online discount brokers, part 5: Zecco

On reading reviews such as this one and this comparison, and looking how spiffy zecco.com is as a site with very Web 2.0-ish features and supporting apps like ZapTrade, I was pretty happy to try out Zecco -- my wife Anna, in particular, really looked forwards to the social networking features of the site, Twitter &c.  Opening a joint account was fast and easy, though strangely the sequence only had a way to indicate one userid for the joint account -- what part of "joint" don't they understand...?!  Ah well, we proceeded anyway, and figured out that customer support would be able to link both of our userids to the account later, as we immediately proceeded to request.

Wrong, and an incredible design bug in their software architecture: they offer no way to have more than one userid on one account, even if that account is a "joint" one.  So the part of "joint" they don't understand is: 100% -- they are absolutely, incredibly, totally, infinitely clueless about what a joint account is all about.  Especially with their social networking features, Anna having to log in as me, or vice versa, in order to access our joint account, is obviously unacceptable.  Suddenly I started having huge doubts about putting any of my money in the hands of people so incredibly clueless about application architecture -- what else had they "oops, forgotten" (or mis-designed) that we'd only find out about later, at some painful and unfortunate moment...?

I can't believe this mis-feature hasn't raised a hue and cry among the users and would-be users of Zecco yet -- hey, even flipping Merrill Lynch (hardly the top technology dog in the online brokerage arena;-) obviously offers the clearly mandatory feature of having two userids co-owning a joint account! I guess most Zecco users must be using individual accounts, not joint ones (or else they're joint just in name, and one spouse actually does all the trading -- but that's not how Anna and I work, thanks be!).

We pushed ahead anyway, figuring the other advantages could maybe make us deal with this one for a while, while we lobbied to have this absurd restriction removed.

Disappointment number 2 was, no foreign exchanges allowed, only American ones.  I guess I must have misread some review or other, because I was under the mis-apprehension that they did support trading on non-US exchanges.  Ah well, guess that's a rare feature for US brokers, and you really need to go with Interactive Brokers (and brave their fearful complexity) if you're keen to do some foreign trading (which for a permanent-resident alien like me isn't really that "foreign" -- e.g., I might have liked to try getting some of Enel Green's IPO stock at the Milan bourse... Milan doesn't really sound "foreign" to an Italian citizen, even though he may be currently residing in the US;-).  Guess I shouldn't really charge this one against Zecco in particular, but it did disappoint me at the time (no doubt because of my misreading from a review somewhere that they did support foreign trading).

Disappointment number 3, and the killer, came the first time we tried to trade options -- and found out that, despite filling all the required fields in the initial application (including trading experience, total income and wealth, the fact that we've read the mandatory brochure on options, &c) and being under the strong impression that we therefore were approved for options trading... we were not!  To get approved for options you need to fill out a paper form, fax it in, and wait -- standard operating procedure for most brokers (and not as bad as ones like Merrill or Vanguard that require snailmail and plenty of phone calls for the purpose), but their initial signup procedure (the one that was so slick, fast and inviting) was definitely misleading in the matter.

Moreover, and worse, to get approved for the "highest levels" of options trading, you need hefty account minimums, like $150,000 for some and $250,000 for others, or the like -- so we couldn't even try option trading on Zecco before fully funding the account with the highest amounts we ever planned to move there.  Worse still, like most brokers, they seem totally convinced that selling cash-secured puts is a very risky, very high-level kind of option trade -- while everybody knows, or should, that it's mathematically equivalent to selling covered calls (which they, and most other brokers, consider the safest kind of option trade).  See Ken Fisher's Debunkery book, point 13, about this idiocy (though Ken wrongly says that it's the options fans that don't get the mathematical equivalence, when it's really the brokers such as Merrill and Zecco!-).

