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Online Brokers Upgrade Retail Investor Tools

(Corrects number of commission-free ETFs offered by Fidelity in 8th paragraph and title of TD Ameritrade's Michael McGrath in 21st paragraph.)

Institutional investors can deploy ultra-high-speed stock trades and complex strategies cooked up by PhDs to make their market bets. How can the little guy hope to keep up? As part of an ongoing series on the latest tools and technologies available to online investors, surveyed the efforts by online investing sites to equip smaller investors with advanced weapons to help narrow the gap.

Websites such as such as Fidelity, TD Ameritrade (AMTD), and tradeMONSTER have come through with features that online traders couldn't have dreamed of little more than 10 years ago. New functions not only enable them to use advanced strategies such as identifying stocks whose options have unusually high volume on any given day, but also suggest ways to hedge trades. In some cases, investors can pretest trade outcomes and share trading ideas online with peers. They're even gaining access to dark pools, the private trading platforms that institutions use to execute most orders because they accommodate far bigger blocks of shares and have minimal impact on stock prices.

Institutional investors typically have access to advanced screening, charting, and analytics tools that individual traders lack, as well as sophisticated research and ways to scan the market in real time for unusual activity in stock options and regarding volatility. Obviously, retail investors are still far from having the arsenal of trading tools and techniques that big hedge funds use, but they at least have more ways to deal with an increasingly unpredictable market.

"It provides a lot of comfort so I can decide whether I like a trade from the outset" before executing it, says tradeMONSTER customer Greg Jensen about TradeLab, an analytical tool the site offers that shows how a trade would perform under specified conditions such as implied volatility. Jensen is a founder and chief trainer of investing education site Options Animal.

Do-it-Yourself Stock Screeners

Fidelity has a proprietary tool that gives customers access to 13 private exchanges with greater liquidity than the public market and lets active traders choose which trading venue their trade will be sent to. A separate Fidelity tool matches institutions' resting limit orders with customer orders that get filled at the national best-bidder offer and execute instantly. E*Trade Financial (ETFC) and TradeKing offer access to dark pools for portions of their retail order flow.

Almost all online brokers offer screening tools that narrow the investment universe from over 7,000 stocks, more than 1,000 exchange-traded funds, and thousands of mutual funds to a select few that meet investors' needs. The number of criteria for which traders can screen vary from more than 100 at Fidelity to 43 at TD Ameritrade. Strategy Builder, launched last March by online trading site TradeKing, lets customers construct their own stock screeners, based on dozens of fundamental and technical filters. Once you find stocks that meet selected criteria, you can save the screen and back test its output against up to five years' worth of historical market data, comparing how the screened stocks would have performed vs. any available market benchmark. Users can be alerted daily, weekly, or monthly if the list of stocks that meet their selected criteria changes. Sharing your screens with other TradeKing customers can generate discussion on TradeKing's own forums and spur strategy revisions based on others' input.

TD Ameritrade's online clients can screen for stocks, options, exchange traded funds, or mutual funds. The platform integrates research from Morningstar (MORN), Standard & Poor's (MHP), and Credit Suisse (CS) into the screening process. For example, a click on Morningstar Analyst Favorites brings up a short list of preferred ETFs based on whatever criteria you enter, and you can open a Morningstar report that shows an analyst's buy and sell targets and when the ETF price and rating were last updated. You can compare up to five ETFs side-by-side, based on specified criteria. Morningstar also provides a Premier List of favored mutual funds, while Standard & Poor's and Credit Suisse provide research on individual stocks.

Trading Volume Slightly Down in 2010

Online brokers are encouraging use of ETFs by offering lots of them commission-free. TD Ameritrade is the most generous, with 101 ETFs chosen by Morningstar that are commission-free as long as you own them for at least 30 days. Fidelity offers 26. TD Ameritrade plans to add "commission-free" to its list of screening criteria for ETFs in the near future.

Daily trading volume appears to be slightly down for the most part this year vs. 2009. Fidelity reports 227,222 daily average commissionable trades year-to-date through September—essentially flat, with 228,038 for the same period in 2009. E*Trade averaged 150,530 daily trades in the first nine months of the year, down 16.6 percent from 180,596 in the prior-year period. TD Ameritrade had an average of 370,000 daily trades year-to-date through September, compared with 376,000 last year.

It's hard to tell how much use online brokerage clients are making of the institutional-grade tools. TradeKing's Strategy Builder averages 10,000 client hits per month, which includes clients back-testing strategies and viewing other people's models. Roughly two-thirds of TD Ameritrade's 5.5 million clients access research reports on the platform and its clients on average perform over 1.5 million screens on stocks, ETFs, mutual funds, and options per month. (SCHW) says it has seen average monthly hits to online screeners jump roughly 250 percent over the last year since it introduced advanced options strategies and screening for implied volatility, although it would not provide exact numbers. TradeMONSTER wouldn't provide usage data but says it has experienced a large inflow of customers from other online brokers, attracted by its new tools and competitive prices.

Back-testing of individual trades and portfolios is another offering that's more in demand among retail traders. Fidelity, E*Trade, and TD Ameritrade offer these functions, which in some cases are less powerful than versions offered through the broker's downloadable software.

