On Line Trading: A Business Plan for the future

I originally wrote this about 6 months ago, but never got around to doing anything with it. Since then, we’ve seen E*Trade bid for Ameritrade (only to get rebuffed) while Ameritrade approached T.D. Waterhouse about a merger. I imagine others in the discount online brokerage space are engaged in similar manuevers.

Its all wasted energy.

Why? Think about Clorox, Kleenex, Post-its — these are commodity products that have differentiated themselves through branding from their competitors. Even specific brands of Premium gasoline are known to auto afficianados  (Amoco Ultimate and Sunuco 94 are the most liked).   

Even commodity products can distinguish themselves from the competition in a commodity field."

Competing on price doesn’t work; Your peers just engage in a price war. Bulking up doesn’t work; There’s still many competitors who will step in to fill the void. And while E*Trade spends almost $100 million per year on advertising, their competitors (collectively) spend even more.

There’s a better solution: Its called Differentiation. 

I’ve thought about this for some time now. I’ve always followed E*Trade closely, because that’s how I got into this business. Well over a decade ago, a friend was running a branch office of E*Trade in NY — they were a proprietary trading house before they rolled out on-line trading. He brought me into the biz as a trader (hence my focus on capital preservation and technicals/internals).

We know there’s a price war, and that discount on-line trading is merely a commodity business. There’s significant customer churn. To break out from the back requires something significantly distinguishing from the other firms. Size isn’t what’s required, a better business model is. Something that is value-added for the customer, gives them a reason to pick you versus the other guy.

Here’s a way for an online trading house to distinguish themselves:

Since they popularized online trading, E*Trade has built tremendous brand recognition. But its come at a cost: Spending north of $86+ million in advertising over the past fiscal year, one must ask if the company is truly maximizing their return on advertising dollars.

It has become a crowded marketplace, but the firm that differentiates itself from the rest of the online brokers — Schwab, Ameritrade, Brown, ScottTrade, etc. — garners a huge advantage.

Of the full list, I believe Schwab and E*Trade are best positioned to put such a plan into full effect, with Ameritrade a close third.

After considerable thought (and using what little expertise and experience I posses), I have put together a series of ideas as to how an online broker can do this. When discussing this with a colleague, he made the astute observation that the ideas were alphabetical: A-B-C-D-E-F.   (Talk about pattern recognition!)

This was purely coincidental, but because of it, I present the list — not in priority form — but in alphabetical order:

A)   Advertising (pundit)
B)   Blog
C)   Commentary
D)   Database
E)   Education
F)   Fund

Here are the details of each:

A.  Advertising

Given the astounding amount of money each of these players spend on advertising (E*Trade’s $86M is an example), I do not think the companies are getting as much for their money as they could. An editorial presence in print, radio, internet and, of course, TV would extend the advertising dollars and dramatically improve ROI.

In my own work, I garner millions of dollars in PR for my firm — TV, Radio and Print. My motivation are not PR — I do it because I enjoy participating and furthering the debate — but that is surely the main reason my firm pays me a salary (btw guys, I want a raise).

Where is E*Trade’s talking head? Its astounding to me they dont have one — Schwab and Ameritrade do. It would extend and further the huge advertising outlay they make. The platform alone guarantees at least moderate coverage.

I figure for about a million a year (plus or  minus) — the Chief Investment Strategist position, staff, office, research, etc — they could add close to a 50% increased return on their massive ad outlay.

That’s the first layer; consider each of the following topics (B – F) as supporting the PR/Branding/Marketing aspect of the firm:

B.  Blog (Web logging)

Blogging is a great way to provide a readership with an overview of topical issues related to current media. By frequently posting short, interesting blurbs related to a given topic — i.e., the macro-economy, market moves, releases, etc. — a readership develops, drives traffic, and stays within a given website.

I’ve maintained a weblog in various forms — most recently The Big Picture — since  after 9/11. Since moving it to Typepad, readership and traffic have grown nicely. According to one traffic ranking site, The Big Picture consistently ranks in the top 100 web blogs. This is out of millions of blogs, with no advertising budget, staff, or research dollars.

