In response to the big news weekend in the financials sector, some clients have expressed concern about how this crisis might affect their TradeKing accounts. I’ve blogged on this subject before when the mortgage and credit crises first broke, but it seems an update is in order. Let me put your minds to rest with a few relevant points.

TradeKing has absolutely zero exposure to the U.S. real estate market and related mortgage-backed securities. That’s been true for us from the beginning, but it bears repeating.

We’re a straight broker-dealer, not a bank with vulnerabilities in its loan portfolio or a market-maker making speculative investments. We make money from trading commissions and margin and other asset balances, and very small amount in payment-for-order-flow – period. It’s a fairly straightforward model that luckily shields us from much of the current turmoil. (Read more about TK’s business model here.)

TradeKing has a strong and stable financial profile. We’re a thriving private company with strong financial backers. The credit and liquidity issues impacting other firms right now have not impacted our liquidity, and there’s no reason to anticipate that they will.

TradeKing accounts are protected. We are a member of the Securities Investor Protection Corporation (SIPC) and provide additional $25 million of coverage per client through supplemental coverage from Lloyd’s of London. Read more about TradeKing’s commitment to security and account coverage here.

TradeKing was built from the ground up to protect our clients from undue risk. You can see that thinking in everything we do -- from our outstanding account coverage, to our advanced secure log-in, to our intense focus on helping clients take advantage of options trading, a skill that can help investors succeed in up, down, sideways and highly volatile markets like the one we’re seeing now.

If I haven’t addressed a specific concern you have here, feel free to contact us. We welcome your questions, and we’re happy to put your mind at ease.

[image: locked steel by Darwin Bell on flickr]

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So... in layman's terms, every account holder of TradeKing would be able to, tomorrow, at once liquidate all their stocks and investments and withdraw their money?

Thanks for your comments, folks. Logomac, the answer to your question is yes. All of our accounts holders could pull out their assets from TK tomorrow and not encounter any problems in doing so. (Of course, we'd certainly be bummed out if you did that.) CNNMoney did an article yesterday on the difference between banks and brokerages in terms of failure that's a great followup to my post:
http://money.cnn.com/2008/09/15/pf/broker_leak.moneymag/index.htm

As reporter Joe Light writes, "For the most part, you really don't have to worry. Even if your firm goes under, your securities should still be there. That's because brokerages aren't allowed to use your money for their own purposes. Your stocks and bonds and other securities are segregated from your broker's other accounts...Brokers function differently from banks. Banks are in the business of investing your deposits - lending out your savings to other customers, who might renege on those loans. Brokerages, on the other hand, aren't supposed to do anything with your securities other than hold them."

The article also explains the ins and outs of SIPC account protection and makes it clear how very rare a brokerage failure actually is. Again, to quote Mr. Light: "Truth is, despite all the bad news in this economy, few brokers have collapsed. Between the end of 2006 and mid-August, only two firms - a small outfit in Orlando and another in Madisonville, La. - have gone belly up....In its entire 38-year history, SIPC has had to spend only $508 million to recover customer assets. And just 349 customers total have failed to get their entire portfolios back."

Snowman, I can't offer you quite the same level of assurance, but I can offer some encouragement and clarification. Liquidity freezes are definitely a big concern over the coming days and weeks, but if I had to guess I wouldn't think the options / derivatives market is especially vulnerable. Unlike the troubled markets and investment banks generating news lately, the options market isn't tied up with mortgage-backed securities or dependent on exotic credit instruments. Remember, when you trade options on U.S. exchanges, as investors do through TradeKing, you're trading "standardized options" (as opposed to OTC, or over-the-counter, options). Standardized options are bought, sold and traded until they expire worthless; then the cycle begins anew. They are backed by The Options Clearing Corporation, which stands in the background as the chief clearing facility for all these options instruments, having collected cash collateral deposits from all the participating clearing firms and brokerage firms. Right now there's no reason to foresee any slowdown in that regular process.

The standardized-options process differs greatly from how OTC derivatives trade between large institutions - that's the segment of derivatives trading surfacing in the news lately. With OTC derivatives, there exists what is known as "counter-party risk": because the contracts have been negotiated directly between the two parties, each only has the other party to go after to demand settlement of a trade. For these big institutional investors, there's no OTC equivalent of the OCC backing standardized options. So it's a different kettle of fish for those traders, compared to the standardized options market you and I participate in.

If anything, investors might consider adding standardized options to their portfolios in a time when simply going long on equities can be a punishing proposition. It's a mantra of mine, but it bears repeating: options offer investors strategies for profit in up, down, sideways AND volatile markets. If you've just been going long or relying on the same few trading tricks that only work in up markets, now may be the time to expand your repertoire. Options can be useful tools as you develop your investing skills.

DavidDT, sorry to hear you got burnt yesterday. Even experienced traders sometimes forget the golden rule of tough markets: trade in haste, repent at leisure. But you seem to be taking the bumps like the champ you are. Here's hoping things will smooth out in the near future!

what is the story about The Reserve Fund breaking a dollar?

Good question, spshapiro. I’ve been working on a blog post this morning that expands on this latest development, but here’s the short answer:

As you may’ve already heard, The Reserve Fund has announced that they’ve placed a redemption freeze of up to 7 calendar days for investors in one of its money market funds, the Primary Fund (RFIXX). The Primary Fund had a $785 million stake in Lehman corporate paper which is now valued at zero. That pulls the per-share value of the Primary Fund down to 97 cents. Usually a money market fund’s net asset value per share (NAV) holds steady at $1 – that’s why dropping to 97 cents is called “breaking the buck”. It’s a rare occurrence in the money-market industry and usually a sign of the fund’s distressed finances.

As you can imagine, this development is making investors nervous, whether they’re directly affected or not. Most investors consider their money-market accounts like cash. They expect full freedom to withdraw their funds whenever they want, and they don’t expect the NAV to drop below $1.

This scenario is like trying to open your piggy bank and finding out that, not only are you barred from withdrawing the money for seven days, your $100 bundle of cash inside the bank has dwindled to $97. That’s probably not what you were expecting when you stashed the money there in the first place.

MarketWatch put out an excellent story explaining this development in greater detail. Check it out at: http://www.marketwatch.com/news/story/money-market-fund-breaks-buck/story.aspx?guid={56A2CEE5-5A53-4A27-A4BA-585CFBE173A4}

I’m sure your next question is whether or not TradeKing clients are affected. The answer is yes, but to a very limited extent – 7 clients of ours had requested that we invest their sweep accounts in a higher-yielding money-market fund and chose The Reserve’s Primary Fund as an alternative to our default cash sweep. Those 7 folks received prospectuses from the Reserve outlining the risks. We’re now actively getting in touch with them to explain the situation and find out what, if any, moves they’d like to make under the circumstances.

Look for my blog post later today offering more detail, and keep the questions coming. We understand that these are stressful, uncertain times, and we’re more than happy to help you sort things out.

Thanks for the vote of confidence, corbinb2!