By acquiring Tradescape Corp.'s stock trading platform and other assets, E-Trade Group Inc. doubled the number of brokerage transactions it handles and strengthened its position in an industry that is rapidly consolidating.
Though the acquisition, whose closing was announced on June 18, seems to be an effort to return the company to its brokerage roots, Jarrett Lilien, the chief brokerage officer at E-Trade Securities Inc., said it was really a diversification.
The accounts E-Trade acquired in the deal "are the professional traders," Mr. Lilien said in an interview. "This is what they do for a living. As part of diversification, it is a nice addition to the mix we have on the brokerage side."
Launched as one of the first all-electronic brokerages amid the dot-com boom of the 1990s, E-Trade has diversified into banking and mortgage services, and it is in the process of adding advisory services. Executives have said they want to fine-tune the business mix so that its three main segments - brokerage, banking, and mortgages - each contribute about a third of the company's revenue.
The banking and mortgage segments have been growing, while brokerage has been languishing, Mr. Lilien said. "In a way, I'm just keeping up to keep my third."
Until recently E-Trade's "active trader" group had been its most productive brokerage segment, but trading volumes - and commissions - have tumbled during the long bear market, he said.
The active trader market segment "can be as changeable as the market and market volumes," he said. "People who were very active [traders] before are less active now," and those who were moderately active during the market's boom have moved their money into mutual funds or bank products.
Professional traders, by contrast, should be a steadier source of trading volume, Mr. Lilien said. He would not discuss how many accounts E-Trade acquired, but said that "the metric you look at" is the 100,000 combined trades each day by the traders involved in the deal.
E-Trade, which announced the deal with the privately held Tradescape in April, paid $100 million in common stock, plus incentives that could add another $180 million to the price, if the acquired units hit certain performance targets.
In addition to the accounts and platform, E-Trade acquired Tradescape's Momentum Securities LLC, a 20-branch brokerage for professional traders, and Tradescape Technologies, a unit that offers high-speed direct-access trading software, technology, and network services. The acquisition did not include Market XT, an institutional agency brokerage, which will remain a subsidiary of Tradescape Corp.
E-Trade also recently acquired $5 million of online trading technology from A.B. Watley Inc. E-Trade had hired Watley last year to develop the technology, which the brokerage then licensed and offered to customers who made at least 75 trades per quarter.
Mr. Lilien said that offering E-Trade's in-house clearing services to the traders coming over from Tradescape would help improve the efficiency of their business. Tradescape was outsourcing the traders' clearing services.
"We own the [clearing] technology, and we've got a very efficient back office on the retail side," he said. "It gives us a huge competitive edge in that we own the infrastructure, and we clear our own trades."
Jaime Punishill, a senior analyst at Forrester Research Inc., a Cambridge, Mass., consulting firm, said the real value of the Tradescape deal was in the technology that E-Trade acquired. "It just so happened that a bunch of customers came with it, and very attractive customers."
Even though professional traders conduct a lot of transactions, they are still a small group, Mr. Punishill said - there are no more than 15,000 of them in the United States. "There just aren't that many people who trade that often. Let's be realistic on the size of this market."
Eric Wasserstrom, an analyst at UBS Warburg, said the deal "does make them much more competitive in that space," but he warned that E-Trade would have to be cautious in managing the integration, because the defection of even a small group of traders could have a disproportionately large impact on trading volume.
Mr. Wasserstrom also pointed to the fact that E-Trade made several acquisitions last year, including the market-maker Dempsey & Co. LLC and the online broker Web Street Inc., while it was expanding into mortgages and banking.
With the ongoing consolidation in online brokerage, "there are a limited number of quality properties left out there to buy," he said. "They bought one of the better remaining independent companies."
Mr. Lilien said E-Trade would offer some of Tradescape's advanced tools, such as "thermo graphs" that depict volume and momentum statistics, to its active traders. The integration is already well under way, he said.
Omar Amanat, Tradescape's chief executive officer, is expected to join E-Trade and oversee its active trader services, said Mr. Lilien, who was the CEO of the institutional trading house TIR Holdings until E-Trade bought it in 1999.
"E-Trade has been very good at acquiring talent as well as businesses," he said. Putting Mr. Amanat in charge of active and professional traders "is the key to make sure we get the technology integrated in the right way."
Mr. Lilien also said he expected E-Trade to cross-sell banking and mortgage products to the new customers. Over half of E-Trade Bank's customers came from the brokerage side, and when Tradescape traders were asked about their interest in other E-Trade products, "we got an overwhelming response that they are," he said.
Mr. Punishill warned that, in addition to being a small group, professional traders are likely to be a tough sell. They will not necessarily take an offer just because E-Trade's name is on it, he said.
"They are pretty choosy, best of breed shoppers," he said. "It had better be a pretty good offer, or they are not going to want to bite."