At this point, we were already fully options-approved on OptionsHouse (which we had started at the same time as Zecco -- but OH's signup process, while a tad less fast and slick, had made it perfectly clear from the start what all you needed to get options trading approval at the various levels, so we had faxed the needed forms and docs right from the start and they had processed them expeditiously -- plus, OH had no weirdly high account minima to get approved for, e.g., cash-covered put writing). Plus, this was the third disappointment, and I'm told that (in the US, and especially in California where it's actually a state law;-), "three strikes, you're out".

So we decided to transfer the balance back to our bank account... and were aghast to see the transferable balance marked as $0 (two-plus weeks after we had originally funded the account, and well after Zecco had let us trade stocks based on that very substantial balance).  We immediately contacted customer service and got some mild handwaving about some bug in their system, and how we'd need to get in touch with them on the phone to get our money back (!) -- by this time, this was starting to smell strongly like a mini-sized Madoff case to me... what broker or bank has ever essentially refused to transfer out cash that's available in your balance, except a fraudulent one?!

Of course, the times during which you can actually talk to human beings about your account are always incredibly inconvenient for people who work (almost independent of who's your broker or bank), especially when it's a joint account so both husband and wife need to be on the call, and they work at pretty separate places during the working day -- not to mention the huge delays always involved (again, not Zecco-specific, they're all terrible -- Merrill probably the worst, as in slowest, in our recent experience).  That's a good part of why requiring phone calls (rather than online transactions) is idiotic and hateful (Vanguard is even worse at this than Zecco).

Fortunately the next morning when I tried the transfer again it did go through -- so apparently the customer service person was not lying about there being a bug in their system: looks like there was indeed a horrible, gaping bug making it impossible at random times to get your money out.  If we hadn't already decided to go away, this experience on its own would have been way plenty to convince us to: I just can't work with a bank or broker whose systems, while spiffy-looking, are so incredibly buggy as to stop me from getting my money at times, depending on the systems' whims, and I just can't believe that anybody else could possibly choose to do so, if they realized this possibility.

Maybe one day they'll fix this bug, and at least some many others they have (for example, they say they're entirely reworking their options trading platform, which apparently has many problems today -- I wouldn't know, since as I mention I wasn't allowed to trade options there, but I imagine that if even they admit it needs to be redone from scratch, it must be pretty lousy indeed... and they've been open how long, only deciding to finally fix their options trading platform by 2011?! jeez...).

But I most certainly will not be waiting around for such a time, just as I am not waiting for Merrill to get their act together and at least get me back to the level of service I got back when I did my trading directly on Bank of America (which booted me out, forcing me onto the MerrillEdge platform as they shut their own, in the summer of 2010) -- rather, I want to take my business to competitors who do have their act a little bit more together.

Fortunately, at the same time as Zecco, I was trying OptionsHouse -- and, while perfection is not of this world, I found myself much better there, as I'll tell about in my next post in this series (where I'll also mention what details on OH I found to be not perfect, and what prospects are there to see them improve soon), so that's going to be my main broker going forward (right now I'm gradually liquidating positions on Merrill and moving cash to OH -- generally much easier and faster than transferring an account as a whole; fortunately I'm not adverse to take my capital gains right now, before taxes perhaps go up on Jan 1 unless Congress manages to get its act together to avoid that, though for the same tax reason I'd rather take most of the capital losses next year instead -- that will slow things down a bit, but fortunately I have many more capital gains than losses so most of the account will be moving this year).

Meanwhile, if you're looking for an online discount broker, I recommend the http://www.brokerage-review.com/ site -- I don't agree with all their reviews (e.g., they give five stars to Zecco, as well as OptionsHouse, Scottrade, TradeMonster, OptionsXpress, TradeKing, QuesTrade -- like a rating agency slapping AAA's on every mortgage-backed derivative, a review site granting the highest stars to seven different brokers is clearly not as selective, and thus not quite as useful, as it could be;-), but they do give many details and mostly well-considered opinions.  I do find their OptionsHouse review to be mostly on-target, though;-).

online discount brokers, part 4: Interactive Brokers

If you're a trading professional, I'm sure you've already heard of Interactive Brokers -- no other brokerage service I've ever heard about comes even close to matching them for depth and breadth of offerings (including, in particular, powerful Application Programming Interfaces -- APIs -- to let you design and implement your own interactive or automated trading platforms -- if, of course, you can afford to hire a few good Java or C++ programmers, otherwise, don't bother:-).

