The merger wave that has dramatically consolidated the online brokerage market — including rumored talks between E-Trade Financial Corp. and TD Ameritrade Holding Corp. — seems to have reached a point where small operators have no choice but to follow suit.
But don't tell that to executives at Success Trade Securities Inc., Kane Reid Securities Group Inc., optionsXpress Inc., or Genesis Securities LLC's SoGoInvest. They say they intend to remain independent by pursuing niche markets or charging less than their larger competitors.
"The consolidation of E-Trade and Ameritrade is going to happen. It is inevitable, but firms like ours — second-tier firms — aren't just going to be swallowed up," said Fuad Ahmed, the founder, chief executive officer, and president of Success Trade. "Those larger, publicly traded megafirms need scale. But due to their huge cost structure, they are going to have a difficult time competing with us on price."
His Washington company, which managed $700 million of assets as of Aug. 15 on three trading platforms, has collected assets and customers since it launched in 1999 by charging less. Its LowTrades.com offers trades for $4.95 each, SuccessTrade.com offers trades at 0.3 cents a share for day traders, and Just2Trades.com, which launched in January, offers trades for $2.50 for investors with two years' experience and at least $2,500 to trade.
Derrick Chu, an analyst with SoGoInvest, said small discount brokerages are driving the consolidation trend, not avoiding it.
"Companies like ours are at the forefront of the low-cost commission battle, and we are creating some intense competition to decrease commission costs," Mr. Chu said. "This is forcing the larger, more famous firms to consolidate to generate the necessary scale to bring their prices down."
SoGoInvest has accumulated almost $100 million of assets under management since it launched in July of last year by offering trades for $3, he said.
Analysts said large online brokerages have been forced to lower commissions to persuade customers to keep trading with them since the dot-com bust reduced the number of day traders and the amount of trading over the past seven years. E-Trade now charges $7.99 a trade, and TD Ameritrade, which is partly owned by Toronto-Dominion Bank, charges $9.99. Competitors like Success Trade, SoGoInvest and Kane Reid, which uses the TradeKing brand, charge $4.95 or less.
The average brokerage commission has declined by nearly half since 2001, to $11.65, according to TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard Inc. By 2010, TowerGroup expects that figure to reach $8.53.
Analysts said that if TD Ameritrade and E-Trade merge, increased scale would allow the postmerger company's commissions to drop. After buying TD Waterhouse Group last year, Ameritrade Holding Corp. cut its commission by a dollar, to $9.99 a trade. E-Trade reduced fees for Harrisdirect LLC and Brown & Co. customers after acquiring those brokerages in 2005.
Donato Montanaro Jr., the co-founder and CEO of Kane Reid, said he thought E-Trade and TD Ameritrade could cut their prices in half and remain extremely profitable, though accepting the cut in margins would be "a pretty hard decision to make for a publicly traded company."
Mr. Montanaro launched his Boca Raton, Fla., firm in December 2005 after running online trading at Quick & Reilly in the mid-1990s.
Mr. Ahmed said small brokerages can persevere by remaining independent and privately held.
"There are a lot of pressures on publicly traded companies on a quarterly basis to raise money and remain profitable," he said. "These larger companies have to find ways to add scale, or they won't be able to lower their prices any further, and they just aren't getting the same bulk of trades that they got 10 years ago."
Mr. Chu said that over time SoGoInvest may look to ramp up its services.
"Initially, E-Trade was just an equity trading platform," he said. "Then they developed other services. We are at that initial stage that E-Trade was at in the early 1990s."
Mr. Montanaro said customers are not demanding more products from their brokerage. "Customers want modern technology more than they want every financial product under one roof. Clients want the best rates and the best deals."
William Butterfield, a senior research associate with TowerGroup's securities and investments practice, said small firms may appeal more to certain customers than larger firm in terms of technology and customer service.
"Some investors are attracted to smaller firms, where they feel customer service provides more of a personal touch than larger firms," he said. "Others are attracted by the leading-edge tools and technology of a niche player in a particular asset class. … I think there is a place for them, as long as they have a strong value proposition."
The executives at the small brokerages conceded that consolidation will continue, but most said they are not worried about being bought, because they are privately held.
SoGoInvest "is still so new," Mr. Chu said. "We are completely off of their radar map. We don't have the scale, so there is no incentive for them to merge with us."
David Fisher, the president of optionsXpress, said that he expects consolidation to continue, and he wants his Chicago firm, launched in January 2001, to be involved. It went public in January 2005 and now has $5.2 billion of assets under management and 250,000 customers. In January of this year it bought the online futures broker XpressTrades to expand its array of products.
The commission at optionsXpress is $12.99.
Mr. Fisher, who will succeed David Kalt as its CEO on Sept. 30, said it will look for more acquisition opportunities to add products and services, not scale. However, optionsXpress would also have to consider selling itself "if someone came along and made an offer that is in the best interest for our shareholders."
Mr. Chu said he thinks small, privately owned firms that have carved a specific niche can survive consolidation.
"If you are TradeKing or Scottrade, and you are charging fees that are not much different than the larger players, it is going to be difficult to compete when you are trying to compete based on the types of services that you offering," he said. "We can compete solely on price, and that is going to make us attractive to cost-conscious consumers and active traders. There is always going to be a segment that is focused solely on trading."
