Business

The cowboys of commerce

Move over fat cats. Discount stock brokers have their keyboards loaded to corral the deals

Kimberley Noble May 17 1999
Business

The cowboys of commerce

Move over fat cats. Discount stock brokers have their keyboards loaded to corral the deals

Kimberley Noble May 17 1999

The cowboys of commerce

Business

Move over fat cats. Discount stock brokers have their keyboards loaded to corral the deals

Kimberley Noble

At first glance, Steven Reid does not look like a driving force behind one of the biggest investment deals in Canadian business history. He looks, quite frankly like a cross between CTV talk show host Mike Bullard and Ohio comic Drew Carey who was dressed by the Gap. Silicon Valleys boy geniuses notwithstanding, this blue-collar teddy bear of a guy does not fit the picture of a man at the epicentre of high finance.

Just look at where he works—on the fourth floor of a suburban office complex 20 minutes north of the Toronto business district, in a building best known as the place where commuters catch the York Mills bus or the subway downtown. He spends the day slumped in a swivel chair, staring at a computer monitor. Once or twice a minute, all day long, Reid reacts to an electronic prompt, punches some keys and, in the blink of an eye, scans what pops up on his screen. Tap-tap-tap, he

punches more keys. Sits back. Swivels. Seconds later, he reacts to the next prompt and starts the whole process again.

Not your idea of a mover and shaker? Look again. Reid is a discount broker for Toronto Dominion Bank’s Green Line Investor Services, the largest cut-rate investment dealer in Canada. When combined with TD’s U.S. operation, it is the No. 2 discount brokerage in the world. Forget the fat-cat stockbrokers in their red suspenders and Brooks Brothers suits—they are fast becoming niche marketers. Discount traders—and the multimillion-dollar computer systems they are hooked up to—are the hot commodities in the investment industry. So what if Reid works over a bus station in the suburbs? Who cares if he never lunches clients? Brokers like him are fast and cheap to employ, cranking out as many as 400 trades a day for salaries that range from $28,000 to $45,000, plus bonus.

Stock and bond discounters don’t give advice and don’t take risks; they are more cowhand than hired gun. But, with a few clicks of the keyboard, they connect their clients to practically every stock exchange in the world. They keep those trades moving along—for as little as $20 each. Occasionally, there are computer problems that annoy customers who are active traders. But system bottlenecks are also evidence of the phenomenal demand for these services. “Information about investing and the access to do it is growing all the time,” says Steve Sparrow, the Toronto-based manager for Green Line’s call centres. “More and more people are willing to make their own decisions. Our job is to provide the key information clients want, and to continue to make the whole process faster.”

Growing pains aside, the system is working and these cow-

boys of the keyboard are suddenly worth a fortune to their firms. Fuelled partly by the huge demand for anything that resembles an Internet stock and partly by analysis of where the investment industry is headed, the market value of brokerages that combine low-priced labour and high-tech equipment has hit the stratosphere.

Charles Schwab Co., the industry’s pioneer, is worth $61 billion on the New York Stock Exchange, $ 19 billion more than the much larger and more profitable Merrill Lynch & Co. Inc. Similarly, on the strength of its discount brokerage, the stock market now views TD—nicknamed “TD.com”— to be worth $825 million more than the Royal Bank of

Business

TD saw potential where others saw risk. It has been clubbed ‘TD.com.’

Canada, even though TD has $92 billion less in assets than the Royal. Most telling of all is the price tag attached to TD s discount brokerage now that the bank has decided to sell 10 per cent to public investors. The share issue is expected to raise $1.5 billion—meaning the entire operation, to be called TD Waterhouse Securities Inc. and consisting of 200 branches in five countries, will be worth up to $15 billion.

In TD s case, the biggest problem with being so far out in front is that its brokerage is playing in the really big leagues— duking it out against titans like Schwab, which is setting up shop in Canada. Before too much longer, TD Waterhouse could even be competing against Merrill Lynch, if industry rumours are correct and Merrill chooses to buy an online discount broker.

For now, TD is golden. It is sitting on 50 per cent of the Canadian discount brokerage market (measured by client assets), which the bank estimates is nearly double that of its closest Canadian rival, Royal Bank Action Direct Inc. Green Line averaged 98,000 trades a day in the three months ending on Jan. 31, a 132-per-cent increase from a year before. It also made a profit of $31 million, more than three times what it cleared in the first quarter of 1998. What’s more, the growing demand for discount services—and the speed and price at which TD has been able to provide them—made Green Line the biggest single retail broker in Canada in 1998. Its 18-percent share of this market surpassed that of long-established giants such as RBC Dominion Securities Inc., Nesbitt Burns Inc. and Merrill Lynch Canada Inc.

Discount trading on the Net

The steps a TD Green Line trade would take on the Web:

D Picking the stock: A customer signs on to the WebBroker site, where financial information can be read. The client chooses the stock to trade, fills in an order form and logs in a password for the request to proceed.

E3 At the brokerage: The transaction moves through servers, the Internet equivalent of phone switchboards. This is where bottlenecks may occur. The brokerage computer system directs the request to a broker at a call centre. (TD has six call centres across Canada. With the exception of Quebec, where orders have to be cleared locally,

the call centres can handle requests from any place at any time.)

B Going to market: The computer assigns the order to the next available broker, who calls up the client’s file to verify the request matches the individual’s investment objectives. Then he or she routes it to the appropriate stock exchange to be executed.

Q A done deal: The stock exchange confirms to the brokerage computer that the trade has been made. On the WebBroker site, the client can see the trade’s status automatically change to “F” for filled.The cost? As little as 10 per cent of an identical full-service trade.