As a kind of a "side line", they also support individual investors... though most of the time it kind of feels like a "second thought" (it probably was, come to think of it) glued on top of their main business model of serving extremely sophisticated professional needs with a dazzling variety of possibilities and the most complicated (even though probably the cheapest in most cases) array of pricing models I've ever heard of in my life.

I have to admit -- in the end, they intimidated me; just picking and choosing the specific set of options that I wanted to buy (including for example various kinds and levels of more or less real-time information on their site, each priced in complex ways...: nothing is really simple and bundled in their worldview!-) scared me off, not to mention the lurking issue of "how will I figure out how much I'll be paying in commission each time I trade -- am I enhancing or depleting liquidity, does that matter to pricing depending on what exchange or set of exchanges I'm trading on, etc, etc...?".

I may have missed out on a good thing -- maybe.  I've just joined Motley Fool's new "Alpha" service (I've long been a happy customer of some subsets of the Fool's services, and this one eventually convinced me -- a hedge-fund-like long-short real-money portfolio service, open for a very limited time to a small set of high-net-worth [[but perhaps not qualifying for an actual hedge fund]] investors, but with a fixed yearly fee [[no 2-and-20 nonsense there!-)]] and complete disclosure of the trades and their rationale, for you to replicate yourself in your own portfolio -- worlds apart from the typical hedge-fund advisors that just want you to blindly trust them with investing your own hard-earned, hard-saved cash!-)... and now I wonder if I should have signed up with IB.

You see, though decades of experience as an investor, I had actually never placed one short sale in my life -- before today (Saturday), when I tried one on my currently favorite online discount broker, just so I can check come Monday morning if it's triggered properly.  But MF Alpha is a long-short portfolio -- a big part of its attraction, of course. I'm quite familiar with all the theoretical results (and practical confirmations) about how long-short strategies can outperform "pure" ones in both good markets and bad ones, as well as with every detail of how short sales are actually handled, margin requirements, and so forth... I'd just never actually put any of this theory into practice (hey, my family kept taunting me for years because, as a kid, before actually trying to make paper planes, I bought and studied a book about their practical and aerodynamical issues...!-).

So, MF Alpha strongly recommends Interactive Brokers -- not just because of their dirt-cheap commissions and margin interest (my currently favorite broker is almost as good in these respects, as well as really much simpler!-), but specifically because IB appears to excel over all other brokers in actually getting hold of (a loan of) the stocks you're selling short, while even well-known names such as ETrade have had problems with this crucial issue in the past.  Alas, not having ever been a short seller before, that is one issue I never thought to check...!  (And when I was choosing my new broker, I had no idea yet that I'd be doing some short-selling so soon!-).

Ah well, let's hope I've been lucky this time.  But, if you can deal with the complexity that scared me off, and are really keen on substantial short-selling (or trading on all sorts of weird international exchanges, something Interactive Broker is the only cheap service to offer, that I know of), do give them a try (and let me know how well it's working, though I'm sure plenty of my MF Alpha co-members, currently busy opening their IB accounts, also won't fail to enlighten me;-).

But I, for once (as I should be more often), was humble, and in the end the choice for me boiled down to two simple, good, cheap online discount brokers: Zecco and OptionsHouse.  More about them (and how things ended up for me) in my next couple of posts!

online discount brokers, part 3: conservative option plays and the importance of cheap commissions

Many risk-takers love options and the huge leverage they can give their gambling -- but a growing number of prudent, conservative investors are acquiring a growing taste for the extra income they can give their conservative portfolio, and I count myself among the latter. Thomsett's classic "Options Trading for the Conservative Investor: Increasing Profits Without Increasing Your Risk", and simpler, breezier books such as Kadavy's "Covered Call Writing Demystified" (the latter comes, when you email requesting them, with some useful spreadsheet that I had no trouble loading into Google Spreadsheets and customizing to my preferences), blaze the way, as do websites such as this one.

