Ameritrade Holding Corporation
Ameritrade Holding Corporation
Incorporated: 1975 as First Omaha Securities, Inc.
Sales: $315.3 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: AMTD
NAIC: 52312 Securities Brokerage; 334611 Reproduction of Software; 551112 Offices of Other Holding Companies
Ameritrade Holding Corporation is a discount broker-dealer that operates through four subsidiaries: Ameritrade, Accutrade, Advance Clearing, and AmeriVest. Through its subsidiaries, Ameritrade Holding provides trading services to individual investors and institutions, with a particular emphasis on providing trading services via the Internet. Known for its low commissions, the company ranks as the fifth largest online broker, having maintained a presence on the Internet since 1995. Ameritrade and Accutrade, the company’s two discount retail brands, provide online, telephone, and fax trading. Advanced Clearing provides clearing services and AmeriVest provides discount brokerage services to financial institutions.
As a teenager growing up in Nebraska, J. Joe Ricketts dreamed of some day becoming a doctor or a lawyer. The future chairman and chief executive officer of Ameritrade Holding made his first step toward gaining his professional degree by enrolling at Creighton University in 1959. Within weeks, Ricketts lost his boyhood passion, quickly finding the classwork not to his liking. Growing restless at Creighton, Ricketts followed the advice of a friend and signed up for a course in economics, which introduced him to the writings and theories of Adam Smith. Ricketts’s academic malaise immediately gave way to a life-changing zeal for matters of the business world. He later reminisced in a January 28, 2000 interview with the Standard: “I knew that this was what turned me on.”
Ricketts discovered the general direction of his professional life while at Creighton, but he did not land on the specific path of his calling until more than a decade after he left school. Ricketts was employed as a Dean Witter salesman when he reached his second life-defining epiphany. In May 1975, the federal government deregulated the securities industry, touching off sweeping changes in the business where Ricketts made his living. One of the pertinent effects of deregulation for Ricketts was the advent of negotiated commissions for individual investors, a facet of the securities industry that would become best known as discount brokerage. Facing a potential flood of new competitors who would be willing to undercut any transaction fee charged by Dean Witter salespeople, Ricketts grew anxious. The new rules meant he would have to substantially increase his efforts to beat back a wave of aggressive rivals. Ricketts was not opposed to more work, but he was opposed to investing more of his time on behalf of Dean Witter. “If I was going to have to work longer and harder,” Ricketts informed the Standard in his January 28, 2000 interview, “[I knew] I’d rather be working for myself.”
Ricketts Establishes Ameritrade Holding’s Predecessor in 1975
The 1975 deregulation of the brokerage industry led Ricketts down the path of entrepreneurialism. Determining that his days working under the aegis of Dean Witter were at an end, Ricketts left for Chicago in pursuit of membership into the Chicago Board of Options Exchange. While in Chicago, Ricketts ran into a Creighton alumnus who was a principal in a discount brokerage firm, one of the new breed of securities companies that found fertile ground in the post-deregulation era. Ricketts’s former classmate invited him to have a look at his brokerage operation and Ricketts agreed, leading to his fortuitous introauction into the nascent world of retail discount brokerage. “There were three people in a small room answering phones and writing tickets as fast as they could,” Ricketts told the Standard, recalling his first impression of the business that would become his life’s work. “To me, that was heaven.”
Inspired and filled with purpose, Ricketts returned to Omaha, determined to establish himself as an operator of a discount brokerage firm. He found four investors who each were willing to contribute $12,500 to his cause. Ricketts added another $12,500, obtaining the money from family and friends. With the $62,500 (which eventually grew into a $2 billion personal fortune), Ricketts took over First Omaha Securities, Inc. in 1975, a company that had been established four years earlier as a local investment bank. Ricketts immediately gave the company a new business direction, creating a discount brokerage firm that offered the lowest transaction fees in the industry. By charging $25 to trade 100 shares on the New York Stock Exchange or over-the-counter, Ricketts, not for the last time, touched off a revolution in the securities industry. The company made $700 during its first month. Ricketts later confessed he had little idea about what he was doing, but First Omaha thrived nevertheless. Before the end of his first year of business, Ricketts was ready to take on a bigger challenge and court a national clientele. To apprise industry observers of his intentions, Ricketts changed the name of the company to the more geographically expansive First National Brokerage Services, Inc.
