Another article with NITE references. Note the statement that says "payment for order flow is going away". Is this correct.
TD Waterhouse May Pull Its Stake in
Island
By Caroline Humer
Staff Reporter
10/12/99 7:00 AM ET
Conventional wisdom holds that Wall Street can't get enough
of electronic trading systems.
Nearly every month brings some new deal between
brokerages, ranging from newfangled cyber types like
E*Trade (EGRP:Nasdaq) to traditional players like Merrill
Lynch (MER:NYSE), and electronic trading systems. The
brokers figure they have little choice but to jump into
electronic trading because it's ushering in huge changes in
the market, like after-hours trading for the retail crowd.
But now it seems that even if some online traders like a good
gamble, not all brokerages do.
TD Waterhouse (TWE:NYSE) may be the one that bucks the
trend by pulling out of a proposed deal to take a 12.5% stake
in Island, an electronic communications network
majority-owned by Datek Online Holdings, leaving it with no
investment in an electronic platform. Four months after the
two firms first agreed to the deal, Datek says it may not go
through, and TD Waterhouse declines to discuss it. A
statement from TD Waterhouse is expected this week.
TD Waterhouse still is working on technical links with Island
and is sending orders there, according to one person familiar
with the discussions. And Stephen McDonald, who heads TD
Waterhouse, recently told Bloomberg that having such a link
to an ECN was enough.
But without a stake in an electronic trading platform, TD
Waterhouse could find itself behind competitors like Charles
Schwab (SCH:NYSE), which has a stake in ECN REDIbook.
Investors already have beaten up on Waterhouse stock,
pushing it down more than 50% since mid-July. Schwab, by
comparison, has fallen about 36% and E*Trade has dropped
just under 30%. Investors are worried in part about falling
trading volumes among online brokers.
For Island, TD Waterhouse could provide order flow given its
place as the third-biggest online broker. "The important thing
for us is getting orders," says Matt Andresen, Island's
president.
Electronic trading systems -- which match buy and sell orders
through computers -- have become hot in part because of
online trading and growing interest in after-hours trading. For
online brokerages, creating links to these ECNs will allow
them to execute trades quickly during the regular session and
during after-hours trading. It also could create a new revenue
stream.
For example, TD Waterhouse's average daily share volume in
the third quarter ended July was 109,000, more than Island's
average daily volume. That liquidity is important because while
ECNs can be accessed through Nasdaq's SelectNet system
or direct links, profits increase when they match orders
in-house. Unlike Nasdaq market makers, which make their
money on the spread (or the difference between the bid and
the ask), ECNs charge a commission on each share.
James Punishill, an analyst for Boston-based Forrester
Research, says TD Waterhouse is "leaving a lot of money on
the table" if it doesn't invest in an ECN. Changing revenue
models makes diversification a pressing issue for online
brokerages, Punishill explains.
"Payment for order flow is going down. It's going away. We all
know it's going away," he says. "There's a little commission
war heating up again. Competition is heating up with the
full-service firms entering. [Brokers] have to find new sources
of revenue."
Which brings the question back to why TD Waterhouse would
pull out of the Island deal.
For one thing, there's money. Although TD Waterhouse raised
$1 billion in its June IPO and recently sold about $200 million
worth of stock in market maker Knight/Trimark (OUCH)
(NITE:Nasdaq), the person with knowledge of the agreement
says Island's valuation -- $25 million for the 12.5% stake --
became a point of contention.
And there's the history of regulatory problems at Datek. Last
week, its founder and head honcho Jeffrey Citron stepped
down to make way for Ed Nicoll, a move seen as an attempt
to distance the firm from a troubled past that scared investors,
including Paul Allen's Vulcan Ventures, which pulled out of a
financing agreement for Datek and Island in July.
Then there's the management situation. Nicoll, who moved to
Datek in January, was a Waterhouse founder and spent more
than a decade there. In March, he brought over another
Waterhouse manager, John Mullin, in a move to shore up
management. The deal between Island and Waterhouse was
announced a couple of months later.
During that same time period, Waterhouse became TD
Waterhouse and McDonald came down from Canada, home of
majority owner Toronto Dominion (TD:NYSE), to replace
Waterhouse's Frank Petrilli at the brokerage's helm. Petrilli
then left TD Waterhouse in July for E*Trade but returned after
a week there.
Petrilli may have found the differences between the
brokerages wider than anticipated, but TD Waterhouse has
resembled E*Trade and other brokerages in the past,
including by having taken part in their bet on order-execution
systems. For example, E*Trade, Ameritrade
(AMTD:Nasdaq), TD Waterhouse and others invested as a
consortium in 1995 in Knight/Trimark, hoping that Nasdaq
trade executions would eventually deliver hefty returns.
When Knight/Trimark went public in 1998, TD Waterhouse
ended up with a winning hand. Now the question is whether
TD Waterhouse is making another smart move by walking
away. |
