In this week’s roundup, we take a look at a major shift in the US online brokerage landscape that could offer some clues as to what might be in the cards for Canadian discount brokerages in the not-too-distant future. From there, we’ll take a look at one major Canadian online brokerage that just rolled out a feature that is sure to make some of their closest competitors have to step up their game. As usual, we’ll cap off the roundup with soundbites from Twitter and the investor forums.
Kind of a Big Deal
How does $4 billion sound? If you’re US online brokerage Scottrade, apparently it sounds pretty good. This past week, US-based TD Ameritrade pulled off a major purchase of another online brokerage, Scottrade, and provided an interesting window into the world and marketplace of online trading, perhaps offering some idea of the state of the industry as a whole and where things are headed.
As many value investors are aware of, it’s only when a buyer makes an offer that the ‘real’ value of an asset (in this case, an online brokerage) is known. So, with TD Ameritrade putting up an offer for 3 million accounts, it now offers some insight into what those accounts are actually worth. Like any big investment, however, it pays to look at the details.
In the case of TD Ameritrade and Scottrade, there are actually two parts to the transaction, one for the online brokerage segment ($2.7b) and one for the bank segment ($1.3b). The breakdown of what TD Ameritrade is paying is spelled out in their investor presentation but the takeaway (or at least one of them) is that TD Ameritrade is buying the 3 million or so accounts funded accounts at Scottrade along with the $170B in assets that come with them.
According to the details of the transaction, some quick math puts the price per account at about $870 and the assets per account at about $57K. With various possible additional opportunities to grow “share of wallet” over time, the price per account falls even further. That said, the figure is in the ball park range of what it costs to acquire a new client, at least in the US. All told, TD Ameritrade is paying 3x revenue for the deal and is looking for the deal to be accretive (12% to 20%) within 3 years, assuming all goes to plan.
For a deal of this magnitude, the numbers have to make sense. That said, there is also the human factor that potentially drove this deal forward. According to some sources, the timing seemed right for Scottrade founder Rodger Riney to cash out. Whether it was age, health or a desire to exit on a high note, the human element likely played a factor.
Within the Canadian context, there has often been chatter and speculation about whether the Canadian marketplace can sustain the number of online brokerage providers that it does. Could a similar deal happen here? The odds would suggest probably not.
Currently, there are only a couple of choices for non-bank owned brokerages for players to purchase – JitneyTrade, Questrade or Virtual Brokers. The other online brokerages have some kind of larger financial institution, such as a bank or credit union as a parent – or in the case of Interactive Brokers Canada, a larger US online brokerage as the parent. So, for a larger player to take out one of the independent brokerages would really be an aggressive move. None of the available ‘independent’ brokerages are particularly large in terms of accounts. On the other hand, for one of the bigger financial firms to try and exit the DIY investing segment might mean ceding market share.
As the Scottrade deal shows, the banking side of the business is always looking for ways to deepen their ‘share of wallet’ not reduce it. Neither buying nor folding seem palatable for the bigger players. Nonetheless, if the asking price is right or there is a catalyst to drive an exit, then business people can usually find a way to make a deal.
For DIY investors, the elimination of some competition may not be a bad thing. In a recent investor conference call published on SeekingAlpha.com, President and founder of Interactive Brokers Thomas Peterffy had the following take on Scottrade ahead of the announced TD Ameritrade acquisition:
“…we are excited about the Scottrade news. Just like the LPL news, the fewer brokers, the easier the comparison and the starker the differences between us and them, and the easier it is to compete for the customers. Also, whenever a broker is taken over, we usually get a bunch of accounts from people who were considering coming over to us, but were reluctant to change. Now that they will have to change anyway, they think they may as well come to us and move on to a better and less expensive platform.”
While trying to put a positive spin on losing 2000 or so accounts to a competitor (Interactive Brokers previously had an agreement to service some of Scottrade’s clients’ trade executions) is basically damage control, there is a valid point that the differentiation between brands will be brought into focus and consumers could stand to benefit by seeing some very compelling offers being made.