BTW, Ken Fisher's new and overall worthwhile book Debunkery "debunks", in its point 13, the myth that selling naked puts is any riskier than selling covered calls -- though he omits to mention that for that purpose it's crucial to have your put entirely cash-secured [no margin!!!], and strangely seems to think the mathematical equivalence means that selling covered calls is risky, while obviously the reality is that selling naked, cash-secured puts is just as secure and conservative, and that the people needing to hear about this are conservative-investing options buffs (which is silly, since popular books by and for such readers, such as Groenke's "Show Me the Money: Covered Calls & Naked Puts for a Monthly Cash Income", show the equivalence quite as clearly and describe it in more detail) -- obviously those who need to hear it said and repeated are the regulators and the majority of brokers that make it so much harder for the investor to qualify to sell cash-secured puts, as to sell covered calls (requiring more experience, a margin account, higher minimum account sizes and/or income and wealth, or any other such silly differentiation between two mathematically identical strategies!!!)


Anyway, buying a call is like buying a lottery ticket: limited risk (just the ticket's price or the call's premium), potentially huge upside (the jackpot lottery prize, a sudden hockey-stick in an underlying price that owning the call option lets you get for a pittance)... and yet not a sensible choice for an investor, because the probability of winning the big jackpot is just too low, so the expected value of the purchase is definitely negative.  But consider that (net of commissions, and we'll come back to that key point!-) the trading of options is a zero sum game: if it's negative for the buyer, it must be positive for the seller.  The seller of lottery tickets will once in a while be giving up a huge upside (when he sells the rare ticket that happens to be fated to win the jackpot -- he could have kept it for himself and cashed the jackpot...!-)) -- but gets a steady, modest, secure stream of income through his selling, nevertheless.   That, roughly speaking, is what you can get by selling covered calls (or cash-secured puts, but despite the mathematical equivalence I've noticed that selling calls is a bit more lucrative than selling puts: maybe there are more gamblers wanting to buy calls, than ones wanting to buy puts, and option prices after all are set by demand and supply -- the underlying math matters, but doesn't entirely determine the prices in the market).


But let's get back to that "net of commissions" provision, which is very important.  In the previous post I've noticed that for a moderatively active investor/trader on stocks, like me, MerrillEdge's 30 free stock trades a month end up meaning basically free trading (say $50/year for a few trades exceeding the monthly limit out of 200 total yearly ones) while (e.g.) Schwab's commissions could cost me about $2000/year (Fidelity's a tad less, Ameritrade's a tad more, but, same ballpark).


But now consider that out of (e.g.) the 30 stocks I own, every month I may want to sell calls on about 20 (I'll use another future post to explain why you don't want to sell calls on every stock every month, and why selling monthly options is best -- at least if your commission's low enough), say typically for about 6 contracts (600 shares) each, with a typical expected profit of (again, typical numbers) $200 for the premium and another $400 if exercised (out of the typically 240 calls [out of the money!] that I sell every year, experience tells me that only somewhere between 20 and 30 will be exercised in a typical market -- fewer in serious bear markets, more in crazy bull markets -- call it 25!-); so, expected revenue around 240 * $200 + 25 * $400 = 58,000/year, about 12% of the portfolio's overall value (and _that_ 12% yield is why I'm so keen to sell covered calls!-), gross of commissions (and taxes).


