Forget about watching the market - it's the brokerages that are in the spotlight now. While Wall Street was spinning up, down, and sideways, online-trading volume took a steady climb - up 44 percent between the first and third quarters of 1997, to make up 30 percent of the discount brokerage business, according to a report just issued by investment firm Piper Jaffray. Now, with fees down and ad-spending up, the market-share war is on - with some surprising early winners.
Just recently out of the blocks, Etrade and Datek Securities have leveraged themselves into competition with some of the industry's seemingly sure bets. Only Charles Schwab, which is the top dog in the online world with a solid 33 percent of the market's volume, can claim greater online action than Etrade, second place with 15 percent, while Datek has vaulted into fourth position with 7 percent.
"Etrade was really the first online-trading firm to come out with a very aggressive marketing campaign and try to build a real brand and identity on the Internet, and really attempt to bring online trading to the attention of the mass market," said Bill Burnham, senior electronic commerce analyst at Piper Jaffray. And Etrade's success in surpassing traditional leaders such as Fidelity, which commands 13 percent of online-trading volume, putting it in third place, has prompted many in the industry to wake up and smell the java. As a result, a quarter-billion-dollar marketing blitz is taking the industry by storm as customer acquisition - and raiding - become the new name of the game.
Burnham credits Etrade's advertising - including its recently announced US$20 million campaign - with transforming the company's fortunes and the very face of the industry. "They were able to very quickly build a brand name such that most people, if they can name any online-trading firms, can name Etrade and Schwab, and maybe one or two others." In 1997 alone, Etrade has already nearly doubled its account base, and has grown its average daily trade volume by 124 percent.
Etrade president Christos Cotsakos claims that the success of the company's marketing campaign has been a matter of style over substance. "We haven't focused on price; what we've focused on is a little bit of an edge - in your face, but not going over the top," said Cotsakos. "It's the thinking-person's ad." At $14.95 for most trades, Etrade's commission is not the smallest. Datek has a dirt-cheap fee of $9.99 for trades up to 5,000 shares, while eSchwab gets $29.95 for a trade of up to 1,000 shares. But Etrade spends 13 to 15 percent of its net revenue on advertising, trying to keep its customer numbers up regardless of whether its prices head up or down.
"The advertising really heated up this summer from all of the players in response to Etrade's success," said Burnham. Ameritrade announced a $25 million ad campaign, while Fidelity ads are popping up everywhere. Online brokerages collectively plan to spend more than a quarter-billion on advertising during the next 12 months, according to the Piper Jaffray survey. "Right now, [ad spending] is a little bit overheated," Burnham posited. "But that's because there are a number of firms spending a lot of money up front to establish the brand. There will be companies that end up overpaying for customer accounts."
Burnham believes that customer-acquisition costs, not pricing, will become the primary focus of online brokerages. "You'll probably continue to see brokerages dropping fees here and there occasionally, but quite frankly, there's not much lower to go," he said. "The key is going to be not only to acquire customers, but to acquire them cost-effectively, and then to keep them in the face of all the competitors bombarding them with advertising."
Ameritrade has publicly announced that it does not expect to see a profit in this or the next quarter, due to the cost of its current marketing blitz. "Ameritrade probably spent 10 to 15 million in the month of October in advertising," said Burnham. "And in a certain sense, it's working; everybody knows their name at this point." The company still has far to go; it currently ranks eighth in volume, with a meager 3 percent of trading share.
Datek's explosive growth can be credited to its success in securing a profitable niche in the world of day-traders - investors who trade based on movement in the stock price and other technical factors rather than fundamental factors. "Datek built a fairly robust technical infrastructure to support Small Order Execution System operations," which are favored by day-traders, said Burnham. "They've been able to take that technical infrastructure, along with their reputation, and leverage that to very quickly build an online-trading site. They've really secured a niche with the day-traders."
For its part, Schwab's dominance online may come at the company's own expense. Schwab gets an average $144 per transaction in the offline world; online, the company brings in less than one-fourth that amount. Since many of Schwab's online customers have migrated from the offline world, the company (along with other traditional discount brokerages like Quick & Reilly - in sixth place, with 5 percent of online volume - and Fidelity) faces the tough task of remaining profitable in the online world of lower commissions, lower order flow payments from market makers, and high advertising costs.
Schwab spokesman Tom Taggart said the company does not disclose information about how its various customer channels are faring. "We don't even look at it as how profitable our online customer is," said Taggart. "We look at a customer by their account, not their channel." But, Taggart noted, "Believe me, we don't get into anything that isn't profitable."
Fidelity likewise declined to comment on the relative profitability of its online vs. offline accounts. But the company, which slipped from second to third in the ranks of volume online traders during the past quarter, did admit that many of its customers are simply migrating from the company's offline services. "Forty percent of our customers are trading in some kind of online capacity," said spokesman Andy Trincia. "We expect that to be up to 50 percent by the end of this year."
In the end, traditional brokerages may not have a choice in the matter. "For the existing discount brokerages, one of the reasons they've been so aggressive in this market is because if they didn't, they would lose all their customers," said Burnham. "Now, everybody agrees that it's just a matter of time before this becomes the primary channel for discount brokerages.
