The Best Online Brokers of 2014
The stock market’s surge produced a new set of winners. Key figures explain their strategies and outlooks.
By THERESA W. CAREY
March 15, 2014
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Scott Pollack for Barron's
Rising stocks are everywhere: They’re on your desktop, your laptop, your tablet, and, increasingly, your phone.
Small investors can rightly complain about lots of things, but they can’t gripe that the historic 173% five-year gain of the Standard & Poor’s 500 was out of their reach. It has literally been at everyone’s fingertips. Online brokerages estimate that, on average, 15%-20% of retail trading now takes place on mobile devices, most of them Apple products that aren’t much older than the bull market.
The thinking among brokerage executives is that investors use their smartphones to track the market and place trades during the business day, but once the sun sets, the tablets come out. Tablets give users more real estate on which to manage their portfolios, learn about the markets via streaming video, conduct research, and think up tomorrow’s trades.
“It’s clear that the devices we use, and the ways that we use them, are fundamentally changing, and that provides investors with room for growth, limited only by the creativity of the tools we provide,” says Ram Subramaniam, president of Fidelity Investments’ retail brokerage business.
IN RESEARCHING Barron’s 19th annual ranking of the best online brokers it was clear to us that personalizing each client’s trading and investing experience, regardless of time or location, was becoming a reality. It’s more than just hardware. Our top brokers let you customize everything from your trade ticket to your portfolio analysis reports, speeding you through placing orders while helping you – understand your gains and losses.
“Clients are getting to the point where they want a robust mobile trading platform with cloud capability that can parallel their desktop trading platforms,” says Steve Sanders, an executive vice president of marketing and product development at Interactive Brokers.
In poking and prodding various Websites, downloadable systems, and mobile applications to see what they could do, we realized that some brokers have reversed the development process: They create mobile applications first, and then adapt them to work across their other platforms.
For instance, TD Ameritrade’s Mobile Trader allows you to set up a column listing your positions, and gives you the ability to assess your portfolio against any index or stock. Once it’s created, the same display shows up when you log into the Web platform.
It’s remarkable when you consider that cellphones’ financial applications were initially thought of as nice ways to check an account balance or a closing stock price. Today, you can even place a multileg options trade on your iPhone or Android.
The bull market, along with the proliferation of electronic distribution venues, made 2013 a good year for most brokers. Overall, there was a 21% increase in stock and options transactions for the online brokers who report those figures. Our review includes a new firm, Livevol, but another new outfit, ZacksTrader, launched too late for inclusion in the ranking that accompanies this article. The pace of buyouts in the online brokerage industry has slowed, following TD Ameritrade’s takeover of thinkorswim in 2009, Charles Schwab’s purchase of optionsXpress in 2011, Capital One’s acquisition of ShareBuilder in 2012, and the TradeKing merger with Zecco that same year. The most recent takeover was of SogoTrade, acquired by a group of private investors who plan to direct it toward Chinese investors looking to buy U.S. securities.
THAT SAID, IT’S STILL a very competitive, price-conscious marketplace that could lead to more deals, especially with brokers’ share prices surging (see accompanying chart), adding to the impetus for corporate growth. “Further consolidation may occur as an ever-more-costly regulatory environment puts pressure on broker profitability,” says Sanders. He believes that fully automated firms that can utilize economies of scale will prosper. Low fees and low interest rates make it tough to gain entry to the business, notes Jim Swartwout, president of tradeMonster. However, he adds: “Small players will continue to look for innovative ways to deliver services.”
Today, that means offering mobile to stay connected with customers – or possibly connecting with someone else’s customers. Only three of the 20 firms in this year’s survey don’t have some sort of mobile application. In fact, a handful declined to participate because they wanted more time to create or upgrade mobile capabilities.
“Mobile investing is still in its infancy and is much like Internet investing was in the late '90s,” notes Swartwout. “There is substantial upside for high-quality, well-designed platforms to continue to gain market share via mobile.”
So who’s doing the best job for investors? Four of the 20 brokers we reviewed this year earned 4½ stars out of a possible five. They are Interactive Brokers, tradeMonster, Place Trade, and TD Ameritrade.
Recognizing that your trading and investing style may differ from our model, we also identify the top online brokers in six categories – high-frequency trading, in-person service, international investing, long-term investing, services for novices, and options trading – to help you decide where you should open (or transfer) an account. We show the brokers that were at the extremes when we calculated the monthly cost of trading for infrequent traders, as well as for those who trade multiple times per day.
Barron’s has tried to make the selection process a little easier this year. We’re providing readers of Barrons.com with separate side-by-side comparisons so you can see how our numerical totals were arrived at and how stars were awarded. You can not only see our firm grading for, say mobile offerings, but a breakdown of what specific mobile platforms an individual online broker supports or whether its mobile platform allows trading of foreign stocks, for instance. We start with our top, 4½ star, brokers and then proceed to the rest, each grouped by their star ranking. It’s the most comprehensive review we’ve produced.
Based on Barron’s numerical calculations, Interactive Brokers (interactivebrokers.com) claims the No. 1 spot overall for the third-straight year. The firm has continued to improve its standard downloadable platform, and has updated its mobile offerings so they can be personalized by clients. New tools for options traders include Strategy Builder and Option Strategy Lab, which help you formulate and then test the suitability of strategies. Both tools explain what they’re doing in plain English, so you also learn more about options trading.
We also like Interactive Brokers’ new Probability Lab, which translates a stock’s options prices into the market’s price forecast for that particular equity. For instance, let’s say you’re considering trading some Tesla Motors (ticker: TSLA) options. You would enter your price forecast for the stock, and then the Probability Lab calculates the odds that your target will be reached. You can build a strategy with the highest expected profit, based on your forecast.