But -- what about the commissions...?  With MerrillEdge's 4.95+0.75/contract (and $4.95 on exercise), they would be: 240 * (4.95 + 0.75 * 6) + 25 * 4.95 = $2391 -- call it 2400 (we're using round numbers anyway!-), reducing profit to 55,600 before taxes.  With Schwab's $8.95 + 0.75/contract (as an example, since it's smack in the middle between cheaper Fidelity and costlier OptionsXpress), and $8.95 on exercise, we'd have 240 * (8.95 + 0.75 * 6) + 25 * 8.95 = $3451, almost 50% higher cost than MerrillEdge's, reducing pre-tax profig to 54,550.  I know, no world-changing difference, but, high enough to smell bad to this skinflint!-)

Whence, the quest for cheap commissions becoming especially important for options trading (and very very frequent trading even just of stocks, of course, but that's not really my case).  I'll reveal what broker I ended up choosing a couple posts from now, but, as a foreshadow -- its commissions are $2.95 for stock trades, and $5 for up to 5 contracts (plus $1/contract over five -- there's another possible commissions schedule you can opt into, changing only before the start of the trading day, if you usually trade more than 10 contracts at a time).  So in this case we'd have 240 * 6 + 25 * 2.95 -- $1513, a full third less than MerrillEdge, and that kind of saving really gladdens my heart!-)

The online discount broker I tried next after MerrillEdge, Zecco, has commissions of $4.50 for stock trading, $4.50 + 0.50/contract for options [Merrill gives qualifying customers 30 free stock trades/month, Zecco 10, but in each case I'm assuming the free trades, just like the "first 100 trades free" &c offers of other brokers, are exhausted on trading actual stocks, before options trading and exercise is considered], so the cost would be 240 * (4.50 + 0.50 * 6) + 25 * 4.50 = $1912, only 15% more than the one I ended up with and a good 20% less than MerrillEdge -- so that wouldn't have been so bad, price-wise, it's for other reasons that I found myself really unsatisfied with them... but, I'll go into that in the next post.

online discount brokers, part 2: costlier ones, and why I eschew them

I barely looked at anything that would raise my cost of trading substantially above what I get from MerrillEdge (at what they call "Superior" status, which just means I have a good total for the amounts in Merrill and BoA accounts and/or do many trades): commissions of $4.95 to trade stocks or ETFs (with the first 30 trades each calendar month for free), $4.95 plus $0.75 per contract to trade options.

I'm a skinflint -- I don't like paying money unless I feel I'm getting full value for what I'm paying, and (ideally;-) then some. So, rates such as Fidelity's (stocks $7.95, options $7.95 + 0.75/contract), Schwab's (stocks $8.95, options $8.95 + 0.75/contract), AmeriTrade's (stocks $9.99, options $9.99 + 0.75/contract), OptionsXpress's (stocks $9.95 up to 1000 shares, a cent per share if more than 1000; options $1.25/contract with a $12.95 minimum, higher unless you're an "active trader" doing at least 35 option trades/quarter), and so on up, turned me right off those popular choices.

Some investors of an ilk quite similar to mine (prudent, conservative, fundamentals-focused) may not care -- they do very few stock trades, and never options. But me, I like for example to "scale into" a position -- buy some stock in a good company that I've decided is substantially undervalued, but not my full intended position at once; buy more if Mr Market gets even more wrongly (I hope;-) pessimistic; and so on down (possibly "filling up" on dips to the full position I always hoped to hold) -- so it may easily take me several smaller trades to build up to a position that could conceivably have been acquired at once (but dearer;-). (Sometimes, but for some psychological reason less often, I do the reverse when a stock becomes fully-valued-and-then-some so that I want to sell it).

Plus, I like differentiation -- sometimes, I guess, I overdo it a bit (say, 50 positions -- no Peter Lynch's portfolio, but a tad too broad for my stock portfolio size, which even for a keen differentiator should be fine at even half that many) -- so the number of trades to build my full portfolio is similarly multiplied.

Then there are little tricks, such as...: say that, researching some particularly interesting idea, I end up deciding that there are, not one, but two or three good companies more or less in that niche, all a bit undervalued by the market. Then, I might buy a "seed position" in each (for a total amount that's, say, about half of the final position I mean to have in that specific play); then follow carefully the market's behavior with respect to the individual companies (as well, of course, as the companies' fundamentals!) and play it by ear.

