[B] Larger brokerages step up courtship of hi-tech trading firms
By Cameron Dueck, Bridge News
New York--Mar 10--The active online investor, once viewed as a scorned
by-product of online trading, has become a coveted source of revenues,
attracting such online brokerage heavyweights as The Charles Schwab Corp. to
make strategic moves to capture a share of the action. While the interest of
larger firms in this investor demographic may validate the group in the broader
investment community, the smaller companies--the companies with the hottest
technology and most aggressive strategies--remain the leaders when it comes to
trading technology.
Online brokerage firms have been paying an increasing amount of attention to
active investors over the past 6 months, evidenced by E*Trade Group's tiered
pricing schedule that offers commissions as low as $4.95 per trade for their
most active customers, and by Schwab's purchase of a leading direct market
access brokerage firm.
Schwab in early February announced its $488 million acquisition of
CyBerCorp, and at the same time the largest online broker re-structured its fees
to attract more active investors.
The message sent by Schwab, which has historically targeted higher net-worth
accounts and not day-traders, was clear: Active traders are valuable, and
mainstream brokerage firms want them as customers.
"These companies have technology that appeals to a more active trader, and
if you have this technology, it allows people to be more active, so the
technology acts as a differentiator," said Scott Appleby, analyst with Robertson
Stephens.
The fact that professional and hyper-active online traders are a valuable
source of revenues, while only now is being acknowledge by the likes of E*Trade
and Schwab, has been the driver behind a small but growing group of closely-held
brokerages designed specifically to serve the needs of these traders.
However, Schwab's move acted as a catalyst, sparking renewed interest among
those firms interested in purchasing this technology.
Merrick Okamoto, president and founder of TradePortal.com, said his firm,
which provides direct market access technology and trading tools to professional
and active traders, noticed an increase in interest from suitors after the
Schwab deal.
"We had expressed interest from parties for several months, but the level of
activity and new parties increased after the CyBerCorp transaction," said
Okamoto.
TradePortal on Friday announced it has hired an investment bank to handle
the sale of a minority stake in the firm in a deal which Okamoto said could be
announced shortly. (See Story .16056)
Russell Keene, analyst at Putnam, Lovell, de Guardiola & Thorton, said his
investment firm was "warmly received" in recent visits to some privately held
firms that offer highly sought-after trading technology and are looking for
advice regarding the inquirers they have received from other firms.
Keene said further consolidation in this space can be expected, and
traditional firms pay be willing to do deals at high valuations if they are
currently losing active accounts.
One example of this consolidation is the deal announced in January by Omega
Research to buy OnlineTradinginc.com in a $300 million stock deal. Omega is a
well-known provider of trading tools for professional traders, while
OnlineTradinginc.com is a direct-access online brokerage.
"We think a lot of mainline publicly traded firms with large client bases
will need direct access technology to remain competitive at the upper end of the
client base," Keene said. "In the broader online client universe, people are not
interested in all the bells and whistles behind order routing, but they'd like
to know the there are algorithms in place to insure they're orders get the best
execution."
William Wong, analyst at Josephthal & Co., said while the smaller firms that
cater to more active investors are leading the effort in innovating new trading
and order routing technology, the game of "one-upmanship" among the leading
online brokers could soon change that.
"The day trading firms are likely more innovative now, but the rate of
adaptation will speed up among the mainstream online brokers," said Wong.
Bobby Earthman, president of TradeCast, a manufacturer and marketer of
securities trading software, said he also received a deluge of calls from "some
pretty big players" after Schwab announced
its purchase.
Earthman received calls from both firms that were interested in using
TradeCast's software and those in buying the firm outright. However, he said the
company is "not on the acquisition block" and is not currently considering any
offers.
"It's not what they (brokerages) really want, it's what the customers want.
The customers are waking up and realizing what the technology is all about, and
the firms are reacting," said Earthman. "Customers are waking up, there's more
talk of it in the media, and customers want a better fill, a better price, and
they don't want their firms to be getting payment for order flow any longer."
Direct access technology essentially links traders directly to the market
rather than going through a broker. Many direct access systems also incorporate
technology that actively searches different markets and ECNs for the best bid or
offer to match with a customers order.
"The average Joe at home doesn't how Archipelago, Attain or Brute work and
they don't care, and they don't need to know. All they want is the best
execution," Earthman said. "We've been preaching the go-direct message for 3
years, and our intention is to take it mainstream."
Earthman said TradeCast is profitable and recently raised $40 million in
private financing which valued the firm at $100 million.
Tradescape.com, which recently bought MarketXT, an ECN, for $100 million in
stock, is an electronic broker that uses "smart order routing" to find th
e best matches for its clients orders. The firm has strong banking from
Softbank, the Japanese technology investment firm.
Omar Amanant, the 27-year old founder and chief executive of Tradescape.com,
said that while Tradescape, which has about 3,500 accounts and a minimum account
requirement of $5,000, may not be considered one of the leading online firms, it
serves a growing market.
"We had no advertising and we had $75 million in revenues last year,"
Amanant said. "There's a big difference between being the known brand and being
the preferred brand, and we want to be the preferred band."
Amanant said CyBerCorp's sale to Schwab further opens the market to his
firm.
"This was a take out, CyBerCorp sold out," Amanant said. "When it comes to
the notions of cashing in, they are stopping the process of innovation, and of
stirring things up in the market. This leaves a huge opportunity for us, and we
continue to poach customers."
Amanant said Tradescape has 50,000 subscribers who have not yet opened
accounts but are expected to and are currently using Tradescape's software,
level 2 Nasdaq quotes, ECN quotes and other trading tools.
"So far in the first quarter we have not been very aggressive in opening new
accounts, but in the second and third quarters we will be very aggressive."
"We have a very aggressive growth plan, and to the extent of the
consolidation that is expected in this sector in the next 3 to 6 months, we plan
to be an acquirer rather than a seller," Amanant said.
Amanant said Tradescape plans to "stay under the radar and grow the business
without the concerns of fluctuations in stock price," although going public is
one of the strategic options the firm will likely pursue in the future. End
[slug: ONLINE-TRADE-FEATURE]
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Mar-10-2000 17:45 GMT
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