The online broker’s upgrade of its Mosaic trading platform lets a user set up multiple trading layouts using tabs, which means you can build work spaces based on a task or a trading style. For instance, you could collect all of your favorite research tools under one tab, and switch to it quickly when you need those capabilities. There’s an iPad look and feel to the new layout, making the transition from mobile device to desktop a smooth one.
LESS-FREQUENT TRADERS, who’ve never been the firm’s target audience, may find themselves more interested than they were before, because Interactive Brokers recently waived its $10-per-month minimum for those with $100,000 or more in their household accounts.
In the past, we’ve shied away from recommending Interactive to anyone who isn’t a big trader because its tools and offerings cater more to hedge funds and registered investment advisors. But today, it offers a lot more support to new clients, including individuals, especially those with larger accounts. Yes, using the word “support” in the same sentence as Interactive Brokers (without the modifier “dismal”) is a change for us, but the firm has clearly made this a point of focus.
Interactive Brokers continues to have extremely competitive pricing, and the lowest margin fees of any broker in our survey. You may incur some data fees, but the firm takes care of any options-exercise costs, which can generate unexpected fees at many other brokers.
TradeMonster (trademonster.com) again takes second place, based on our tabulations. A key to its continued high ranking is the firm’s success in bringing desktop functionality to mobile devices. The tradeMonster experience remains relatively consistent, regardless of where you are. The firm’s recently launched mobile liveAction market scanner, which offers a wide variety of technical and fundamental scans, can now be run on iPads and iPhones and will soon be available for Android devices.
One of our long-running favorite features, tradeCycle, also has been extended to mobile platforms. TradeCycle brings discipline to the trading decision by including extensive analysis of the potential transaction’s profitability, and allowing the creation of an exit strategy. It includes context-sensitive help, so you can be prompted to make your next move, regardless of where you are in the platform. Just click on the question mark visible on each screen, and you get an explanation.
TradeMonster lowered its equity commissions by $2.55 on March 3, to $4.95 per transaction, making its fees extremely competitive. The online broker integrated futures trading into its platform on March 11, along with lots of related educational materials. Previously, futures trading required a separate login. The firm also has rolled out a futures ladder tool called Vertigo, along with 11 order types for futures trading. Futures traders sometimes must guess at what a potential transaction will do to their margin balances and buying power, but tradeMonster’s futures platform has real-time calculations for both built in.
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For options trading, which is the firm’s focus, a long list of new features has been added. Among them: inclusion of nonstandard options (minis, jumbos, adjusted options) into all of the platform’s tools. All quotes are streamed, including options chains and calculations that affect the risk profile of a strategy, so you’re always using current data.
New features in tradeMonster’s streaming charting package include the display of options trades, which is fairly rare. You can even see a spread’s price history in the options charts.
TradeMonster’s strategySEEK forecasting engine lets you drill down into specific events, and the firm has added a lot of firepower to its servers, so that additional screens can be run. We like this platform for its consistent look and feel across devices, and for its holistic approach to buying and selling.
IN THIRD PLACE is a full-service brokerage built on the Interactive Brokers platform, Place Trade (placetrade.com). Its fee structure is slightly higher than Interactive Brokers’, but it offers more service amenities.
CEO Sarah Place notes that her firm added some a la carte financial–planning services, which work for either online or full-service clients, even if they don’t have a Place Trade account. “We have been able to help out some people who felt that other firms were not interested in helping them or giving them unbiased advice,” she says.
Interactive Brokers’ suite of tools for registered investment advisors allows firms like Place Trade to use the technology while wrapping it in a different level of service. Place Trade’s clients range from totally independent online traders and individuals who use the full-service functions to mutual-fund and hedge-fund traders, as well as other financial institutions. Place Trade says that clients can buy and sell on their own or ask for as much advice as they want. Full-service commissions, which start at $15 a transaction, kick in when you bring a financial advisor into your decision-making.
TD Ameritrade (tdameritrade.com) takes the fourth spot in our numerical ranking. This brokerage has altered its development strategy in the past year and is one of those that creates features for mobile trading and then drives them back to the desktop platform. The mobile emphasis is supported by TD Ameritrade’s trading and account statistics, which show that almost half of its new customers download the mobile app before signing on to the desktop. A growing percentage of TD Ameritrade’s customers are mobile only – it’s still under 10%, but the percentage is on the rise.
TD Ameritrade has created a nearly seamless way of working on multiple devices. A watch list you set up on your iPhone can be used the next time you sign onto the desktop. You can share charts across -devices, as well as test trading ideas on any platform. TD Ameritrade’s recently launched Android app isn’t quite as powerful as the iOS apps, but it has most of the features, including customizable charting.
The most powerful platform in the suite, especially for options traders, continues to be thinkorswim, which came to TD Ameritrade via the 2009 acquisition. It can be personalized. Options statistics display where orders are executed relative to the bid and ask price, which can give you clues to future price movements. Most screens in thinkorswim include a button labeled “share,” which lets you post to any social-media site a link to the chart, watch list, or news item you’re looking at. If you share with another thinkorswim customer, the entire screen is duplicated on that person’s desktop.
TD Ameritrade’s revamped Website was rolled out slowly in order to avoid shocking established customers, but the more modern layout makes finding features much easier. It uses a grid framework and -includes a consolidated search function that can locate anything, from ticker symbols to tips on using a particular piece of technology. Most functionality can be accessed from a single screen. There’s no need to click through multiple menus.
Educational programs are a real strength at TD Ameritrade, which organizes them by topic. They include a variety of high-production-value videos that are arranged into playlists. As you watch these playlists, you earn points that can be swapped for books, commission-free trades, and other interesting stuff.