First National developed a sound foundation during its formative years, broadening its operations as its business volume grew. In 1983, Ameritrade Clearing, Inc. was established as a clearing broker, adding another facet to the brokerage business governed by Ricketts. By all measures, the company was a success during its first decade of business, but the extent of its success was limited. First National attracted little national attention, occupying what was regarded as the second tier of the securities industry, competing against a smaller breed of competitors than the country’s elite brokerage firms. The company’s stature would change during its second decade of business, altered substantially by Ricketts’s pioneering advancements in the securities industry. He had gained his business footing through aggressive pricing, but Ricketts national fame and the prolific growth of his company were ignited by his intrepid incorporation of new technology. From the late 1980s forward, Ricketts’s company consistently embraced new ways of doing business in the securities industry, resulting in the company’s promotion from a market underling to one of the leaders of the industry.
Touchtone Telephone Trading Debuts in 1988
Before taking his first big risk in the field of technology, Ricketts changed the name of First National to TransTerra Co. in 1987. TransTerra served as the holding company for Ameritrade Clearing and the company’s discount brokerages, led by the flagship operation, Accutrade. Shortly after the name change, Ricketts began seriously considering allowing customers to place orders via touchtone telephone, a service that would greatly reduce his costs once the investment in the technology had been made. The idea was a gamble. No other company had tested the technology, but Ricketts was willing to take the risk. He canvassed his customers and formed focus groups, trying to determine whether there would be a demand for touchtone telephone trading. The market studies showed unequivocally that customers had no desire to use their telephones to buy and sell securities, but, remarkably, Ricketts pressed ahead with his plans. He was convinced automated trading would reduce costs significantly, resulting in savings that he could pass on to customers. Ricketts invested in the technology and announced the new service in 1988, becoming the first in the industry to offer touchtone telephone trading. Customers who had flatly stated they would not use the service quickly changed their minds when they learned that they could trade for three cents a share, an exceedingly low commission. Although the technology required a heavier investment than Ricketts had anticipated, the decision to offer automated trading proved to be a resounding success, substantiating Ricketts’s belief in the potential of technology.
Beginning of Online Trading: 1994
During the 1990s, Ricketts’s company recorded explosive growth primarily because of his willingness to incorporate emerging technologies into the securities business. After his experience with touchtone telephone trading, Ricketts needed little encouragement to dive headlong into online trading. “The Internet wasn’t a puzzle,” he informed the Standard in his January 28, 2000 interview. “We were crystal clear from the beginning that customers would migrate to this,” he added. The era of online trading officially began in August 1994, when K. Aufhauser & Company became the first brokerage outfit to offer Internet trading. Ricketts acquired K. Aufhauser the following year, as well as All American Brokers, Inc., quickly forging a sizable presence in the new market niche. Accutrade for Windows, the first online investing system that used preprogrammed investment parameters, debuted in January 1996, giving individual investors a trading system that previously was only available to institutions. In May 1996, another online trading brand was added to TransTerra’s portfolio called eBroker, which functioned as an Internet-only broker organized as a subsidiary of All American Brokers.
Our mission is to be the largest broker in the world for individual consumer investors as measured by agency trades (not revenues, not investment banking, not market making, and not principal trades —only agency trades).
Ricketts’s faith in online trading paid substantial dividends, fueling his company’s prolific growth during the latter half of the 1990s. After the company’s expansion in online trading in 1996, the effect on business volume was swift and decisive. “We’ve seen a near doubling of our core discount brokerage accounts in the past year and a 300 percent increase in online business in one year,” Ricketts told Knight-Ridder/Tribune Business News on September 4, 1997. “We have a unique opportunity before us, and we are intensifying our focus on account growth, particularly online accounts with the Ameritrade brand,” he added. The Ameritrade brand was a product of the several important organizational changes implemented in 1997 that followed a change in the company’s corporate title from TransTerra to Ameritrade Holding Corporation in November 1996. The newly named company filed for an initial public offering (IPO) in February 1997 and completed its IPO the following month. In October 1997, the company established its new brand Ameritrade, Inc., which represented an amalgamation of K. Aufhauser, eBroker, and Ceres Securities, Inc., a deep discount brokerage Ricketts formed in 1994.
The impetus for the structural changes of 1997 stemmed in part from Ricketts’s miscalculation of the online trading market. His prediction that consumers would migrate to online trading—evinced by his acquisition of K. Aufhauser in 1995—had come true, but he had underestimated how fast individual investors would embrace the Internet age. What Ricketts believed would take years to develop was happening in a matter of months, which put Ameritrade Holding in the uncomfortable position of lagging behind other brokerage firms who had carved a deeper presence in online trading services. By mid-1997, Ameritrade Holding was trailing a handful of brokerage firms that included Charles Schwab, E-Trade, and TD Waterhouse, a market position that Ricketts sought to improve by consolidating his discount brands into Ameritrade and announcing a new industry low for online trading fees. Concurrent with the debut of Ameritrade, Ricketts lowered his commission to $8 per equity market order and invested an unprecedented $14 million into the company’s “Eight Bucks a Trade” marketing program.