There are a few examples of where a business’s website added a known blogger and drove their own traffic and reader retention much higher. The best example I know of is Washington Monthly, which integrated Kevin Drum’s CalPundit blog into their front page. But other companies have been using them for a variety: see  Jupiter Research and Microsoft as examples of different applications of Blogging to a corporate need.

E*Trade needs to hire a talking head, start a blog (with some editorial assistance and a small blogger crew), make their site stickier and actually be useful for their clients. Further, you
can use it to attract new clients who are not reached thru newspapers or TV ads.

On a ROI basis, I’ll bet a good blog utterly kicks TV advertising’s ass.

On-line brokers need a stickier site, a reason for customer and non-customers alike to hang around their — perhaps even open an account.

C.  Commentary

Whenever anyone asks me to help them get on TV, I give them my "only 10 years to become an overnight sensation"
speech.  Getting into print is a prerequisite for expanded media
coverage. An overview of the markets, with some commentary as to what’s
happening today and why is the key to garnering print coverage (WSJ,
Barrons, NYT, Business Week, Bloomberg, Fortune, Forbes, USA Today, LA
Times, etc.) as well as lining up subsequent radio and TV.

Its especially helpful if you have something a bit different and/or
interesting to say. My own experience is instructive: I work for a
relatively small firm ($5b in assets) with no special clout, no PR
department, no hired PR guns, and no "golden rolodex." Yet I’ve managed
to garner appearances on just about every show there is: Wall Street
Week, Squawk Box, Cavuto on Business, Power Lunch, Bulls & Bears,
Kudlow & Co., etc.

Hey, I’m not that good. (Certianly not telegenic!) But I
worked relentlessly at it over the years. It took a long time
commenting on all manners of markets and conditions to develop a
reputation for being a reliable voice with a slightly different

Further, I have published commentaries in CBS MarketWatch (now owned
by Dow Jones), TheStreet.com, and why I submit  items to Barron’s.

For an E*Trade, I suggest their commentary be “tiered:”  general
overviews (no recommendations) for the full investor base; A higher
tier — offered to more active, professionally oriented investors —
can contain specific macro recs — no individual names, but sectors and
overall market actions can be discussed.

There are a few legal hoops to jump through, but they are not a major obstacle.

D.  Database

There is a goldmine of internal data which an online firm can and
should analyze relative to their clients on line trading behavior and
any subsequent market action. Sector concentration, margin activity,
long/short positions, option activity, purchase/sales relative to
recent markets — these are just the tip of the iceberg.

This is an area that may could generate a huge internal data set,
providing some information to account holders, as well as creating
another source of media activity.

I suggest spending up to six figures bringing in the Pros from Dover
(anyone get the reference?)  and set up an ongoing data sharing
agreement. The goal is to finthe correlation between online activity
(compare it to the old oddlot data)

E.    Education

Given how much is spent acquiring new accounts and bringing dollars
into the firm, it would be worthwhile to prevent individuals from
closing accounts and/or losing those dollars. Whether its spectacular
blow ups/losses, or via sandpapering themselves to death, neither activity serves the firm’s purposes.

Basic risk management skills can be taught, along with stop loss strategies and capital preservation. Its more productive and less expensive to retain clients — and help those accounts hold onto their money — than getting new clients.      

This segment of the investing public has been extensively ignored. There’s a barbe;ll — newbies on one end, pros at the other — with a big chasm in between. The people with some experience and skills is the most underservd  niche. They are the intended audience for “The Apprenticed Investor
column in TheStreet.com. Its target
audience is neither the novice nor the pro, but rather the great mass
of investors in between. And thats pretty much the online trading firms’ key
client group.

F.   Fund

This last one is very unlikely to occur — at least publicly. I just know the online brokers would recoil in horror over this — but its intriguing nonetheless: Have their pundit run a fund.

There are enormous advantages to running a fund. Doing this places
the firm’s talking head squarely on the Buy Side, which allows for more
extensive discussions in the media of specific sectors, stocks, markets
and asset classes.

Wearing two hats increases the range of subjects they can discuss, as well as creates the potential for new products.


This is just an overview of these 6 items. My priority of them would look something like this:

B)   Blog
E)   Education
A)   Advertising (pundit)
C)   Commentary
D)   Database
F)   Fund

Each deserves further discussion and details. Feel free to discuss in the comments . . .


