Trading Online Brokers

INVESTORS WHO TYPE http://www.ameritrade.com in their Web browser may wonder what may pop up in the future. Datek, J.B. Oxford or National Discount Brokers customers already know how it feels to log on to their accounts and end up at a different Website from the ones they were expecting. And again the rumblings of realignment are being felt in the online-brokerage industry.

More than seven years ago, we expected “shrinkage in the numbers of Internet brokers out there. Consolidations and shakeouts seem all but certain in this crowded marketplace” (Barron’s, “Beyond Cool,” March 16, 1998). Two years later, when concluding the annual review of online brokers, a peek into our crystal ball revealed this industry forecast: “Several smaller brokers reportedly are up for sale, while other aggressive firms are burning cash furiously to buy market share. Look for consolidation in the industry.” ("Better, Not Just Bigger,” March 13, 2000.)

We were a few years ahead of the game, as it turns out. The industry ballooned to approximately 150 online brokers in 2000, just before the bubble burst, when it seemed that everyone was getting into the act.

Ameritrade went on a buying spree that took off in 2002, and after absorbing several erstwhile competitors, seriously improved its online offerings. Industry insiders have reported for a few months that Ameritrade and TD Waterhouse are talking about a merger.

On May 9, the news hit that E*Trade Financial had made an offer for Ameritrade, which the latter publicly turned down on May 12. “With seven merger-and-acquisition transactions in the past four years, Ameritrade is a leader in consolidating this industry,” said Joe Moglia, chief executive officer, in a statement. “ We will continue to explore strategic opportunities, basing our decisions on whether a transaction will enhance shareholder value and benefit our clients.”

“The board believes there will likely be further consolidation in the industry, but confirmed Ameritrade is not for sale,” adds Joe Ricketts, founder and chairman.

Are they just being coy in order to drive the price higher, or will Ameritrade continue to fly its own banner? Time will tell. In the meantime, it’s obvious that mergers and buyouts will be prevalent in the industry, as firms deal with reduced trading activity.

Officials at other brokers weighed in on the issue of industry consolidation. “We’re watching the situation and keeping an eye on it, but being privately held, we’re in a different league,” says Kelly Doria, Scottrade’s director of corporate communication. “We’ll keep doing what we’ve been doing, which is focusing on our customers. It’ll be interesting to watch and see what happens in the next few weeks.”

“We see it as opportunistic,” says David Kalt, optionsXpress’ chief executive “When you see a big deal like this one go through, it diverts the consolidating companies’ attention and will create some opportunities for us. We have historically benefited from consolidations in the past.” He adds, “We benefited hugely from Ameritrade/Datek consolidation,” which took place in 2002. Schonfeld Group President Andrew Fishman, whose firm does extremely high volume in the short-term-trading space, says the possible merger would not affect his firm. But he notes, “If E*Trade drops the ball, there will be some opportunity for my company to pick up some of their more active traders.” From figures supplied by Graham Mudd of comScore Networks, it appears that there is little overlap between E*Trade and Ameritrade’s customer bases. Mudd says that only 3% of the total 2.36 million unique visitors to these two sites visited both sites in March 2005.

Although consolidation is likely to characterize the year 2005, competition is a good thing for end-users. My initial reaction when I heard the rumors was disappointment—Ameritrade is doing so many things right these days that I’d hate to see its site completely disappear.

“Ameritrade’s site is so nice now,” optionsXpress’ Kalt says. “If E*Trade is focusing on banking, I think it will be a struggle to see which system prevails. To get the complete financial-services solution they’ll have to fold one of them.”

Based primarily on letters readers have sent to The Electronic Investor’s mailbox, I would guess that E*Trade and Ameritrade attract customers who are very similar in terms of portfolio size and trading styles—fairly well-heeled independent types—and that their customers have made deliberate choices to go with one or the other. I can imagine that current Ameritrade customers would be unhappy about being swallowed up by E*Trade, which could lead to an exodus if such a huge consolidation wasn’t done right.

If you’re worried that your online broker might be the Jonah in a takeover, consider the firms that appear to be immune from acquisition. Scottrade has firmly stated its intention to remain private and independent. Fidelity has pumped so much into its customer offerings and service makeovers in the past year that it looks safe. And Schwab’s size makes it an unlikely takeover target.

Of course, I thought Ameritrade was also safe, owing to its size and market positioning. So much for my crystal ball. As the Laws of Forecasting states, “He who lives by the crystal ball soon learns to eat ground glass.”

Scottrade’s Makeover

As this issue of Barron’s hits the streets, a redesigned version of Scottrade’s Website (http://www.scottrade.com) is hitting the Internet. Says Kevin Dodson, Scottrade’s manager of online trading platforms: “We brought in features and functionality requested by our customers. We’ve been testing the new site for 11 months now, going through multiple iterations of the redesign with actual customers.”

Navigation has been seriously streamlined, with just four tabs—labeled Home, Trade, My Account and Quotes & Research—across the top of the screen, as opposed to the nine tabs in the current system. The menu displayed on the left side of the screen changes based on which tab has been selected at the top.

The new home page displays an overview of a customer’s holdings and activity, as well as communications from the broker. Specific notices regarding the account are displayed at the top of the list, followed by Scottrade’s broadcasts below. One feature, the “quick-quote widget,” follows the customer through the site.

The main reason the number of tabs has been cut from nine to four is that all of the trading activity takes place under the “Trade” tab. The old Website had a tab for each type of trade—you’d click “Trade Stocks” or “Trade Options,” for example. This streamlining makes the site considerably easier to use.

The enhanced Website rolled out after the close of the market on May 19. The old site will still be available throughout the summer. “We’re giving people a transition over to the new site, while letting them use the old site if they’re more comfortable there,” Dodson says. He expects to shut the door on the old site by end of summer.

Posted by on 05/23 at 01:21 PM

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