The history of discount brokerage in Canada is synonymous with Green Line. Out of all of Canada’s leading financial institutions, TD has been the only one to recognize the potential of what, even a few months ago, was being dismissed as a marginal and even risky business. In 1983, Ontario regulations prohibiting stockbrokers from competing on commissions were abolished, and then-TD president Robin Korthals decided to build a discount broker. “Robin is a brilliant visionary,” says Paul Bates, a former Green Line president who now heads Charles Schwab Canada Co. “The decision was driven by his intellect, as well as by the fact that he was also an active investor.”

The firm started small, buying the customer list from a little company called Equity Trading, and taking orders over the phone. For the next decade, the discount broker grew through acquisitions—starting with the purchase of a rival, Torontobased Gardiner Group, and culminating with the 1996 takeover of Waterhouse Investor Services Inc. of New York City. TD officials were willing to bet the farm that the U.S. market was on the verge of a growth spurt. The bank paid $726 million for Waterhouse, recalls Dan Marinangeli, TD’s senior vice-president of finance. “A lot of people were saying, ‘Why are you doing this? That thing will never make you any money.’ ”

By last year, when TD decided to try to join forces with the Canadian Imperial Bank of Commerce, Waterhouse was a success—not to mention a key attraction for its potential merger partner. Throughout the merger debate, TD continued to close

bank branches while expanding electronic services. This did not help its public relations campaign, but left TD shares in great shape when Ottawa turned down the bank unions. Then, “we got lucky,” Marinangeli says. “Just as the mergers fell apart, Internet shares took off.”

And so did discount bro„ kerages. TD’s Sparrow esti! mates that between 25 and 27 S per cent of Canadian retail inI vestors now use discount I traders. Royal Bank’s Action Direct is signing up 500 customers a day and spending $43 million to expand into the United States. “Green Line is growing so rapidly,” says Mary Savona, a finance instructor at Toronto’s George Brown College who also trains these newwave brokers for the industry. “They don’t have room to put new desks anywhere.”

Driving the trend are advances in technology. Trades can now be made on high-tech gear ranging from laptops to pagers and cellular phones. In recent weeks, however, the technological revolution backfired. Unprecedented demand for both e-commerce stocks and Internet trading, combined

The discounter’s cut

The range of fees discount brokerages would charge a customer buying 250 shares of a Canadian equity at $20 a share:

Bank of Montreal InvestorLine

www.investorline.com

CIBC Investor’s Edge

www.investorsedge.ciDC.com

CT Securities

www.ctsecurities.com

Charles Schwab Canada

www.schwabcanada.com

Disnat

www.disnat.com

E*Trade Canada

www.canada.etrade.com

HSBC InvestDirect Canada

www.hsbcinvestdirect.com

Royal Bank Action Direct

www. royalbank. com/actiondirect/

Scotia Discount Brokerage

www.sdbi.com

TD Green Line Investor Services

www.greenline.ca

Online fee $25

$28

$29

$37.50

$29

$27

$29

$29

$28

$29

Broker-

assisted

fee

$45

$47.50

$47.50

$75

$46.25

$42

$43.50

$47.50

$35

$47.50

with system problems, gummed up phone and computer lines at major online brokerages for 10 days in April. I Hate TD Green Line and other chat forums bristled with the indignation of investors who claimed glitches had cost them thousands of dollars.

Still, Action Direct president and chief executive officer Michael Bastian says technology shall overcome any setbacks. Suddenly, everyone with a computer has access to the type of investment research that used to only be available to pension fund managers. “It’s the migration of what used to be the province of a few to the mass market,” Bastian says. “Look at wholesale pricing and buying in bulk, the advent of Costco and other such stores. That’s essentially what’s happening here. Individual consumers are buying wholesale.”

The discount brokers’ current clients are middle-aged professionals choosing to make decisions for themselves rather than paying hundreds of dollars to add some stock or bond to their investment portfolio. Once they move out of the market, they will be replaced by younger investors who will be more computer and finance literate. “People in their 20s already have investment portfolios,” says Bastian. “And their kids will use computers like you and I use the telephone.”

There are still some clouds on the horizon. Today’s keyboarding brokers are under intense pressure as new players emerge. In the United States, discount firms are in the middle of a price war that has driven commissions as low as $5 (U.S). a trade. Schwab—which opens its first Canadian storefront in Toronto this summer and four more offices across the country later in the year—is responding by breaking new ground. Having staked out the discount turf, Schwab is venturing into full-service territory, offering customers different levels of investment advice and services, with a sliding price scale. “We are looking for investors,” Bates says, “who are not afraid of technology, but who also like being able to bounce ideas off a broker and get guidance sometimes.”

TD Green Line is limited in how far it can expand in this direction. The bank is already in the full-service business through TD Evergreen. However, Green Line—soon to be Waterhouse—is following a route similar to Schwab’s. It sells a line of economical no-load mutual funds, and has set up a half-dozen or so “specialist desks” that provide value-added services. “Discount’s looking beyond the boom,” says Savona. “The brokers may not be able to offer advice, but they can do a lot to help customers maximize their profits on each trade.”

Meanwhile, back on the trading floor, Green Line is trying to make the assembly line quicker and more efficient. Over the strenuous objections of full-service brokers, discounters are lobbying for an end to the “know-your-client” rules requiring brokers like Reid to review even the least contentious of trades—such as straight sell orders. “Can you imagine how many more orders those brokers will be able to process?” Savona asks.

Not really. It is hard to imagine brokers like Reid moving any faster—although perhaps no harder than remembering how his high-priced predecessors operated a decade ago. E3