Waterhouse Slashes Fees For Frequent Stock Traders
By Stacy Forster
WSJ.com Feb 09,2001
Amid the stock market's recent sputters, TD Waterhouse Group Inc. (www.tdwaterhouse.com ) has joined the fray of firms aggressively courting traders who can help cushion against a downturn in activity when casual investors become timid.
The firm slashed commissions Wednesday for active traders and unveiled other meatier services -- including professional-type tools and market data -- as a lure for a segment of investors whose business is considered lucrative for online brokers.
But Waterhouse (www.tdwaterhouse.com ) is a Johnny-come-lately. Several of its rivals, including Charles Schwab Corp. (www.schwab.com ), E*Trade Group Inc. (www.etrade.com ) and Fidelity Investments (www.fidelity.com ), have long ago moved firmly to establish ground among these traders. Other specialty brokers already offer professional-type tools and cut-rate commissions geared toward frequent traders.
Waterhouse, which is the No. 2 online brokerage firm by market capitalization behind Schwab, ran the risk of being at a severe disadvantage if it had continued to allow its competitors and niche players to become more dominant among active traders without an aggressive response.
"TD Waterhouse recognizes this and they don't want to cede that market segment to any of their competitors," said Tim Butler, an e-brokerage analyst with Pacific Crest Securities in Portland, Ore. Mr. Butler and other analysts note that active traders generate a significant amount of commission revenue for online brokers by making frequent trades.
Indeed, Waterhouse acknowledged that it didn't want to overlook active traders. "The active investor is a great segment for us, so we've listened to what they want and we've developed this product to meet their needs," said Stuart Rubinstein, a senior vice president of e-commerce for Waterhouse.
Waterhouse plans to offer two levels of service for active clients. For both, the firm will charge a commission of $9.95 for market orders compared to its regular $12 fee. (The first ten limit orders in a quarter will cost $12.95; after that, all orders will be $9.95). For the time being, prices for options, mutual funds and bond trades will remain the same, Mr. Rubinstein said.
For the lower level service, customers must conduct at least 36 stock, option, mutual-fund or bond transactions in a single Waterhouse account during a calendar quarter. They will get real-time quotes, account information and order tickets all in one page. Mr. Rubinstein said this will cut down on the amount of time it takes investors to see their account data and place a trade, because it will be consolidated on one screen.
Eligibility for the top-tier service requires at least 72 transactions per quarter. In addition to the other features, these customers will get Nasdaq Level II quotes, which allow them to see prices from various market makers in a stock, and get news headlines and First Call earnings estimates, among other things.
Customers must re-qualify for the programs each quarter based on account activity.
Melissa Gitter, a spokeswoman for Waterhouse, declined to say how many of the firm's customers would be eligible for the new services. Waterhouse has about 2.4 million customers. The firm had given benefits before to its active clients -- but nothing as aggressive and comprehensive as its latest program.
Data show that even when the market has been volatile, as it was for much of the final quarter of 2000, active traders are less likely to remain on the sidelines than average investors. Richard Repetto, an electronic brokerage analyst for Putnam Lovell in New York, said typically 20% of a firm's customer base accounts for about 80% of its trading activity.
"[Brokerage firms] want to keep these customers because they're so profitable," Mr. Repetto said.
Scott Appleby, an analyst with Robertson Stephens in San Francisco, said an active trader is about 10 times more valuable than a casual investor when you compare their trading activity and commission revenue. These traders continue to trade -- albeit less -- even when the market is sour.
Schwab began targeting active traders early last year when it slashed commissions for its biggest traders by half and bought CyBerCorp Inc., an Austin, Texas, firm that catered to day traders. Schwab charges $14.95 per trade for its affluent clients who make at least 60 transactions a quarter. Investors trading at least 30 times pay $19.95. Meanwhile, commissions at it CyBerCorp unit range from $9.95 to $17.95 a month.
E*Trade and Fidelity had developed programs geared toward their high-volume customers even earlier than Schwab. E*Trade cut its commissions in August 1999 to $4.95 a trade for customers who make 75 or more trades a quarter. The firm also offers power-trading tools and information. Fidelity also offers lower commissions for very active clients, but it has been more aggressive in providing trading tools and information.
Meanwhile, other smaller firms such as Datek Online Brokerage (www.datek.com ), a unit of closely held Datek Online Holding Corp., and A.B. Watley Group Inc. (www.abwatley.com ) have made active traders a prominent part of their focus. Datek charges $9.99 a trade and A.B. Watley charges $9.95; both offer frequent traders direct access to trading venues.
Unlike Waterhouse, E*Trade and Schwab also offer direct-access trading, an important consideration for active traders because it allows them to direct their orders to specific market makers or electronic trading venues where they see the best price. Ms. Gitter said Waterhouse could add direct-access trading in the future, but it wasn't currently planned.
Waterhouse customers trade less frequently on average than other firms. The firm's customers traded an average of 3.2 times in the third quarter of 2000. Datek's, for example, traded an average of 9.9 times and Ameritrade's 5.5 times. However, Schwab customers, including those trading through CyBerCorp, traded an average of 2.2 times.
Like many other online brokerage firms, Waterhouse has been sharply hit by the market decline, which kept individual investors on the sidelines toward the end of the year. Although Waterhouse reported average daily trading volume of 151,900 in the third quarter of 2000, an increase of 49% from the year-earlier period, volume dropped toward the end of the year.
In November, Waterhouse reported average daily trading volume of 136,900, a decrease of 15.5% from October and 14% from November 1999. Trading volumes picked up in December, with an average of 160,000 trades a day, down 12.4% from the same month a year earlier. The company will release its quarterly earnings next Wednesday.
These market slowdowns are when active traders become more important to firms, because they are less likely to sit on the sidelines until conditions improve. For example, CyBerCorp customers are accounting for a greater share of trading activity at Schwab, conducting 9% of Schwab's volume in the third quarter of 2000, up from 7.8% in the second quarter. |