Although Ameritrade Holding continued to trail the industry leaders in the wake of Ameritrade’s formation, the company’s rate of growth increased substantially. A month-and-a-half after launching its marketing campaign, the company’s online accounts increased 50 percent, prompting Ricketts to assume a more aggressive marketing posture. He set aside an additional $44 million for another marketing campaign, which underpinned a remarkable rise in the company’s business volume during the late 1990s. Between 1997 and 1999, as the prospect of trading online gripped millions of individual investors, Ameritrade’s accounts soared from 98,000 to 560,000. Significantly, Ameritrade averaged more than six trades per quarter, per account, by far eclipsing the average activity of accounts held by E-Trade and TD Waterhouse and more than three times the average recorded by Charles Schwab.
By the end of the 1990s, Ameritrade Holding ranked as the fifth largest online investment broker in the United States, a position the company was poised to improve upon during the first decade of the 21st century. Important agreements had been reached during the late 1990s to ensure the company’s visibility on the Internet, particularly marketing agreements with America Online and MSN, The Microsoft Network online service, both reached in 1997. Additionally, Ricketts had begun to expand beyond U.S. borders by the end of the decade, opening new growth channels for his company to explore in the 21st century. In November 1998, Ameritrade Holding and Deutsche Bank AG formed a joint marketing agreement to allow their customers to trade online in both the U.S. and German securities markets. In March 1999, Ameritrade and a European discount broker named Coital announced a similar agreement that opened access to French securities markets. A foray into Japan was expected to be made in the early years of the 2000s.
Ricketts was expected to pass operational control over Ameritrade Holding to co-CEO Thomas Lewis in the first half of 2000, leaving behind a company with a market capitalization of more than $3 billion. During Ricketts’s last few months at the helm, Ameritrade Holding took steps to prepare itself for rapid growth in the near future. Two new facilities were expected to be completed during the first half of 2000, an enormous data center in Kansas City, Missouri, and a four-story building in Annapolis Junction, Maryland, to house the company’s Advanced Technology Development Center. Once its processing capabilities were improved, Ameritrade Holding claimed it would be able to handle 400,000 trades per day, or approximately six times the company’s capacity in 1999. With its focus centered on capturing the business to take advantage of its potential, Ameritrade Holding moved resolutely forward, intent on becoming the market leader in the decade ahead.
Ameritrade, Inc.; Accutrade, Inc.; Advanced Clearing, Inc.; Ameri Vest, Inc.
E*Trade Group, Inc.; TD Waterhouse Group, Inc.; The Charles Schwab Corporation.
- J. Joe Ricketts establishes First Omaha Securities, Inc. as a discount broker.
- First Omaha is renamed TransTerra Co.
- Accutrade, a TransTerra subsidiary, is the first company to introduce touchtone telephone trading.
- TransTerra acquires K. Aufhauser & Co., the first company with an Internet trading site.
- Ricketts completes initial public offering of newly named Ameritrade Holding Corporation.
- Ameritrade Holding enables customers to invest overseas for the first time through an agreement with German concern Deutsche Bank AG.
Booth, Tamzin, “Day Traders Beware,” Institutional Investor International Edition, March 1999, p. 23.
“Discount Brokerage Ameritrade Reorganizes,” Knight-Ridder/Tri-bune Business News, September 4, 1997, p. 904B1072.
Frederick, Jim, “Why Online Brokers Can Win the Web War,” Money, July 1, 1999, p. 103.
Garrity, Brain, “Ameritrade Stock Woes Cost Chairman and Underwriters,” Investment Dealers’ Digest, August 2, 1999, p.ITEM9921100A.
Loizos, Constance, “Online Brokers Turn to—Gasp!—Service,” Investment News, October 11, 1999, p. 14.
Rasmussen, Jim, “Earnings, AOL Propel Stock of Omaha, Neb., Brokerage Ameritrade,” Knight-Ridder/Tribune Business News, July 24, 1998, p. OKRB982051EB.
——, “Earnings Top Expectations at Omaha, Neb.-Based Ameritrade,” Knight-Ridder/Tribune Business News, October 30, 1997, p. 1030B0927.
——, “High Volume Overwhelms Ameritrade Online Brokerage Service,” Knight-Ridder/Tribune Business News, September 15, 1998, p. OKRB982570EC.
Rodriguez, Karen, “Casting a Wider Net,” Business Journal, January 7, 2000, p. 17.
Snael, Ross, “Snubbed by Banks, Ameritrade Unit Turns to ‘screen Scraping,’” American Banker, January 10, 2000, p. 1.
Taylor, John, “Few Midlands Stocks Escape Dow’s Big Drop,” Knight-Ridder/Tribune Business News, August 4, 1998, p. OKRB982160E9.
—Jeffrey L. Covell