E*Trade Group, Inc.
E*Trade Group, Inc.
Incorporated: 1982 as TradePlus Inc.
Sales: $51.6 million (1996)
Stock Exchanges: NASDAQ
SICs: 6211 Security Brokers & Dealers
E*Trade Group, Inc., through its subsidiary E*Trade Securities, is leading the investment services revolution of the digital age. E*Trade, one of the pioneers of electronic investment services, is also one of the top online and Internet-based brokerage firms. Unlike traditional “brick and mortar” houses, such as Merrill Lynch and Smith Barney Shearson, and discount brokers such as Charles Schwab Corp., E*Trade operates only online, without the overhead of the extended sales offices networks and large employee base of full-service brokerages. E*Trade offers its customers 24-hours-per-day, seven-days-per-week stock and options trading and access to real-time market information, company research, market analysis, and other investment information services. E*Trade’s services are available through online services such as America Online, Compuserve, and the Microsoft Financial Network, through the World Wide Web at the company’s web site, through Internet-based “push” services such as the PointCast Network, and through direct-modem access and the touchtone telephone Telemaster system. E*Trade has broken the paradigm of traditional investing by giving its customers—typically computer-savvy, individual investors—access to the information previously available only to brokerage professionals. E*Trade does not act as an adviser, but rather gives its customers the tools to make their own investment decisions. As such, E*Trade has slashed the cost of trading, charging as low as $14.95 per 100-share transaction, compared to $150 or more at a full-service broker, or even the $70 or more per transaction charged by discount brokerage houses. The company, which operates a second “hot” facility in Sacramento, California, which duplicates the company’s Palo Alto facility’s equipment and customer service staff as backup protection, employs only around 350 people, compared to the many thousands at full-service brokers.
E*Trade customers subscribe to the service by establishing a minimum $1,000 account with the company. To discourage hackers, cash accounts are maintained offline—leaving the customer vulnerable only to the threat of unauthorized trading, which itself is discouraged by the company’s secure online site. Customers are issued a password with which they can access their portfolio through the company’s full web site. There they can choose among a variety of information, research, and portfolio management features, including personalizing the site for their own interests, and buy and sell stock and perform other investment transactions on the AMEX, NYSE, and NASDAQ exchanges. Based in Palo Alto, California, E*Trade’s services are not limited to U.S. customers; indeed, the company’s electronic services are accessed by private investors from more than 60 countries. At the same time, E*Trade, through its E*Trade Ventures subsidiary, has been establishing a presence on international exchanges, operating in Canada under the E*Trade brand name through a joint venture with Versus Brokerage Services, Inc. In June 1997, the company announced that it had reached a similar agreement to bring its services to Australia, through an alliance with that country’s Nova Pacific Capital Limited.
Founder William Porter, E*Trade’s chairman, owns a 20 percent stake in the company and serves on the board of directors. Leading the company’s growth, however, is Christos Cotsakos, also a director with a 5 percent stake in the company, as president and CEO. E*Trade’s growth has been dramatic: its nearly $52 million in revenues for 1996 is more than double its sales for the previous year, and estimates for 1997 expect revenues to double again. Meanwhile, the company adds 500 new customers and as much as $10 million in new assets daily. E*Trade’s more than 150,000 customers have also been steadily increasing the company’s trading volume. In April 1997, the company reported a daily transaction volume of more than 14,000.
Fomenting the Brokerage Revolution in the 1980s
When William Porter formed TradePlus with $15,000 in startup capital in 1982, the online investment revolution was already underway. The first online service, called Tickerscreen, was initiated in May 1982 by Max Ule, as a division of Ro-senkrantz, Ehrenkrants, Lyon & Ross, Inc. A bulletin-board system, Tickerscreen enabled customers to place orders after the markets were closed, which would then be transacted by the brokerage house when the markets opened again the next day. Porter, who had held management positions with General Electric and Textron, after earning an M.A. in physics at Kansas State College and an M.B.A. in management from the Massachusetts Institute of Technology, saw an opportunity to take online investment services further—by automating the full transaction process.
Porter’s TradePlus “vision” combined two emerging trends. Already trading under his own account, Porter also looked at cutting the cost of trading. By then, a new breed of discount brokers, such as Charles Schwab, had arisen to challenge the full-service brokerage houses. By the mid-1980s, discount brokers amounted to nine percent—up from two percent at the start of the decade and rising—of all stock transaction commissions. Porter, however, believed that he could cut the cost of trading even deeper than the discount brokers, who still charged as high as $100 per transaction. The second trend was the appearance of the first personal computers in the early 1980s. Porter immediately recognized the potential of this new electronic market, foreseeing that personal computers— equipped with their own modems—would soon become commonplace office and home equipment.
