Ameritrade Team 25
John Bollen, Curtis Leung, Bobby del Rosario & Yiannis A. Simos
Situation Analysis
Last year, investors flocked to online investing and the trend continues to grow. Among all equity trades conducted by individual investors last year, over 37% were done online. And total online accounts numbered 7.3 million at 1998 year-end, up substantially from the 3.7 million online accounts at year-end 1997. Total assets in online accounts for 1998 was $420 billion. In 1998, An average online trades per day went to 336,700 (a 125% increase over 1997). The growth continues. Between 1999 and 2003, the number of online accounts is expected to grow over 400%. Forrester estimates online accounts will grow to 14.4 million by 2002i. Total assets to grow from $500 Billion to $3 Trillion. From 1997 to first quarter 1999, trades per day are growing at over 25%. There have been several factors contributing to online trading. These include declining interest rates, growth in US markets, technology, Internet population growth, new IPO opportunities, and growing online brokerages. 91% of Internet users research investment on the net. However, only 11% of the users trade online. Online Investor have over 100 online brokers to choose from. These brokers have historically differentiated themselves through pricing and services. However, the last two years prices have leveled off at about $15.50 per tradeii The implications are huge. There is a large market opportunity in online brokerage services. Many Internet users are researching, but not investing. Only 25% of the market is captured. Financial portals currently capture the share of visits. Online brokerages enabling low-cost, high-volume trading services. The savvy investors can use financial portals for research and easily visit an online brokerage for trading. This opportunity will fuel the market’s growth. There are several different Investor Profiles. There are the Hyperactive Traders. These traders seek low-cost, fast trades and little else. They are not interested in additional research or advice. There are also the Serious Investors. They are active traders usually in search of hot stocks. They value quick, reliable trades and timely information. You also have the Hobbyist, who aims for strong returns from portfolio. Finally, there is the Long-Distance Runner. This person is not a frequent trader and seeks tools for financial planning and portfolio optimization Forrester has found three distinct Online Brokers types - the discount broker, mid-tier broker, and full service broker. The discount brokers have a low amount of product depth and low amount of human advice. They basically offer automated aide. The mid-tier brokers have moderate product depth and moderate human advice. This type of firm offers product value. Finally, the service broker has a high amount of human advice and high depth of products. They act as an on-line advisor.
Ameritrade Company Overview
Ameritrade is one of the leading Online Brokers. Ameritrade is designed to appeal to customers who are seeking very low execution costs. They are known as an online discount broker. However, they have a much broader business model. The online business starts as a discount broker and for additional fees you can move to a mid-tier broker. Finally, you can have a full service broker at higher priced trades. The prices are given as follows. Clients may trade any number of shares, regardless of share price, at $8 per trade for Internet trades, $12 per trade for trades made via touch tone telephone or personal digital assistant (mid-tier), and $18 per trade for broker-assisted trades (fullservice). They also have special programs tailored to the Hyperactive investor. These Hyperactive traders must maintain a $10,000 minimum balance and will receive a year of equity executions for a flat $800 annual fee. Under this program Hyperactive traders have unlimited trades. Ameritrade’s Online Broker has approximately 500,000 customers. For the 1998 fiscal year revenue was $165 million (up 154% from fiscal year 1996). Ameritrade sells itself as no frills online broker offering few products and little human advice. However, their real business model is to attract the discount buyers and move them into a full service offering. We mentioned Ameritrade's web site (www.ameritrade.com) is a no-frills portal. Customers can enter orders for stocks, mutual funds, and options; view their balances, positions, order status, quotes, and transaction history. For an additional fee user can access to up-to-the-minute company reports, industry news, earnings reports, analyst recommendations, charts, and quotes. Once again this supports their discount to full service model. Ameritrade’s target market are online investors that are active traders, Investors that seek high quality, low cost trading, and savvy investors that rely on many sources of financial/investment information. This fits the Hyperactive and serious investor we mentioned earlier. It also supports an investor they may want additional services at additional fees. Ameritrade offer more than online trading. As mentioned earlier, for additional fees users can execute trades via personal digital assistants (PDA’a) , touchtone telephone, facsimile, as well as through traditional registered representatives. Also, Ameritrade provide clearing and execution services to its own retail brokerage operations as well as unaffiliated broker dealers. Ameritrade is much more than an online broker. The parent company was formed in 1971. The company has provided discount brokerage services since 1975 and offered clearing services since 1983. The majority of Ameritrade’s revenue (90%) comes from the retail discount brokerage services. Ameritrade offers a wide breadth of trading options. You can scale from the discount broker all the way to the full services broker. No matter what you want from a brokerage house, Ameritrade can deliver. As you grow from discount to full services, additional fees are incurred. However, these fees meet the competition’s prices.
