nice to see ab mentioned and the only publicly traded in the group. thanks for the alert.
October 6, 1999
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Online Brokers, Day-Trade Firms Start
To Encroach on Each Other's Cyberturf
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
If online stock trading is a fast-moving car, the rapid-fire version known as "day trading" is a race car in the Indianapolis 500 -- a supercharged subset emphasizing speed and control.
But the once-clear line between conventional online trading and day trading is blurring. Both types of companies are merging lanes and starting to fight for each other's investors now: Conventional online brokers such as E*Trade Group Inc. and Charles Schwab Corp. are scrambling to grab the business of the superactive traders, while some upstart day-trading concerns are trying to soften their edges and peddle their services to a wider audience.
It is all happening as the rate of growth in the online-trading industry slows, making all firms more vulnerable to customer defections.
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The New Guard ...
"Direct access" brokers, which until now have catered to rapid-fire "day traders," allow investors to automatically link with electronic-trading networks and the Nasdaq Stock Market, bypassing a middleman. Now, they're going after a wider market. Here are some of the largest, and some of their backers:
Tradescape.com, New York
Softbank Finance Corp., J.W. Childs Associates LP. Product will launch later this month.
TradeCast, Houston
Sid R. and Lee M. Bass
A.B. Watley Group Inc., New York
Public company, symbol ABWG
CyBerCorp.com, Austin, Texas
Completed private placement in June with groups of investors in Baltimore and Austin.
Source: The firms
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Technology has a big role in the battle. Many day-trading companies, despite their image problems, have developed new computer systems that work well. The systems allow traders to blow past the traditional speed limits of the Web, usually with professional-style software that links to the stock market directly, without a middleman. It is clear that this technology could have a wider appeal, says Greg Smith, an analyst with Hambrecht & Quist in San Francisco.
"Online brokers need to wake up to this and start adding this functionality," he says. They "need to pay attention to this technology, and build it or buy it."
The issue is tricky, because the image of day trading -- the high-pressure offices where many full-time traders go to access the markets -- has been somewhat battered recently. State securities regulators and the U.S. Securities and Exchange Commission are looking into various practices at day-trading firms, including questionable advertising and possible margin-lending violations. A recent SEC examination of 45 day-trading firms found widespread problems that could result in enforcement actions against 10 of them.
Still, many little-known day-trading brokers that also sell trading software to day-trading shops are gaining some respectability with analysts and investors. The firms, with names such as Tradescape.com, CyBerCorp.com and TradeCast, are beginning to offer their high-speed services to investors trading from home.
And they are getting noticed: Some of the firms have quietly received private financing from big names, including Japan's Softbank Finance Corp. and the Bass family in Texas. Some are also planning big advertising campaigns that could soon raise their profile.
"We're trying to make it mainstream," says Bobby Earthman, the president and co-founder of three-year-old TradeCast, based in Houston. In August, TradeCast sold a 40% interest in the company to businessmen Sid R. and Lee M. Bass for $40 million.
Often, this high-tech access is pricier than doing business with a regular online broker. For its "advanced" software, TradeCast charges a base commission of $19.95, less than Schwab's $29.95 but far more than E*Trade's $14.95 or the $7.95 offered by Suretrade, a unit of Fleet Boston Corp. There is also a hefty $280 monthly charge for the software itself, if customers don't make at least 50 trades a month.
Some day-trading shops are standing pat, content to market their services to busy full-time traders. And the majority of online investors are happy with more-mainstream online brokers that offer them relatively quick trade executions and such add-ons as stock research and fancy charts. But analysts say more serious investors could switch to day-trading firms that are courting them, because they feel they will get faster trade executions and, possibly, better prices on trades.
"There is revolutionary technology that is providing all investors with direct access to the markets that's never been available before," says Henry McVey, an analyst with Morgan Stanley Dean Witter & Co. "Definitely, the bar has been raised in attracting and particularly retaining the active-trader market."
Traditional Web brokers, as they fight back, are adding services for active traders that would have been unthinkable two years ago.
In the past four months, both Charles Schwab and Fidelity Investments have rolled out trading packages for their frenetic traders, even though both firms are simultaneously going after wealthier investors who keep more than $500,000 in assets with the firms. (Many frenetic traders often have less assets than the big guys.) Fidelity's new active-trader Web site even contains complex technical stock analysis and arcane "Nasdaq Level II" stock quotes, which allow investors to see the "bid" and "ask" prices quoted by individual Nasdaq Stock Market dealers.
Last year, E*Trade unveiled a similar whiz-bang program called "Power E*Trade," and in August slashed commissions for investors making 75 or more trades a quarter to as low as $4.95.
Though many online brokers try to play down their links to day trading, hyperactive traders are often the companies' most profitable clients, though they represent just a tiny portion of overall customers. Bill Burnham, a general partner at a venture-capital fund run by Softbank Capital Partners LP, calls it the Internet-trading industry's "dirty little secret."
Indeed, E*Trade won't reveal how many customers are enrolled in Power E*Trade. Schwab declines to say how many of its customers make 100 or more trades a year, though officials acknowledge those clients make 60% of all the company's retail trades. Such customers are a "very, very small population" at Schwab, but the company does "want very much to be there for the active trader," says Dan Leemon, Schwab's chief strategy officer.
The traditional companies, however, say that while their active customers want more services, they aren't clamoring for the full-fledged direct access to the markets that some of the day-trading companies offer. "It's not something we hear from our customers," says Tracey Curvey, an executive vice-president for electronic brokerage at Fidelity. Fidelity adds that its ranks of active investors are growing, not shrinking: Customers making 36 or more trades a year make up 4% of the firm's client base, up from 1% two years ago.
But the differences in how online brokers and day-trading outfits execute trade orders, particularly for Nasdaq stocks, can be stark. Customers essentially e-mail orders to most Web brokers, who then pass the order along to a Nasdaq market-maker, who executes it.
Usually, the Internet brokers receive a rebate for each trade order sent to a dealer under a practice called "payment for order flow." The rebates also help subsidize the rock-bottom commissions at many firms. Other companies, such as Schwab and Fidelity, actually own their own market-making firms.
The setup raises some questions about whether online brokers are always seeking out the best price for their customers' orders. Firm officials, though, generally say they closely monitor the quality of trade executions. And some big Nasdaq dealers, such as Knight/Trimark Group Inc.'s Knight Securities, note that they automatically execute the vast majority of their trade orders, often by matching the prices offered by the vaunted off-exchange trading networks that day-trading concerns love to use. Firms such as Knight also say they can fill bigger trade orders, since they handle larger trading volumes than most electronic-communications networks, or ECNs.
"Direct access" brokers, by contrast, allow investors to directly hook up with ECNs, which automatically match customer buy and sell orders. They also offer direct links to Nasdaq's SelectNet system, so investors can shoot trade orders directly to the dealer of their choice.
Some of these brokers are taking the technology a step further by building "smart" order-routing systems that automatically scan the market for the best price on a particular trade, instead of having the trader pick it out from a complicated screen full of quotations. Tradescape.com of New York, plans to roll out such a product later this month. The service is being tested, and 50,000 people have already signed up for it, Chief Executive Omar Amanat says.
There is "a much larger audience of people who would want this type of access, this type of connectivity in a simplistic, dumbed-down form," Mr. Amanat says.
Write to Rebecca Buckman at rebecca.buckman@wsj.com |