-Barry L. Ritholtz

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What's been said:

Discussions found on the web:
  1. JWC commented on Jun 4

    I would never go to Barrons or other sites like that if there was not a link from a blog somewhere. I think a good blog would atract a lot of traffic.

  2. DJV commented on Jun 4

    Schwab already does education extensivly, has pundits such as Liz Ann, offers significant commentary from in-house analysts and is kicking ass with thier new fund methodology(preformance wise.) I’m shure they must do some data mining but I think there would be some tricky compliance issues involved in releasing trading trend data, and blog would really enhance the stickyness of thier site. mabey they are differentiating themselves again and that’s why they are taking market share. Et is being left in the dust!

  3. RichL commented on Jun 4

    There is a simple way to differentiate a discounter; give good executions! All of these bozos sell their order flow to Knight-Trimark or one of the other third markets. The third market trader does his level best to steal from the order. The broker who handed off the trades to the thief has plausible deniability as to whether he is culpable for the theft, while receiving payment for the order flow and not incurring floor brokerage fees.

    Instead of spending a fortune on marketing (otherwise known as lying), maybe one brave soul will actually spend money to provide a good execution. The world will beat a path to his door.

  4. DJV commented on Jun 5

    As part of the sale of thier capital markets division, Schwab entered into an 8 year aggreement with UBS to handle thier formerly internallized (never ever sold to NITE) order flow, thus removing any conflict-of-intrest. They are consistently the most ethical OLB.

  5. Half Sigma commented on Jun 5

    Price wars are good for the consumer!

    As a frequent user of Ameritrade, I fear thar mergers may mean higher prices are coming.

  6. RichL commented on Jun 5

    DJV – Please look at the order disclosures posted at Schwab. They send 85+% to UBS, who internalizes the order flow. Just a different guy profiting from your order. Do you REALLY think that 85% of the time that UBS is the natural best market for the stock you are trading in?

    Schwab merely sold their fiduciary duty away in advance!

    To quote- Part of the consideration Schwab received for the sale of SCMLP related to the Services Agreements and Schwab’s commitment to route most types of equity orders and listed options orders through UBSCM.

  7. DJV commented on Jun 5

    RichL- The executions I recieve at Schwab are consistantly better than those that I get from Fido,Meisro and NDB. Thats why I have the bulk of my assets there and use the other three less frequently.You should try them, and mabey read barry’s A. I. series, especially the latest piece where he recommends keeping one’s emotions in check.

  8. BusinessPundit commented on Jun 6

    Online Trading Business Plan

    Barry Ritholtz has a very cool post in which he proposed a business plan for online trading. He proposes differentiation byA) Advertising (pundit) B) Blog C) Commentary D) Database E) Education F) FundEach section is explained in detail in the…

  9. BusinessPundit commented on Jun 6

    Online Trading Business Plan

    Barry Ritholtz has a very cool post in which he proposed a business plan for online trading. He proposes differentiation byA) Advertising (pundit) B) Blog C) Commentary D) Database E) Education F) FundEach section is explained in detail in the…

  10. Gary Marcus commented on Jun 6

    I call Schwab the big dk room because the brokers, trading consultants, etc. just do not know anything about the stock market. They have these trading consultants who have never worked a trading desk, floor of any exchange or been exposed to anyone with this experience. They only know charts, charts, and more charts. Open book, freeze the book, do a look, lets find a natural they have no idea what your are talking about. Marty Cunningham what happen???

  11. turnkey business websites commented on Jan 8

    why don’t you all get direct access to the market through an ECN. it is about $10 a trade, but when you hit the bid or ask the order is executed before your finger leaves the keyboard.

  12. tswas commented on Sep 4

    Great advice on differentiation. But I think another concern is that after the 2000 crash many individual investors became dormant, and put their ‘heads in the sand’. Etrade and others have caused these investors to have a ‘bad taste in their mouths’ with the excessive non use account fees. They may want to reenter the market, but are put off by the fees and loss of cash over the years. Therefore a couple of good blogs, and less on the minimal-value advertizing and there may be a comeback of new cash from less seasoned investors. No non-use fees may be a great differentiator.

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