Wednesday, November 08, 2006

What the Retail Brokers are Buying May Not Be What's Served to Active Traders

TD Ameritrade purchased another technology platform company, after it recently bought QuoteTracker. This company is called Crontech, they make a front end called “Stock Watch Pro” which TD Ameritrade is renaming into Strategy Desk (Note: the rest of our review of this software appears in the first comment to this post). Surprisingly the product, Stock Watch Pro, is in many ways similar to QuoteTracker. There is significant overlap in that it also has charts and level 2 but the main purpose of this acquisition, from what I hear, is the back-testing and auto trade capabilities that Stock Watch Pro provides. This makes it a combined $90 million between QuoteTracker and Crontech that Ameritrade just spent to try and catch up to TradeStation, gain a sense of parity with Fidelity, and the lead the industry with a reputation for powerful, advanced tools.

Are there other reasons for these moves? Surely.

I mentioned in a previous post the virtues of companies who at least consider that the best thinking in product development exists outside their four walls. I assumed that fast moving companies can buy, partner, or license with another company in order to get the best of the best technology under their roof and to the customers. Yet there is another possibility. An industry leader can buy another company to eliminate its technology from the marketplace or from falling into the hands of another competitor - if the technology has loyal customers willing to stay with the acquiring company - all the better. I don't know if this is TD Ameritrade's tactic but they are in an acquisition mode for technology and their ultimate purpose is not yet clear.

The acquisitions may not entirely be in the service of active traders but may also influence regular investors who trade infrequently. The thinking here is the same company that engineers a NASCAR winner ought to be equally capable of producing a well-built sedan. Active traders (or as Bear Stearns calls them, 'instividuals'), however, are clearly a coveted and profitable group that represent trade volume and revenues. Online brokers are desperate to get their hands on technology that can boost both of these items. A recent WSJ article mentions that TradeStation customers trade an average of 47 times/month. The industry average among retail online brokers is just 2.5 times/quarter! There's a big prize to the player who can close that gap.

2005 appeared to be the year of brokerage acquisition and consolidation. Among the notables were: Ameritrade's acquisition of TD Waterhouse, E*Trade's acquisition of Brown|Co and Harrisdirect, and J.P. Morgan's acquisition of Neovest. 2006 appears to be the year of technology acquisition and consolidation (e.g., QuoteTracker, Crontech, Instinet by Nomura, etc.) with the looming possibility of a price war (witness the free online trade offers from Bank of America and Zecco).

Note: We pay attention to this segment of the marketplace because of our licensing partnership with Scottrade and their Scottrade ELITE customers - plus it is easier to follow the steps the players in this space take vs. the more secretative and walled off segments we also cater to (e.g., hedge funds, institutions, etc).

3 comments:

D TradeIdeas said...

StockWatch Pro seems like an also-ran to existing platforms out there - no points for thinking out of the box. Why? This product reveals the same problem present in most back-testing tools on the market today:They want you to first find a stock like IBM and then find a strategy to trade IBM. In this regard they are just copying what TradeStation, eSignal, and CyberTrader offer in the market.

That is in stark contrast to The Odds Maker which determines a strategy's usefulness no matter what stock appears in the strategy.

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Anonymous said...

Very interesting blog post. Looks like the online brokers are all into backtesting. That should be good for you guys :-)

By the way the Odds Maker rocks!

TI Maven said...

Thanks for the compliment. We are excited about how the Odds Maker is playing out and it is certainly interesting to see the acquisitions in the space.