Online Trading and the Active Investor

Today, many mainstream full-service and online brokerages offer active and hyperactive investors special software, amenities, and low trading fees.

Active investors are often defined as individuals who place at least 36 stock, bond, or option trades per year and have $25,000 or more in assets. Some of the special services these investors receive are

Multiple order-entry screens that enable active investors to send many trades with just one click of the mouse

Low trading fees that are often a fraction of the brokerages’ normal rates

Access to IPO information for investors with high balances in their trading accounts

Access to knowledgeable representatives to discuss margin buying, short selling, complex options strategies, and day-to-day operations of various markets

Customizable software that makes the active investor’s workstation fit his or her specific needs

Special technology, such as real-time streaming quotes and Level II NASDAQ quotes

Most investors are familiar with Level I quotes. These quotes are the ones we’re all comfortable with: Bid, Ask, Last trade, Volume, and so on. Level II NASDAQ quotes provide investors with a little more information. For active traders, this information is sometimes considered essential because Level II NASDAQ quotes reveal the order book for a certain NASDAQ stock. In other words, Level II NASDAQ quotes show the best Bid and Asking price of every market participant who is publicly posting a quote. For more about Level II NASDAQ quotes, see Investopedia.com’s clearly written explanation of electronic trading at www.investopedia. com/university/electronictrading/default.asp.

Active investor trading platforms Today, individual investors have access to new desktop software that can convert your PC into an effective trading tool. Making your workstation into a trading pit by using active trading technology from full-service and discount online brokerages is truly wonderful, but it can’t compete with day-trading software that works directly with an ECN. In other words, you aren’t able to aim a transaction at a specific ECN to gain that extra .125 points in 10 minutes. This feature is the one day traders count on for their livelihoods. Active trading software is designed for gains of between 3 percent and 10 percent over several days or weeks. The following are a few examples of what mainstream online brokerages can offer active investors:

Charles Schwab (www.schwab.com) offers the Street Smart Pro trading platform. The Street Smart Pro trading platform leverages CyberTrader’s trading technology (CyberTrader is owned by Charles Schwab) and combines NASDAQ Level II quotes, real-time streaming news, unlimited watch lists, and real-time, streaming, interactive charts with account management features, risk management tools, multichannel access, and personal support. Street Smart Pro allows you to execute your trades through SmartEx, Schwab’s proprietary order-routing technology, without having to access another trading program. Commissions are as low as $9.95. For more information and a demo of Street Smart Pro, see www. schwabat.com/platforms/streetsmartpro/default.aspx.

Fidelity (www.fidelity.com), shown in Figure 5-1, offers Active Trader Pro, which is geared for households that place 120 or more trades per year. Fidelity Active Trader Services offers directed trading, streaming market data, depth-of-book Level II quotes, advanced technical filters, and real-time and historical sales figures. Wealth-Lab Pro is a complete platform within Fidelity’s Active Trader Pro software that allows users the ability to develop and back-test trading strategies based on technical analysis. You receive commissions as low as $8 per trade, as well as guaranteed one-second execution and convenient wireless trading. For more information and an online tour, see personal.fidelity.com/ products/atp/content/atsoverview.shtml.

E-TRADE (www.etrade.com) offers Power E-TRADE for active traders. Power E*TRADE is a consolidated trading command center that offers automatic routing of stock and option orders, streaming NASDAQ Level II quotes, streaming options chains, custom watch lists, streaming intraday charts, dynamic account positions, and live order status, in addition to real-time buying power, live time and sales views, intelligent alerts, speed keys, high/low ticker, market data ticker, and real-time news. The Power E-TRADE Trading Desk is a streamlined one-page trading console that lets you manage multiple stock and option orders from a single trading screen, allows you to prepare multiple orders in advance for rapid-fire trading, lets you create watch lists with customized quote updates, and permits you fast access to open orders account balances and trade records. Power E*TRADE Pro is E*TRADE’s desktop software that delivers real-time streaming market data, advanced charting, and direct access to three ECNs. For more information and demos of all three active trader platforms, go to the home page at www.etrade.com. In the search box, enter advanced trading platforms, and then click the Advanced Trading Platforms link. Commissions are $9.99 with no extra fees for stop or limit orders.

Scottrade (www.scottrade.com) offers ScottradeELITE for active traders. To download ScottradeELITE, you need to have a minimum account value of $25,000. You also need to maintain a minimum account value of $25,000 or you’re no longer eligible to use ScottradeELITE. You’re charged $9.95 per month for NASDAQ Level II quotes. Internet trades are $7 per order (add $5 for stop and limit orders). Trades placed by touch-tone phone are $12; broker-assisted trades are $17; and online mutual fund orders have no transaction fees. ScottradeELITE includes advanced charting, integrated trading tools for stocks and options, customer support, streaming NASDAQ Level II and quote grids, real-time streaming news, integrated account management tools, and technical and fundamental research capabilities.

You might be a day trader if . . . The SEC (www.sec.gov) sees pattern day traders as investors who trade four or more times in five business days. If day-trading activities don’t exceed 6 percent of the customer’s total trading activity for the 5-day period, the clearing firm is not required to designate such accounts as pattern day traders. The 6 percent threshold is designed to allow clearing firms to exclude from the definition of pattern day trader those customers whose day-trading activities comprise a small percentage of their overall trading activities. Additionally, if the firm knows or has a reasonable basis to believe that the customer is a pattern day trader (for example, if the firm provided training to the customer on day trading in anticipation of the customer opening an account), the customer must be designated as a pattern day trader immediately, instead of delaying such determination for five business days. The benefit of being classified as a pattern day trader is lower transaction fees. The disadvantage of this classification is the requirement for a higher trading account balance. Pattern day traders are required to keep a minimum balance of $25,000 in their brokerage accounts to meet NASD requirements. For details, see an explanation of SEC Rule 2520 at the Securities and Exchange Commission Web site located at www.sec.gov/rules/sro/ nd0003n.htm. Note: This rule was approved August 27, 2001. CyberTrader (www.cybertrader.com), owned by Charles Schwab, is geared toward hyperactive traders. (Trading is so frequent for hyperactive traders that they don’t want to reenter their passwords on each order entry.) What makes this Web site unique is the self-paced education and extensive glossary. The proprietary trading system is software-application-based with extras such as charts, NASDAQ Level II data, multiple ECN quotes, and riskmanagement tools. The software comes in two flavors: CyberX2 for beginners and CyberTrader Pro for the more advanced trader.