Interesting article. I'll post it here for those who don't subscribe to WSJ/Interactive:
Dow Jones Business News -- November 14, 1996
PT Discount Brokerage Carving Out
After-Hours Trading Niche
By REBECCA BUCKMAN
Dow Jones News Services
NEW YORK -- Autumn Henry, a California housewife who's been actively
trading stocks for less than a year, admits to being somewhat naive about the
more arcane rules of the stock market.
But when Henry watched the shares of tobacco giant Philip Morris Cos. (MO)
plummet one Friday in August after the markets officially closed, she knew she
was witnessing something unfair.
Philip Morris stock - stung by a Florida jury verdict against another tobacco
company that day - was being dumped by big, institutional investors with access
to special after-market trading systems, Henry discovered. Most individual
investors couldn't get in on the action until Monday.
''When it finally gets to the little guy, he gets the scraps,'' Henry said, recalling
how angry she was when she understood the two-tiered system, which resulted
in Philip Morris opening on Monday at 95 after closing on Friday at 102. ''I just
couldn't believe that something like this could happen nowadays.''
But now Henry, a talkative mom-turned-stock picker who follows the markets
full time from her living room, has found a way to crack that system - through
her broker.
Henry, of Newport Beach, is one of about 7,000 investors with accounts at PT
Discount Brokerage, a fledgling Chicago firm that's trying to carve out a niche
offering after-hours trading to individuals.
Customers like Henry can call PT, formerly called Pioneer Trading, and
execute trades before or after normal market hours over SelectNet or Instinet,
two computerized trading systems normally available only to securities firms.
''As long as trading is happening, we're willing to facilitate it,'' said Stephan
Schuetz, a PT managing director. About 8.5% of the firm's trades occurs
outside normal market hours, the firm estimates.
PT, a unit of John Dawson & Associates Inc., charges customers an additional
one-sixteenth of a dollar, or 6.25 cents, for every share bought or sold over the
special systems, which PT traders use throughout the day for some other
Nasdaq market trades as well.
On top of that, the firm's standard commission is $35 - higher than most deep
discounters and Internet trading companies, PT officials acknowledged, but a
cost that's worth the sizable savings customers realize when they're able to trade
within the bid-ask spread on the computerized systems.
The bid-ask spread is the difference between the prices at which traders are
willing to buy or sell a stock. Normally, retail customers must place their orders
at either end of the spread, and the trader pockets the difference.
But at PT, customers wanting to execute trades are connected directly to a
trader, not a broker, who often can get them a better deal by finding a price
between the spread on Instinet or SelectNet.
Someone who saved half a point on a 1,000-share order, for instance, saved
$402.50, or $500 minus a commission of $97.50. The commission cost is the
sum of the $35 flat fee and $62.50 for the use of Instinet.
Schuetz calls the practice ''cutting edge.''
''We believe the industry is going to have to go this way,'' he said. ''We're ahead
of the times.''
Indeed, new Securities and Exchange Commission rules due to go into effect in
January will force all firms to take steps toward offering individual investors
better stock prices.
But PT managing director Schuetz and David Arrich, a trader at the firm, said
PT will continue to have an edge over competitors because of its after-hours
trading capabilities. Demand for the service has been intense, they said; since
opening in January, the firm has gone from employing five traders to more than
20.
Market experts and advocates for individual investors laud PT's efforts to give
noninstitutional customers wider access to the market and better prices. SEC
Chairman Arthur Levitt publicly praised PT, along with several other firms, in a
speech last spring, an SEC spokeswoman said.
Still, some in the industry say the firm is catering to a small group of active
investors.
''There's probably a very, very finite audience for that (service),'' partly because
many Instinet trades involve very large blocks not normally held by individuals,
said Michael Anderson, president and chief executive of Accutrade Inc., a
discount brokerage unit of TransTerra Co. Accutrade offers electronic and
Internet trading and can sometimes get customers prices between the bid and
ask spread, Anderson said.
Arrich admits that his firm appeals mainly to intense investors such as client
Henry, who watches CNBC from dawn until dusk and often calls PT to place
trades at 6 a.m. PST. ''I just kind of work around the clock,'' said Henry,
adding that she's even trained her friends not to call the house during market
hours.
As it has snared devoted clients such as Henry, PT has gone through some
growing pains and controversy.
A print advertisement the company began running in Investor's Business Daily
and Barron's last winter - which touted what PT called its superior prices - was
deemed objectionable by the National Association of Securities Dealers. PT
was told to stop running the ad, said Marc E. Willis, PT's compliance officer.
Willis said the NASD seemed mainly concerned with a chart PT had drawn up
directly comparing its prices with those of other discount brokerages. PT has
since revised the ad to leave out the chart.
Officials from the NASD weren't available to comment.
Separately, however, NASD disciplinary records show that PT's parent
company, John Dawson & Associates, had been denied registrations to operate
in Alabama, Florida and Nebraska from 1986 through 1994.
Alabama regulators cited the firm's previous denials in Nebraska and Florida,
while Nebraska regulators said Dawson failed to report previous sanctions on its
applications. In Florida, the firm reapplied and was registered in July, according
to the state's Securities Commission.
Willis and Dawson Chief Executive Peter Cho said the firm's past regulatory
problems have been cleared up, and new principals are running the PT
subsidiary.
And Julio Gomez, a senior analyst at Forrester Research Inc. in Boston, said
there's a good chance the new PT unit - and other brokerages like it - will
prosper.
''They're keying in on a concern investors have, which is, as they go down in
(commission) price, they're sacrificing quality of execution,'' he said. ''I think
there's an audience there.'' |
