Brain Weds Brawn

INVESTMENT EDUCATOR INVESTOOLS LAST MONTH acquired online brokerage firm thinkorswim in a $340 million cash-and-stock deal with intriguing possibilities.

First, it isn’t just another transaction in which an online broker exits into the arms of a bigger rival, forcing clients to adapt to an unfamiliar platform. In fact, thinkorswim may emerge larger, post-purchase. Second, the deal combines two complementary attributes—market knowledge and online-trading execution muscle—that could spur new growth at the combined entity.

INVESTools (http://www.investools.com) considers an educated investor is a more effective—and profitable—investor. The firm (ticker: IEDU) offers courses, online and live, aimed at helping investors understand how to balance risk and opportunity, and fatten their portfolios.

In fact, students brought the two companies together, according to INVESTools’ CEO, Lee Barba. A number of one-time classmates and other colleagues get together periodically to talk about stocks and strategies. One such Washington, D.C., group—primarily active options traders—had organized a conference call with thinkorswim founder Tom Sosnoff, and invited Barba to listen in.

Sosnoff stopped the session at one point and asked, “Who are you guys? You seem to know a lot about options trading.” They identified themselves as INVESTools grads. The group members suggested that Barba take a look at thinkorswim’s technology and consider working it into INVESTools teaching toolkit.

“We needed an account-acquisition engine because we hate marketing, and I think we made the best trade possible,” Sosnoff told Barron’s in an e-mail. In a letter to current thinkorswim customers, he added, “With our new partner, we won’t have to worry about morphing into a marketing company like most of our online competitors.”

Sosnoff also says this deal will double the size of his development team and that he’ll add new investment classes to thinkorswim’s existing curriculum in the coming year. Previously privately held thinkorswim (http://www.thinkorswim.com) also launched a Web-based paper-trading platform, which allows users to simulate trades and view the results.

Last month, thinkorswim rolled out Shadow Trader, which delivers streaming market commentary, including live analysis of sector trends and individual stock performance. Designed to round out thinkorswim’s option-oriented education programs, this new content, available at no additional charge, explains technical indicators and market internals, such as volatility divergences and contrarian- sentiment indicators. Shadow Trader is broadcast live via the thinkorswim software over a dedicated audio network.

Richard Fetyko, an analyst at brokerage Merriman Curhan Ford, says the purchase should allow INVESTools to hold on to more client revenue. Previously, the firm generated small fees from referrals to online brokers. But it spent heavily to acquire customers before handing them off to the brokers. “INVESTools was missing out on the recurring revenue streams that online brokers have,” he adds.

Fetyko says that INVESTools talked to several online brokerage firms. “They were most impressed with thinkorswim, in part because of the corporate culture being very aggressive on the customer side, and the high-touch customer service,” says the analyst.

Prior to this linkup, INVESTools had been affiliated with optionsXpress (http://www.optionsxpress.com). Both thinkorswim and optionsXpress ranked very high in Barron’s annual review of online brokers. Earlier this year, optionsXpress was the winner for Web-based brokers while thinkorswim was at the top for software-based brokers. Thinkorswim ended up in second place for Web-based brokers as well.

Fetyko says that INVESTools management seeks “best in class” affiliations. For example, in January 2005, it bought Prophet.net (http://www.prophet.net), an excellent online charting and analysis platform.

Barba says that thinkorswim’s philosophy is consistent with INVESTools’ regarding the importance of education. “I’m very passionate about what we’ve built and saw that same passion in Tom,” Barba states.

OptionsXpress will now lose clients referred to it from INVESTools. These folks usually qualified for the firm’s Active Trader commission schedule ($9.95 per transaction, rather than $14.95). OptionsXpress president David Kalt says the impact will be minor. “We’ve seen fewer and fewer accounts directly from INVESTools over the last six months,” says Kalt. “We have other channel partners, and we have our own educational areas.”

Kalt agrees that education is key to successful trading. “I clearly see that there’s strong demand for increased education among investors, especially about options,” he says. As a result, optionsXpress is offering more seminars and “webinars” than in the past, teaching the mechanics of deploying options strategies as a long-term investor. “The growth of online investing and online options investing will be directly correlated to educating the investor,” says Kalt.

TRADESTATION (http://www.tradestation.com) clients who trade 5,000 or more shares in a month will have the firm’s $99.95 platform fee waived for the following month. The offer begins Nov. 1. The previous minimum was 25,000 shares. TradeStation’s analytical platform, with its charting and trade-automation capabilities, is aimed at frequent traders.

Posted by on 10/21 at 08:45 AM

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