In 1982, TradePlus contracted with C.D. Andersen & Co. to create a computerized order entry system. That system went online in July 1983. TradePlus enabled its customers to access market information, and conduct trades during market hours, while offering 24-hour-per-day portfolio management capability. By paying a premium on the basic service charge, customers could also receive real-time stock pricing and portfolio updates; otherwise, they received information after a 20-minute delay. Customers paid a signup fee, ranging up to $195, and monthly subscription fees of $15, which gave them one-hour of connect time per month. Use of the service beyond that cost $24 per hour during market hours, and $6 per hour when the markets closed. For the premium, real-time service, nonprofessional customers paid $75 per month and professional investors paid $135 per month, fees established by the National Association of Securities Dealers.
By 1984, C.D. Anderson counted some 500 TradePlus customers, who contributed as much as 12 percent of the firm’s commissions. In that year, the Anderson’s exclusive agreement with TradePlus ended, and Porter began marketing the company to other discount brokers, signing on Fidelity Brokerage Services, of Boston, and Texas Securities, Inc., of Fort Worth, by the middle of the year. By then, TradePlus was not alone: several other discount brokers had begun to offer their own online services. But TradePlus continued to build, in 1985 signing Quick & Reilly, then the nation’s third-largest discount broker, to offer TradePlus through the CompuServe Information Network. The following year, TradePlus services were also added to another large database service of the time, Dialog Information Retrieval Service. The concept of online investment transactions was catching on, although individual investors were still burdened by monthly subscription charges. Toward the late 1980s, that changed when Donaldson, Lufkin & Jenrette introduced its PC Financial Network, which was incorporated into the standard services of such online businesses as America Online and Prodigy. TradePlus’s primary customers, meanwhile, included a growing number of discount brokerage houses, conducting their activities via the TradePlus system.
Online trading continued to build momentum. By the summer of 1987, TradePlus reported that its servers were in use nearly every minute, often by several people at once, 24-hours per day, including a large number of international customers as well as domestic customers. By then, in addition to Quick & Reilly and C.D. Anderson, two banks began offering TradePlus as a brokerage gateway. Bank of America’s Home Banking service gave customers access to Charles Schwab & Co. using TradePlus’s computers, while Chemical Bank’s Pronto customers could place orders through TradePlus to Quick & Reilly. Electronic trading seemed on its way to becoming a competitive force in the investment community. But then, in October 1987, the market crashed. Trade volume contracted, and the online trading services, TradePlus included, withered.
Reborn in the 1990s
Trading picked up only slowly as the 1990s began, crippled by a national recession, and then by the U.S. entry into the Gulf War. But in 1991, Porter, still active with TradePlus, again showed his visionary side. With several hundred thousand dollars of startup capital from TradePlus, Porter established a new company, E*Trade Securities, Inc., providing deep-discount brokerage services. Instead of the monthly fees charged by TradePlus, E*Trade offered flat-rate trading and free information services via the online services, including America Online and Compuserve. By the following year, Wall Street had recovered from its slump, entering the bull market of the 1990s. At the same time, interest in the online services began to build, while advances in modem technology and falling prices among computer equipment in general, were providing faster access to a widening range of people.
E*Trade quickly dominated this new investors market. As trade volumes continued to build, interest in investing— particularly among the Baby Boom generation—was also rising. By the mid-1990s, more than 20 percent of the nation’s population was investing in stock, compared with less than 5 percent the decade before. By 1992, combined revenues at TradePlus and E*Trade neared $850,000. The following year, revenues—based on E*Trade’s $40 per transaction charge— topped $2 million. The company also turned profitable, posting $100,000 in net earnings. The new availability of investment information, accessible by the online services’ customers 24 hours per day, added to the popularity of investing, and particularly self-directed investing by the growing numbers of computer-literate customers. Both America Online and Compuserve were undergoing their own growth boom during this period. By 1994, the two companies counted some two million customers between them. In less than three years, America Online alone would count more than eight million customers.