Whatever the case, there is a lot of change on the horizon for the Canadian financial services sector. This past week National Bank (parent to National Bank Direct Brokerage) also announced that it is going to be shifting its focus to ‘going digital’, joining its peers in spending massive amounts on meeting the banking and investing needs of consumers in an increasingly online world. Thus, one of the biggest drivers of who is left standing in the online brokerage space here in Canada might very well come down to who can afford to keep innovating. With that in mind, cashing out might not seem so bad after all.
Conditions are Improving
TD Direct Investing seemed to be in the spotlight again this past week with a news release announcing the official rollout of conditional orders to their flagship platform WebBroker (even though clients started to see this feature show up last week).
Ever the savvy marketers, they also announced that they are the first ‘bank-owned’ brokerage to deploy a platform with conditional order types. While that is technically accurate, conditional orders (aka bracket orders) are already available at a number of other Canadian online brokerages, such as Questrade, Interactive Brokers and Desjardins Online Brokerage and on the thinkorswim (aka US trading platform).
Nevertheless, this latest edition to the TD Direct Investing trading platform feature set is a fairly powerful one.
Conditional orders enable traders and investors to set criteria for entering or exiting a trade and then have a trade execute if that criteria is met. Criteria could include when a price goes above or below two different levels or when a condition – such as the value of an index, goes above or below a target. Some traders refer to this as the “set it and forget it” approach, however, with all things online trading, it’s never wise to fully trust that the technology will work as promised.
While there are numerous types of bracket/conditional order types out there, TD Direct Investing has enabled the following order types:
- One Triggers Another (OTA)
- One Cancels Other (OCO) and
- 1st Triggers OCO (FTO)
An example of when this might be useful is if an investor owned a stock at $15 and put in a condition to sell the stock if it hit $20 or if it dropped below $10. If one of those conditions were met, the corresponding order (in this case a sell order) would execute. This enables investors to create rules for how a particular investment or trade should be handled that go beyond the traditional limit order.
Interestingly, at the time of publication, the documentation for conditional orders on WebBroker platform was not available on the TD Direct Investing website. Fortunately, there is a webinar available that walks users through each of the order types and how they work on WebBroker.
Clever marketing aside, TD Direct Investing has continued to distance itself from its bank-owned brokerage competitors in terms of platform offering and now trading experience. And, while they may not be the first or only online brokerage to offer conditional orders, the reality is that as one of the largest and most popular online brokerages in Canada, TDDI has just given DIY investors one less reason to consider looking at competitors who also offer these order types.
Discount Brokerage Tweets of the Week
It was a fairly tame week on Twitter this week. Interestingly, technology was on the minds of investors chiming in on Twitter. Mentioned in the DIY investing conversation was BMO InvestorLine, Questrade, RBC Direct Investing, Scotia iTRADE, TD Direct Investing and Virtual Brokers.
From the Forums
Dash for Cash
One of the platforms TD Direct Investing markets to advanced traders is their advanced dashboard. In this post on RedFlagDeals.com’s investing thread, a user looking for feedback on the experience with advanced dashboard received a few interesting suggestions for data platforms.
Low Cost Education
The stock market can be an expensive place to learn how to trade. Still the fear of not knowing how things work is something that prevents many people from even trying. In this post, also from RedFlagDeals.com, one beginner investor is contemplating using either Questrade or Virtual Brokers for the commission-free ETFs as a way to get their feet wet with investing. Worth a read to see what other forum members had to say.
Into the Close
Just when things seemed like they were on track for a smooth finish to the US Presidential election there was a monkey wrench thrown into the works. It would be a great time to get some rest this weekend because there’s every indication that next week is going to get a little wild. In the meanwhile, with hockey, baseball, basketball and football, not to mention Halloween all on deck, there are plenty of reasons to take a break. Have a spooktacular weekend!!
