THREAD ---Wher SCHWAB is headed---Charles Schwab Corp.
Dow Jones Newswires -- April 14, 1999
Future Schwab:Firm's Capital Mkts & Trading Is Wired,
Ready
By Caroline Humer
NEW YORK (Dow Jones)--Charles Schwab Corp. (SCH) is now best known for its burgeoning
online brokerage and Internet-style stock price. But its capital markets and trading division also is in
the midst of a technology-driven revolution.
From raising capital on the Internet to preparing for the new ways of online bond and electronic
options trading, every sector of Schwab Capital Markets and Trading Group has undergone
incredible change during the past year, group president Lon Gorman told Dow Jones.
And it hasn't stopped yet.
"When you think about the capital markets, we are currently undergoing the biggest change since
negotiated rates in May of '75," Gorman said, referring to May 1, 1975, the day the New York
Stock Exchange ended a 183-year-old system of fixed brokerage commissions.
Schwab Capital Markets & Trading includes operations for trading in listed and over-the-counter
equities, options and fixed income; a research group based in Washington, D.C.; a division that
creates structured products for high net-worth individuals and an underwriting department for initial
and secondary public offerings.
Not one of those areas has escaped new technology.
"The Internet and electronic trading are having a profound effect on every facet of what I do for a
living," Gorman said.
In the past year Schwab has adapted to new market rules and benefited from increased investor
trading. Schwab is expected to report first-quarter results that will include a rise of at least 35% in
trading volume and a doubling of earnings per share to 33 cents a share from a year ago.
Facing continued Internet stock volatility, new Nasdaq trading rules and guidelines, the Internet and
growing electronic communication networks, Schwab is adapting. And that may mean taking part in
the next market trend - 24-hour trading, Gorman said.
"This is a very, very complex issue from several perspectives. Having said that, if there's a way it
could be done that customers are educated and protected and that there is enough regulation around
it, this would be a customer benefit," Gorman said.
Customers are at the heart of Schwab's business. The San Francisco-based online brokerage has
$491 billion in customer assets, making it one of the largest financial institutions in the nation.
Extended trading would help customers by smoothing out the heavy trading crunch at the opening, he
said. But, he said, the regulatory framework, links between the proposed after-hours sessions, and
the three-hour time difference between the East and West coasts are just some of the issues that need
to be hammered out.
The Nasdaq stock market, the New York Stock Exchange and businesses like Eclipse Trading and
Wit Capital are all working on making trading hours longer than the current 9:30 a.m. to 4:00 p.m.
"We are not an insignificant participant in trying to figure out how this will work," Gorman said. But at
the moment, "There is a lot more sizzle than there is steak."
Reinventing Underwriting With The Internet
One hot arena that Schwab has leaped into is the increasingly competitive field of online underwriting.
Schwab got into syndication in September of 1997 and has participated in more than 100 deals
through agreements with three underwriters: J.P. Morgan & Co. (JPM), Credit Suisse First Boston
and Hambrecht & Quist Group Inc. (HQ).
Schwab was co-manager for the first time in the late 1998 IPO of Minneapolis mattress company
Select Comfort Corp.'s (AIRB) IPO and is planning to do more.
"Our longer term plan is to try to reinvent this business and we have a few folks out there such as Wit
and W.R. Hambrecht who are trying in their own way to reinvent this business. It's too early to say
whether these models would be successful or not," Gorman said.
Issuers - mostly medium and larger companies - are now calling Schwab directly to raise capital over
the Internet, Gorman said.
But the Internet-related changes don't stop at IPOs.
Gorman said that the fixed income market is facing new competition from Internet-based services that
allow retail customers to buy and trade government, corporate and municipal bonds online. The
options market - which has been largely focused on the floor exchanges like the Chicago Board
Options Exchange - is preparing for next year's launch of the first all-electronic options exchange, the
International Securities Exchange.
Optimark, an anonymous electronic trading system, is poised to revolutionize the institutional
business, he said. And electronic communication networks like Instinet, owned by Reuters Group
PLC (RTRSY), will be able to register as exchanges later this month and eventually start trading
listed stocks. That will mean changes for Schwab's institutional and retail business. Schwab has threes
seats on the New York Stock Exchange and specialist operations on two regional exchanges
Changes For Mayer & Schweitzer
All that comes on the back of massive change in the Nasdaq broker-dealer world. For Schwab, that
means Mayer & Schweitzer, the Nasdaq market-making unit it bought in 1991 and of which Gorman
is chairman and chief executive.
Gorman has been in the securities business for 30 years, having joined Schwab almost three years
ago from Credit Suisse First Boston, where he was a managing director and head of global equity
trading. He is on the Nasdaq stock market's Quality of Markets Committee and a director for the
Securities Industries Association.
While there are a slew of new Nasdaq trading rules in the pipeline this year, Gorman said they will
not challenge the broker-dealers the way order-handling rules did in 1997 and in 1998. Those rules
required market makers to make publicly available any superior prices they offer through ECNs. That
led to a boom of new ECNs, which now total nine.
The National Association of Securities Dealers' board recently agreed to start trading halts for news,
to institute a pilot program to reduce market data fees and to request comment on proposed rules for
day trading. The board approved a "trade or move" rule requiring market makers to lower their
quotes when they receive and fail to execute a larger order and approved a rule regarding markets
that are locked or crossed before the morning opening.
Gorman said that trading halts for news-related events are good both for customers and market
makers because it will prevent them from being blind-sided.
He supported a measure that would have brought trading halts for volatility - a market phenomena he
sees continuing. To cope with that, Schwab will continue to review margin requirements on
fast-moving stocks - such as Internet stocks- and some will abstain or decrease their trades in such
equities.
And the firm will continue education efforts - like explaining to investors the importance of placing a
limit order, or one that sets a price, during the early trading of an initial public offering.
"I think we've entered a return to volatility after a period of absence of volatility, and that now we are
returning to a period of normality," Gorman said.
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