Fire-and-Acquire Pattern at Discount Brokerages

August 16, 2001, 1:00 a.m. EDT 3 Min Read

With retail investors still mainly sidelined, discount brokerages are persisting with what might be called slash-and-buy survival tactics.

The cost-cutting now endemic to the entire financial services sector shows no sign of abating in this subsector. Charles Schwab Corp., which has laid off 13% of its work force this year and had hinted at more to come, said Wednesday that the San Francisco-based broker will probably let more people go this quarter.

On the acquisition side, TD Waterhouse Group, the New York discount broker that is mostly owned by Toronto-Dominion Bank, said Wednesday that it had agreed to buy R. J. Thompson Holdings Inc. of Omaha, a privately held direct-access broker.

Just two weeks ago, TD Waterhouse rival Ameritrade Corp. announced it had agreed to buy National Discount Brokers Corp. from Deutsche Bank. At about the same time that deal was announced, TD Waterhouse said that it would make layoffs because of lower trading volume after months of attempting to trim its payroll through attrition.

In an interview Wednesday, TD Waterhouse chief executive officer Steve McDonald said it is making the acquisition of RJT to compete with peers and court the active-trader market. Terms of the deal, which is expected to be completed in the fourth quarter, were not disclosed.

The company would provide TD Waterhouse customers with direct access to market makers and electronic crossing networks, automatic updating of real-time balances and positions, streaming real-time quotes, and other institutional investor-like services.

"This is a technology investment. It's critical to our platform," Mr. McDonald said. Indeed, TD Waterhouse and its peers have increasingly looked to slice and dice their databases to cull the most profitable customers as the markets have weakened.

"Pretty well everybody at the majors is interested in building their active-trade segment," Mr. McDonald said. "They've reduced their trading activity somewhat in these times, but probably less so than the less-active trader."

Henry McVey, an equity analyst with Morgan Stanley Dean Witter, described TD Waterhouse's deal for RJT as "a way to play offense in a declining market."

He added that all brokers are hoping the end of the traditionally slow summer period will also bring an end to the market downturn, but it was hard to find optimists Wednesday.

"Certainly these times are tough," said TD Waterhouse's Mr. McDonald, who added that he believes the cuts his company announced this month should be enough for it to weather the market volatility. "If it gets substantially tougher, we would certainly have to revisit the issue, as everyone else would have to."

Speaking after the broker released its daily trading numbers for July, which at 173,100 were down 7% from June, and 36% from July 2000, Schwab chief financial officer Christopher V. Dodds said his company's executive committee is to meet next week to discuss cuts in staffing, technology, and advertising.

"It isn't a question of whether we're going to do it, it's more a question of how much cost to take out," Mr. Dodds said in an interview Wednesday. "It's difficult to see bright spots." But he noted that Schwab pulled in more than $7 billion of net new assets last month and said "it would be unwise to think any reduction of the work force would be across the board."

Richard Repetto, an equity analyst with Putnam Lovell Securities, said it's possible Schwab will eliminate an additional 2,500 jobs, which would pare its work force to 20,000. "They still need to trim capacity," he said.

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