Say for example that the two companies' (A's and B's) fundamentals are and remain equivalent (for the prospects in the time frame I care most about, say the 3-5 years range typically), but Mr Market in its unending manias raises A's stock 5% (putting it that much closer to a fair valuation) while sinking B's by another 5% -- then I can sell off A, double my stake in B, and end up with a fully position in B (and out of A) substantially cheaper than I would via the "buy the full stake outright" approach. (If Mr Market did exactly the reverse, for whatever passes for "reasons" for his behavior, I'd be just as happy owning A instead -- I'm a skinflint, after all, so I focus on getting a low cost basis!-).

All of this means that doing (say) 20 or 30 stock trades in a month is not at all strange for me, and some months I even go a bit over 30. So, just for the stock, what I get more or less free at Merrill (OK, call it $50 for a few trades exceeding the 30/month quota) would cost me, say, $2000 a year at Schwab -- sorry, but for skinflint me that just doesn't feel good... why toss away every year the price of two superb laptops like Apple's new 11" Air (my wife Anna just got one -- I got the 13" version, but hers is cuter, smaller and lighter, as well as cheaper!-)? What am I getting in return for such a splurge, again?

My penchant for safe, conservative options plays makes this kind of consideration even more important -- but I guess that's better left for another, later post.

online discount brokers, part 1: why I had to start looking

On this latest spell of my life as a US resident, I started out with Bank of America's "self-directed trading" service -- nothing fancy, but usable, and I did love the 30 free stock trades per month (given that my account size met their threshold).

Alas -- this summer they automatically switched my account over to "Merrill Edge", the "Wealth Management Platform" (ha!) they got from their acquisition of Merrill Lynch.

Among many minor inconveniences, I found out I couldn't trade options any more -- had to apply all over again. I did, and found out I was only allowed to sell covered calls -- no options buying any more, no selling cash-secured puts any more (!).

Selling covered calls is my main use of options (since I'm a pretty conservative investor!), but I missed the ability for occasional buying of some puts or calls to temporarily hedge a position, and the somewhat more frequent use of cash-secured puts as an alternative to a buy limit order to perhaps purchase a stock if it goes down enough.

I nevertheless endured, kinda golden-chained by the free stock trades I guess (I'm a real penny-pincher!-), until Merrill mysteriously locked me out of my online accounts for weeks, on varying claims about "funds due" (when I had plenty of cash in the account!) or "sale-not-long" (whatever exactly they mean by that).

Phone customer service was almost invariably good (with the exception of one guy with a strong Brooklin accent who appeared to be looking for a fight, and even though he was totally clueless about what the problem was still kept trying to pin it on me), eventually excellent when we (me and my wife -- we trade usually together and by consensus) were finally escalated to a manager who gave us his direct phone number (saving us the incredibly long waits any normal call to customer support usually involves), online-rate trades ($4.95 for stocks -- he couldn't unfortunately gave us the free trades we would have gotten if actually online) rather than the ridiculous rate for human-assisted trades as long as the mysterious lock-out remained, and really bent over backwards to try to find out about the problem and fix it for us.

Alas, he couldn't -- though it eventually disappeared, as it happens, just after the settling date following the expiration date for some calls I had sold (a couple of which got exercised); so I suspect their bug may be related to the one that recorded me as selling the same covered calls twice at a few minutes' time difference (when I had stock enough to cover only one of the two sales -- and remember, I'm not allowed to sell uncovered calls, so, even had I tried -- which I obviously didn't, as I'm not crazy yet;-) -- their SW obviously should have blocked me!-).

That customer-service manager was incredibly good in his follow-through, even offering to waive the fees for account transfer to some other broker, if, given how we justifiably felt after that episode, we just wanted to get rid of Merrill altogether (which we definitely did!-).

So, I had to start looking around -- and I did, and I plan to post one or more follow-on "episodes", in the course of the next few days, about what transpired afterwards...