Strengths 1) Many ways to trade. Ameritrade allows you to place orders using different systems. Orders may be placed through Ameritrade's Internet site, by our Touch tone system, using a PDA, PC modem, fax, or by speaking directly with an Ameritrade representative. 2) $2000 minimum deposit required to open an account. The minimum does not need to be maintained. 3) The Ameritrade Touchtone System is designed to make trading easy, convenient, and economical - 24 hours a day. The system will lead you through the quote and order process, and will prompt you to make appropriate entries using your telephone keypad. 4) Representative - Some investors feel more comfortable placing their orders with a representative. Ameritrade has a staff of experienced representatives on call every business day from 6:00 a.m. to 10:00 p.m. EST. 5) Account Protection Ameritrade is a member of Securities Investor Protection Corporation (SIPC).SIPC provides $500,000 of coverage, limited to $100,000 in cash. An additional $10 million, limited to securities protection, is available through an independent insurance firm. 6) Execution Reports Ameritrade’s Automated Order Status System, as a courtesy, provides immediate verbal notification and 24 hour access to retrieving execution reports. E-mail notification is also given. 7) Price – All trades are $8. This is the lowest price in the market. 8) Reliability – No outages to report, unlike the competition. Weaknesses 1) Market Position – Ameritrade is positioned as a deep discount broker. Often lower prices are associated with lower quality. This may attribute to Ameitrade’s lower market share. 2) Product – The product is best for just trading. Extended research and services are offered, but not widely advertised. Ameritrade offers a no frills website. Competitors offer better products, but at a higher premium. Even with Ameritrade’s additional paid services, competitors high site are better. Opportunities
1) 91% of the Internet population does financial research online. Only 11% of this Internet population trades online. This is the perfect market for Ameritrade. These potential investors have done research and know what they want to buy. Ameritrade Threats 1) Many new players are entering the market. All trades are coming down in price. Offering the lowest trade may become the norm not the advantage.
Competition (Account Growth)
Most recently, E*Trade has been highly publicized as a fast growing online brokerage company. And, having quickly grown to take the number 2 spot behind Schwab, this statement is indisputable. This chart shows the account growth rates of each of 6 online brokerage companies over the past 9 quarthers. In 1997, E*Trade clearly displayed a significant jump in its customer base. Then in 1998, on the heels of a major marketing effort, Ameritrade generated this huge growth rate. Although E*Trade appears to have the lead in Q199, the trend is that over the past 9 quarters, Ameritrade has a slight edge over E*Trade in its growth rate per quarter at a robust 35%.
Competition (Interest Income per Account)
According to research by the Deutsche Bank, among the most critical drivers of a brokerage firms profitability is interest income - measured as the interest revenues attained by the brokerage firm per account under management. Again, this chart shows the interest income of the six primary competitors in the online brokerage market. A quick look at the chart, it would apper that E*Trade and Ameritrade are quite closely matched in their interest income per account. However, the trend over the 9 quarters reported in the report shows Ameritrade leading E*Trade by about $13.00 of interest income per account. This is an indication of how effectively Ameritrade is investing the funds they have under management.
Market Strategy
To capitalize on its momentum in the growth of its customer base and to leverage its leading position in interest income per account, Ameritrade is set to aggressively grow its business. Communications Strategy: Ameritrade’s goal is to triple its current customer base over the next year. To do this, Ameritrade plans to build its brand and promote its
services by spending $200 million in advertising and other marketing /PR related activities. Market Expansion: To reach international markets, Ameritrade’s strategy is to form alliances with online brokerage firms abroad with strong brands in their geographies. The nature of these partnerships are such that they enable customers of Ameritrade and their partners to trade in each other’s markets. This gives Ameritrade a global footprint as well as a near 24x7 trading service. Product Extension: To further its reach into a market fast being adopted by mainstream customer seeking advanced, value-added services Ameritrade is preparing to deliver premium services for which it could charge extra fees. These services could include richer, customizable financial/investment information. It could also include enabling customers to interface with Ameritrade via multiple devices. Technology: Finally, to ensure that all their efforts to develop its markets are not thwarted by inadequate network and systems capabilities, Ameritrade is building its technology capabilities. It is spending $150 million over the next year to boost its information systems capacity. It’s goal: to enable its systems to up to 3x its current peak capacity.
Conclusion
Ameritrade is well positioned to remain a leading provider of online brokerage services. It has a healthy core set of customers that rely on Ameritrade’s current strategy to offer a singular value proposition to its customers – quick, low-cost, no-frills, online trading services. Based on internet income per account and its customer growth rates, Ameritrade is leading the market in growth trends and in internal management. With its aggressive marketing strategy, Ameritrade is poised to take advantage of the growth trends in the online brokerage market – especially as a new profile of trader adopts to online brokerage services. These customers will be more mainstream customers, seeking longer term investments and more centrally located financial information and online investment advice. Ameritrade is clearly well prepared to capture this growing market and is ensuring their systems can handle this growth.
i ii
Forrester, Net Investing Blasts Off, August 1997 Barron’s, Credit Suisse Bank Boston