Nineteen ninety-four proved significant for E*Trade as well: revenues exploded, nearing $11 million, making TradePlus and its E*Trade subsidiary the fastest-growing private company in the country. E*Trade quickly outpaced its parent, and the company would eventually be reorganized as the E*Trade Group, with E*Trade Securities remaining its principal subsidiary. The company, which counted 44 employees in 1994, scrambled to keep up with its own growth, adding more than 200 employees in one year, and expanding its office space from 4,800 square feet to more than 20,000 square feet in 1994. By the end of 1995, however, E*Trade was forced to move again, to new quarters with some 48,000 square feet.
By 1995, the new American information revolution was firmly underway. The appearance of so-called multimedia PCs, which bundled sound, video, and—particularly important for E*Trade—modems into relatively inexpensive and easy to install packages, brought a whole new wave of people to computers and online services. E*Trade soon found itself joined by competing online investment services, forcing it to drop its transaction rate to $19.95. But the company had already taken the lead among the growing home investors community— which was also served by such popular online services as America Online’s Motley Fool investment information area. E*Trade found its system overloaded with customer calls, and in the summer of 1995 was forced to quadruple its systems. By the end of that year the company’s revenues had doubled again, reaching $22.3 million and generating a net income of $2.6 million.
The online services proved merely a taste of things to come. By the end of 1995, the Internet—and more specifically its graphical World Wide Web interface—had become the buzzword of the country. A new range of service providers sprang up, countering the hourly charges of the online services with unlimited access at flat-rate monthly fees. E*Trade quickly set up shop on the World Wide Web as well. Within weeks after the company’s entry on the Web, the Internet accounted for more than 13 percent of the company’s sales.
In early 1996, E*Trade began preparing its own initial public offering. Porter stepped aside, bringing in Christos Costakos to lead the company. Costakos, a son of Greek immigrants from Paterson, New Jersey, had been a decorated Vietnam veteran—a volunteer awarded the Congressional Medal of Honor for his actions during the Tet Offensive—before joining the early 1970s startup Federal Express. Beginning at an hourly wage of $3.50, Costakos worked his way up the Federal Express ranks over nearly 19 years, before becoming president and CEO of Nielsen. With Porter as chairman, Costakos was named president and CEO in April 1996 and led E*Trade into its IPO that summer.
E*Trade was adding some 500 customers and as much as $10 million in assets per day; by May 1996, the huge increase in trading volume—in the first half of that year alone volume had tripled, from 50 million shares traded to more than 170 million—proved too much for the company’s system, crashing the company’s computers and leaving its customers stranded for some two hours. For that two-hour period, the company paid out $1.7 million to cover its customers’ losses. A second, more limited glitch occurred in July. But the company had already begun to prepare for such an event, having leased a 53,000-square-foot space in Sacramento, California, to install a redundant hardware and customer service facility. The growth of its competitors, including the arrival of Schwabs’ e.schwab service, forced E*Trade to cut its transaction rate again, to as low as $14.95.
E*Trade’s growth pace continued, seeing revenues more than doubling again to near $52 million for 1996. The company also began expanding its services, offering investors the opportunity to buy shares in IPOs and purchase equity in private offerings. Trade volume continued to grow, reaching 8,000 transactions per day—with the Internet accounting for more than a quarter of all transactions. The company also formed a subsidiary, E*Trade Online Ventures, to search for other directions in which the company could expand. One such expansion was the company’s agreement with Versus Brokerage to extend the E*Trade brand name to Canada’s financial market. A similar agreement would bring the company to Australia in May 1997. In June 1997, E*Trade and leading World Wide Web search engine Yahoo!, which recorded some 10 million “hits” per day, announced an agreement which added a direct link to E*Trade’s web site from the Yahoo! site.
With an estimated 40 million Americans online by mid-1997, and a total online community of some 60 million worldwide, E*Trade’s future appeared electric. Analysts expected the online investment market to grow from 1.5 million in 1997 to 10 million or more by the turn of the century. E*Trade looked forward to becoming the top brand name of this new investment era.
E*Trade Securities, Inc.; E*Trade Online Ventures, Inc.
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McCarroll, Thomas, “Investors Rush the Net,” Time, June 3, 1996, p. 54.
Tyson, David O., “The TradePlus Innovation: Latest Prices and Automated Orders in Market Hours,” The American Banker, August 16, 1984, p. 1.
Wyatt, John, “Etrade: Is This Investing’s Future?” Fortune, March 3, 1997, p. 190.
—M. L. Cohen