Cool tools for faster, cheaper stock trades
MSN Investor
New Net brokers like A.B. Watley and CyBerCorp put investors almost on a par with the pros by providing access to tools with real-time information and the ability to execute stock trades in seconds.
By Mike Robbins
Online investors can make $5 trades, access real-time price data and receive confirmation of their transactions in minutes or less. In short, life is good. But as any active Internet trader could tell you, it could be better. Those $5 trades don't mean much if poor execution costs you thousands in lost profits.
Real-time price data might be nice, but the current bid and ask are hardly the only pertinent information out there. Besides, without real-time executions, the value of real-time information is diminished. And just about every Internet investor must know what it feels like to be left uncertain if a trade has gone through. For the most active traders, a delay of minutes can seem like days.
Now active traders willing to spend a bit more per trade, say $15 to $25 instead of $5 to $10, can take a big step forward in terms of execution speed, access to real-time information and perhaps even the quality of execution. In fact, firms including A.B. Watley and CyBerCorp promise to put individual investors nearly on par with the professionals.
Precisely what do you get for the extra money? Actually, quite a bit, although that doesn't make this right for everyone.
Improved execution
When you place a trade through a conventional Internet broker, all you're really doing is using the Internet to contact a traditional broker. You still must rely on the broker to execute your trade quickly and at the best possible price. Unfortunately, this doesn't always occur. There is considerable debate on just how good or bad the execution received by Internet investors truly is. Brokers sometimes experience trading delays, and they sometimes sell orders to market makers who in turn might delay making the trade until they can make a greater profit -- at the investor's expense.
What firms such as Watley or CyBerCorp offer is the ability to place trades directly. No broker or middleman stands between the investor and the market. Just hit "Buy," and your trade has been placed. According to A.B. Watley, orders typically reach their destination in less than one second, and confirmation time averages between three and four seconds. This speed might not mean a great deal to the buy-and-hold set, but it's the sort of benefit that day traders love.
Perhaps even more intriguing is the prospect that executions won't just be faster, they'll be better. That's because by investing through these new brokers, investors gain access to electronic communications networks (ECN). ECNs essentially are private alternative stock markets where buyers and sellers are matched up directly. There's no market maker serving a middleman, so there's no spread. Thus, trading directly through an ECN can save an investor perhaps 1/16 to 1/4 per share per trade -- amounts that will add up quickly for active traders of large blocks of shares.
But be warned that ECNs are for the most part new; all but one began after the SEC's Nasdaq order-handling rules changes of 1997. And they still have their doubters. "You get rapid execution for ECNs, but it's not clear that you always get the best execution," says Jack Wing, executive director of the Center for the Study of Law and Financial Markets and a past governor of the National Association of Securities Dealers. "A 10-million-person ECN will offer great executions, but a two-person ECN won't. They need to achieve a certain size."
Perhaps, counter firms such as CyBerCorp, but while any one ECN may or may not offer a great execution on a given stock at any given moment, investors would be very likely to benefit if they were given the option of selecting the best price available from a range of ECNs (there recently were at least nine, although some remain quite small) and market makers -- or better yet, if the best price was found for them.
"I used to be a flight instructor, and handing this information to people is like sitting them in a cockpit and saying, 'Read the manual, then go fly.' "
-- Day trader Brian June
CyBerCorp's CyBerBroker, for example, is designed to route trades automatically to the best price currently available from a range of ECNs or market makers, or to allow investors to choose their own trading partner. Meanwhile, the ECNs are rapidly gaining the scale that they'll need to succeed, accounting for 18% of all Nasdaq trade executions in the first quarter of 1999, according to E-Offering estimates.
Still, ECNs might not be appropriate for all situations or all investors. "If you need to place a market order, then an ECN might not be appropriate," says Gary Craft, senior analyst with E-Offering. "And if you don't understand the right time or price to place a limit order, that's going to mean a lot more than whether you pay a spread."
Reams of real-time data
Buy-and-hold investors might be able to use data that's a few days old, but active trading strategies require real-time information. Yet many day traders have little real-time data beyond the current best bid and asked prices. These numbers tell only part of the story. Many of the firms offering investors direct trading through ECNs also allow investors access to Nasdaq Level II screens, a view of the market that professional traders have long employed. (Some conventional Internet brokers, such as E*Trade, also have begun to offer Level II screens to their most-frequent traders.) These screens provide not only the current highest bid and lowest asking price, but also:
Time and sales. Rather than just watch the price, investors with Level II data can see each trade happen, with the exact price and time listed for the most recent trades. "There's a definite advantage to seeing this," says Johnny White, CyBerCorp's CyBerTrader product manager. "It's what's driving the price of stocks."
Other bids and offers. Level II provides a list of bids and offers, as well as the number of shares involved, not just the best bid and offer price. This can provide a vital glimpse at the market's depth: If there are 10 listings on the top bid price, but only one listing of limited size for the lowest offer, it might be a tip-off that the price could be about to head up.
The names behind the trades. On Level II screens, market makers are identified with their bids and offers. On occasion, who's making a trade can be as informative as the price at which the trade is made. "You can start to learn what different market makers' intentions are," says White. "For example, if I see a Goldman Sachs or Morgan Stanley on the uptick, it might mean more than if it's coming from a Knight Trimark, since it's institutional volume instead of just order filling."
But be warned that putting Level II screens to use is not a simple process. Even many professional investors will admit that the first time they had access to this real-time data they over-traded and misinterpreted information -- so proceed with caution. "I think this information is wonderful," says Brian June, an electronic day trader. "But I used to be a flight instructor, and handing this information to people is like sitting them in a cockpit and saying, 'Read the manual, then go fly.' I had 20 years' trading experience when I first got Level II, and I still made costly mistakes."
Extended trading hours
With many ECNs, trades can be placed perhaps a half an hour or more before the open or after the close. This can give knowledgeable ECN investors the jump on other investors. But since liquidity can be particularly light in off-hours trading, this, too, should be approached with caution. "In the end, when you trade is not as important as how you trade," says Ray Kelly, manager of K&S Global hedge fund.
Many analysts believe that direct access to ECNs and Level II data is likely to become more common over the next two years. But for the time being, you'll probably have to go to a firm that's a bit less familiar if such services are important to you.
Among the biggest names in the business are A.B. Watley, with its Ultimate Trader, and CyBerCorp, with its CyBerBroker. Other top players include Tradescape.com, SpeedTrader and The Executioner. Day Trading Stocks.com provides a list of links to firms offering day-trading services. Prices and services vary considerably, so it does pay to shop around.
These new brokers aren't right for everyone, but for frequent and knowledgeable traders, they might be worth a look.
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