Category Archives: trading

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.

Additional Resources

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.

Additional Resources

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

Downside of piggyback investing

After yesterday’s review of the latest entry into the piggyback investing game (read what piggyback investing is and why it’s important), alphaCLONE, I came across a chart that I felt needed to be shared.

The chart below is the chart of a fabled value investor, Bill Miller, of Legg Mason. It was part of a write-up in today’s WSJ.  I recommend reading it here.

from the wsj.com

from the wsj.com

Guru investors can have years, perhaps even decades, of outperformance.  At some point, most of them fall back to the mean and either end up tracking the greater market or even trailing it.  In this case, Miller has essentially given back all his gains over the S&P 500 throughout his storied career.

Investors should be aware of this tendency to revert back to the mean.  It happens to the greatest of investors.  Very few people have outperformed the markets for a significant amount of time.

Investors utilizing piggybacking strategies always need to decide if the manager is in a temporary or permanent slump.

Check out our interview with John Reese of Validea who has been tracking certain guru strategies (like Ken Fisher and  Warren Buffett) over a multi-year period.  He’s found that while they occasionally lag the market, they typically make up the loses and ultimately outperform.

StockTwits investor experiences Twitter epiphany

Interesting how an investor relates to a deeper understanding in a portfolio company after making the investment. Roger Ehrenberg is an investor in StockTwits.  As Roger mentions in a recent blog post, StockTwits recently release a new version of StockTwits where users can insert a ‘$’ sign before any mention of a specific stock, effectively tagging the twit with a specific stock to be included on stock pages within the StockTwits site.

Roger recently quipped about a big issue he had regarding Twitter and its ability to pair-up users with the same interests.  “If StockTwits didn’t exist, it would be much harder to find people with similar interests where one could easily be inserted into the dialogue.”

Now, as more vertical applications are being built upon the Twitter platform, Roger forsees a movement “that facilitate[s] the creation of communities that interact on Twitter but can dig in deeper elsewhere (like StockTwits), Twitter’s power as an enabling platform is rapidly coming into view.”

I found it interesting to see that Ehrenberg invested before this greater appreciation of Twitter’s ability to act as a communications platform for more vertical apps written on top of it.  While StockTwits takes users part of the way — in a sense, it recreates the perennially-broken Yahoo Message Boards into a self-selected conversation with only those stocks and users allowed into the conversation  — it will be interesting to see what unfurls next.

StockTwits creates stock pages to aid in stock discovery and promote a hierarchy of experts within the StockTwit community.  Any meta information — most commented on stocks or performance metrics — would enhance the value of all the information being created.  It still doesn’t address the problem, however, of how Joe the Plumber or Bill the Doctor decides how to build and manage his portfolio.

StockTwits.com launches

StockTwits.com launched last week after a well-telegraphed development period.  Built on top of Twitter, users can use filters to hone in on the type of information they’re looking for and use a search function to search by stock ticker.  Read a quick (if not overly smug) review of the site here and Roger Ehrenberg’s take here.

SmartStops rolls out BrokerLink with TDAmeritrade

As a follow up to my post on July 17th where I profiled SmartStops and the firm’s innovative way of handling trading exit strategies, it appears as if the firm landed a whopper of a partnership with the largest online broker, TD Ameritrade.  The agreement brings SmartStops’ BrokerLink,  the “ability to have trades automatically executed when at-risk stock and ETF prices fall enough to trigger their daily SmartStops” to TD Ameritrade’s almost 7 million account holders.

For buy and holders who have seen their portfolio’s go nowhere over the past few years, SmartStops claims that its system beats traditional buy and hold strategies.  It’s interesting that Ameritrade launched this program.  As basic online brokerage services have become commoditized, any research or trading strategy that can be integrated into a broker’s platform and increase trading volume is a boon to the broker.  I’d love to see some preliminary data coming out of the partnership about trading volume and performance.

I think this bodes well for both Ameritrade and SmartStops.  It immediately gives SmartStops the credibility of a deal with a Tier 1 player and for Ameritrade, it’s great to see them expand out their research/trading platform to incorporate this type of system.  SmartStops doesn’t claim to tell you which stocks to pick — rather, once you’ve made that decision, SmartStops wants to give you an exit strategy that according to the firm, widens when market volatility goes down and tightens when it increases.  I look to both firms to sign more of these types of deals (especially seeing that the online brokers typically sign business development deals in tandem).  Sometimes this is just lazy deal making and other times, brokers and their customers don’t actually know what they want until they see it.