It's 10 a.m. Do you know where your sell order is
Reviewed by Theresa W. Carey
Edited by Randall W. Forsyth
Just in time for your yearend
reflections, the SEC has implemented rules intended to provide an
overview of how brokers handle clients' orders.
SEC Exchange Act Rule 11AC1-5 requires market centers -- market
makers and securities exchanges -- to report monthly on the speed,
price and size of their orders. Rule 11AC1-6 mandates that
broker/dealers report quarterly on order- routing practices for U.S.
equities (New York Stock Exchange, Nasdaq, American Stock Exchange)
and exchange-listed options. A key goal is to eventually build a
database that will determine where investors get the most for their
Statistics for the third quarter, published in compliance with
Rule 1-6, paint a revealing picture of each brokerage. Among the
figures provided are those for the major market centers (for
instance, exchanges, specialists, market makers and electronic
communications networks, or ECNs) that receive 5% or more of a
brokerage's orders; payment for order flow arrangements, and
percentage of orders by type (market, limit and "other," including
The orders the SEC is most interested in are those considered
"non-directed," which are placed when an investor just hits the
"trade" button without telling the brokerage to use a particular
exchange or ECN. The SEC wants to see how the brokerage handles
orders when it's given free rein.
Brokerages are required to post this information publicly, though
that doesn't mean the link is prominent on their Websites. For
instance, to find Charles Schwab's report at http://www.schwab.com/, you must
scroll to the bottom of its home page and locate the "SEC
Disclosure" link under "Company Information." At Wall Street Access
you'll have to click on "Trader Education and Resources" and then
find "Order Routing" at the bottom of the menu. And the story is
much the same at all 15 online brokers whose Websites we
One fact leaps out, as Salomon Smith Barney's Guy Moszkowski
notes in a report: Brokerages with market-making divisions
concentrate their order routing internally. Schwab sent 96% of its
Nasdaq orders to Schwab Capital Markets, while Morgan Stanley kept
84% of its trades inhouse. Brokers that don't have internal market
makers naturally spread the orders around, but payment for order
flow appears to be a factor in their decisions on where to place a
trade. Datek sends 89% of its Nasdaq orders to its wholly-owned
Island ECN subsidiary.
Moszkowski analyzed 11 major brokers. He found that, on average,
44% of their Nasdaq orders during the third quarter were market
orders, 39% were limit orders and the remaining 17% were
Certain brokerages produced order mixes that differed
significantly from the average. Only 16% of the trades placed with
Datek were market orders, while Merrill Lynch customers favored
market orders 71% of the time.
Market centers have been publishing their Rule 1-5 statistics for
three months now, with numbers available for August-October. Reports
are available for individual ticker symbols. Two problems: First,
with the current system, making comparisons isn't easy. Second, the
sheer volume of information is too staggering to be easily digested.
For the NYSE alone, there are approximately 50 megabytes of data per
month to examine. That's an enormous pile of information, and one
we're still sorting through.
A key question: Will these disclosures affect investors'
decisions on which broker to use? Write us at firstname.lastname@example.org
about how important it is to know the destination of your
Analyzing risk: early this year, we
looked at PortfolioScience ("Beats
Dramamine," January 8) which analyzes a portfolio and calculates
the dollar amount by which it is likely to fluctuate daily, weekly,
monthly or yearly. The calculations let users determine the greatest
sources of risk in their holdings, based on historic volatility.
We noted that the site fell prey to that old bugaboo: the hassle
of having to enter data. You can still use the PortfolioScience
engine free if you don't mind entering numbers, as long as your
portfolio has fewer than 50 positions.
However, if you're tracking your portfolio using Excel, or are
using an online broker that allows you to download your data in the
Excel format, you can subscribe to the personal version of the
PortfolioScience Excel add-in for $19.95 per month and avoid having
to input data. The institutional version is a heavy-duty enhancement
to the free tools available to institutional subscribers and
includes covariance analysis, correlation matrices, and beta
helps investors to analyze the risks in their
The add-in tacks an extra menu onto Excel that connects your
spreadsheet to the PortfolioScience servers. You specify your
holdings and their ticker symbols, and then indicate which
analytical function you want to use. The request is sent to the
Portfolio- Science servers, where the calculations take place. Then
the results are reported back to your spreadsheet. Having the work
done offsite avoids the need to download historical data onto your
computer. Certain calculations, such as figuring the correlations
between 10 or more stocks, would make some PCs bog down in a
Says Ittai Korin, founder and president of PortfolioScience:
"Some of our clients have portfolios with 500 to 1,000 symbols or
more, so the power of having the calculation engine operate remotely
lets you harness computing power you couldn't access before."
The Excel add-in lets you insert a calculation into a
spreadsheet, to instantly update your spreadsheet when your
portfolio changes, or let you do "what-if " analysis. Korin says
PortfolioScience is popular with hedge-fund managers. One reason: It
lets them correlate the performance of baskets of securities with
that of indexes.
AmeriTrade's takeover of national
Discount Brokers is complete, and by now all former NDB customers
should have new account numbers and PIN codes.
The deal has led to a few additions and a few deletions in
services offered. The "Same Side, Same Day" commission is gone; it
had allowed a trader to make multiple transactions on the same side
(all buys or sells, in other words) on the same day, for a single
commission. Also gone are some portfolio-analysis functions.
But the folks at AmeriTrade have added several new methods of
viewing stock quotes, including the ECN Book Quotes Tab and enhanced
charting capabilities. They've also left the order-entry screen
open, making it easy to execute a trade, and have added the ability
to route orders through AmeriTrade's proprietary "TradeScout"
Since taking over
National Discount Brokers, Ameritrade has added and deleted
some online services.
Portfolios with more than $5,000 in assets are assigned an
account executive, and holders can switch to one of AmeriTrade's
other offerings in its Private Client division, if desired.
The completion of the NDB takeover gives AmeriTrade three levels
of service in the Private Client division: AmeriTrade Brokerage on
the low end, AmeriTrade Plus in the mid-range, and AmeriTrade Pro
(formerly direct access brokerage TradeCast) for frequent