading PowerPoint presentations versus watching video.  As one user said, “This video is 28 minutes long. I spent only 5 minutes to go through [the slides]. If possible, do a separate online presentation. Make the online version easier to understand — shorter.

Given the findings, I’d like to enumerate 10 suggestions (including some of  Nielsen’s own) to make IR activity more successful (providing the right information in the right format, useful to investors):

  1. PDF doesn’t work for financial communication.  Use a more flexible, web based presentation technology like SlideShare.
  2. Design IR websites with both institutional and individual investors in mind. They have different needs.  Accommodate both.
  3. Free your content.  Take video, PDFs, and PowerPoint presentations and upload them to YouTube, Scribd, and SlideShare.  These formats overlay real web usability to make these formats more accessible to investors.  YouTube even has basic annotation functions to bookmark important sections of video to enable users to skip around.
  4. Since users don’t read online, IR websites can improve usability by making it easier for users to find things.  Chop up text.  Use bold and italics judiciously.
  5. Weave an investment thesis.  Don’t think that investors can do this on their own.  Write the web copy to help promote the story behind your stock.
  6. Stock charts are helpful, but they need to be simple to use and easy to understand.  Consider using an embedable, annotated chart like these.
  7. Get CEOs out from the corporate boardroom and conducting interviews in public.  Investors really use these as an input in their investment decisions.
  8. Tap the blogosphere by making your company’s information easy to find and easy to share.
  9. Consider getting a video editor to chop up presentations into 3 minute chunks.
  10. When you post video, make sure that there is a clear description of what the user should expect to see by watching it.  Time is precious and you must convince browsers that watching your videos is worth their time.

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