Experts and Traditional Research

Fidelity has broadened its research offering for online investors by coaxing such financial risk firms as RiskMetrics Group—now part of MSCI (MSCI)—and Audit Integrity into the retail marketplace for the first time. Their research enables customers to evaluate stocks according to environmental, social, and corporate governance metrics, along with financial audit risk and so-called "vice alerts," for exposure to gambling, tobacco, or alcohol. Audit Integrity gives stocks a financial audit score and shows the percentage of companies with the same score that have faced shareholder lawsuits or significant financial restatements recently. Fidelity also offers reports from Integrity Research Associates, which rates research providers, based on the accuracy of their recommendations. offers research more selectively from outfits such as S&P, Credit Suisse, and Ned Davis, as well as online seminars about how to use the research and what to look for. Schwab also publishes online commentaries by in-house options expert Randy Frederick. E*Trade Financial supplements traditional research from S&P, BNY Jaywalk, and others by encouraging social media activity. The platform links to market commentary blog SeekingAlpha and—through a partnership with the website Minyanville—Buzz & Banter, which puts clients in touch with "credible insiders" in the investing world, says Kevin Delo, head of product management for E*Trade's active trader platform.

TradeKing eschews traditional research offered by brokerages. "The online clients we serve prefer to do their own homework and research, and not read the preformatted ones," says Don Montanaro, TradeKing's chief executive officer. His platform offers free access to, which analyzes 5,500 U.S. listed companies and generates upgrade and downgrade recommendations.

Choosing Among Four Key Priorities

Getting a deeper view into market activity has become important to retail traders, who believe such tools can boost their ability to compete with institutional investors. LiveAction, a new offering from tradeMONSTER, lets traders scan the market for unusual volume in call or put options and unusually high volatility in options. Based on a customer's selected investing ideas, LiveAction's StrategySeek tool provides alternate strategies that fit the view a trader has of a particular stock. The TradeLab tool takes it a step further by letting you test your strategy before placing a trade, based on making priorities of four factors: safety, profit, the probability of a given outcome, and total return.

A more aggressive investor would want to emphasize profit and return while a more conservative investor would list safety and the probability of an outcome as his top concerns.

"Nobody's ever been able to test their strategy before they place the trade. As an individual investor, I want to know the probability of this making money, or losing money, or breaking even," says Travis McGee, director of education at tradeMONSTER.

Retail traders also want a clearer sense of what their peers are doing because stock price fluctuations mostly reflect the outsized trades of institutional investors, says Franklin Gold, who heads Fidelity's active trading business. Orders by Fidelity Customers is a tool that shows order flow among Fidelity's more than 12 million clients, updated roughly 40 times during trading hours and at least every 30 minutes. Users can get a quick sense of market sentiment by seeing the ratio of buy orders to sell orders.

Stop-Limit Orders, Trade Triggers

"It's important to see not only what investors are buying and selling, but the degree of bullishness or bearishness among them," says Gold. "Oftentimes we see retail customers buying into weakness."

On some online platforms, individual traders can place more complex trades, another advantage that institutional investors have long enjoyed. E*Trade customers can now place orders akin to buy- and sell-stop trades, triggered only when a particular index such as the Nasdaq Composite reaches a specified level.

TD Ameritrade customers can place stop orders that are triggered when a stock hits a particular price—higher or lower—and they can issue stop-limit orders that won't execute if the price doesn't hit the chosen level. Users can also place conditional orders by which money made from the sale of one stock is automatically used to buy shares of another stock. Trade triggers let you set a market condition for a trade to execute such as an order to sell a highly correlated stock if the market falls 100 points, and they set the expiration date for that trigger. Traders can "set a whole sequence of events without having to be at the computer every moment," says TD Ameritrade's director of ETFs, Michael McGrath.

TD Ameritrade gives each client a $100,000 fake account to "paper trade" until they are confident enough to use real money. It's a safe way to introduce more complex products such as futures and foreign exchange trades to customers who may not understand them much without exposing them to excessive risk. "We want a lifetime relationship with our clients. You don't want a retail investor to put on a heavily leveraged [trade]," says Peter Sidebottom, executive vice-president of product, marketing, and client experience at TD Ameritrade.

Social Media and Mobile Device Apps

Just as important as bells and whistles is the overall user experience a platform provides. Some platforms make you leave the task you're engaged in to look into tutorials if you don't understand something. TradeMONSTER lets you click on a little yellow question mark, causing the relevant education article to pop up. If you want more detail, click again for a deeper layer of detail. "All the while, you're still watching real-time quotes," and less likely to miss the trade you're trying to do, says tradeMONSTER's chief executive, Wade Cooperman.

Online brokers have responded to customers' growing demand for social media and mobile device applications. E*Trade scales its entire platform to iPhones and will soon apply it to Android phones. TD Ameritrade's MyTrade has 50,000 customers discussing trading strategies with peers and matching trades—"more than the number of people that would be listed as followers on the Facebook sites of any one of our competitors," says Sidebottom. Investools, which TD Ameritrade acquired as part of its June 2009 purchase of options education firm ThinkOrSwim, is a learning community with an estimated 40,000 members, at which people exchange ideas about what they're learning and how to get better at trading and investing. There's also a women's investing group with nearly 500 members.

With individual investors still spooked by the market meltdown of 2008-09 and by the sudden plunge in major indexes on May 6, the advanced tools that online brokers are providing could be a carrot that draws more people back to stocks—and gets them back in the habit of trading online.

Bogoslaw is a reporter for Bloomberg Businessweek's Finance channel.

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