Dumb Money

Peter K. peterk at enteract.com
Sat Apr 22 11:43:27 PDT 2000

[sorry about the length] New York Times / Technology / April 22, 2000 Ameritrade Offering Free Electronic Trading By PATRICK McGEEHAN

A few years ago, the chairman of Ameritrade Holdings said the price war among online brokerage companies might eventually drive trading commissions to less than zero. To undercut Ameritrade's latest discount, competitors will have to go that low.

This week, Ameritrade, the sixth-biggest electronic brokerage company, introduced a completely electronic trading service that pledges not to charge any commissions on orders to buy or sell stocks at market prices. The bare-bones operation, called freetrade.com, expects to make money from interest on loans to investors, from payments it gets from other companies for sending trades their way and from selling ad space on its Web site.

"The Internet is all about freedom and free," said J. Joe Ricketts, Ameritrade's chairman and co-chief executive. "Some of our competitors have started to offer certain types of trades free. This is just a continuing evolution."

American Express is the only big financial company that is giving away stock trades. That offer, which was widely mocked by American Express's competitors, is viewed as a lure to attract wealthy customers to use the company's other services.

In some ways, freetrade.com is the anti-Ameritrade. Like its rival, the E*Trade Group, Ameritrade has pumped huge sums into a national ad campaign, wiping out virtually all of its operating profits. That approach has created a following for a character in the commercials who is called Stuart, a punkish youth with a fetish for trading. He peppers his appearances in the Ameritrade commercials with exhortations like "Let's light this candle."

Ameritrade, which earned $3 million last quarter, plans to spend about $200 million on advertising this year. "If you turn off your advertising, you'll die," Mr. Ricketts said. "Those big budgets will always be there."

In contrast, freetrade.com will not advertise or promote itself much at all, he said. Indeed, the only announcement of its existence was made on Ameritrade's Web site.

The stealthy start-up puzzled analysts who worry that Ameritrade's existing customers will exercise their freedom to switch from paying $8 to place an online trade through Ameritrade to paying nothing to place the same trade through its new sister company.

Scott Appleby, an analyst with Robertson Stephens in San Francisco, called the venture an experiment. "They would do this because they think this is where the market will go eventually," said Mr. Appleby, who has followed Ameritrade for a few years but was not aware of freetrade .com until a reporter asked about it.

Amy Butte, an analyst with Bear, Stearns, said: "This, to me, is unbelievable because it shows how desperate these companies are, that they are willing to cannibalize their own business to build account growth. I don't think the competition is on price any more. I think the competition is on technology."

Electronic brokerage companies are taking extreme measures to hold the most active stock traders because they are so much more profitable.

Ms. Butte estimated that "semiprofessional" traders make up less than 1 percent of the customers at online brokerages but account for 75 percent of all trades.

Charles Schwab , the longtime industry leader and trendsetter, made a statement about the importance of the most active traders earlier this year when it agreed to buy CyBerCorp, a small company that provides individual traders direct access to electronic stock exchanges.

Freetrade.com was designed to appeal to experienced online traders who will not mind that they cannot visit or call their brokerage company. Their only means of communicating with the company will be by e-mail messages.

"It's not something that everyone is going to find attractive," Mr. Ricketts said. "There will be some people from Ameritrade who move, and some who won't."

Feed / 4.19.00 http://www.feedmag.com/daily/dy041900_master.html Dumb Money by Tim Cavanaugh

FULL DISCLOSURE: The author of this article is quoted at damning length on page 32 of Dumb Money: Adventures of a Day Trader, Joey Anuff and Gary Wolf's narrative of a personal journey through the capital markets of 1998 and 1999. He wrote a pre-edited blurb for the book. That blurb was rejected from the final jacket copy, but the author remains sufficiently proud of it to reproduce it here in its entirety: "Dumb Money will make you wish they gave Oscars to books.

A deft combination of diligent reporting and cloacal preoccupation makes this the toilet read of the year." Although the blurbs that actually made the cover of Dumb Money are all top-notch, one by Ken Auletta strangely enjoins the reader: "Read Dumb Money and never again will you worship at the shrine of day traders. " Which brings up the question of who, exactly, has ever worshipped at the shrine of the day traders. For the pros at Bear Stearns or Goldman Sachs, those do-it-yourself traders with Real Tick accounts have always been figures of ridicule, contemptible gnomes to be derided frequently and preyed upon even more frequently. For the rest of us, the new day traders are objects of ill wishes at best, and at worst -- such as during the current spasms in the stock market -- of smug, told-ya-so schadenfreude. It is Dumb Money's achievement to treat this despised demographic with sympathy, though rarely with respect.

The trick is that readers tend to read books on finance as either how-to's or morality plays about the foolishness of naive investing (such naiveté usually amounting to a failure to use whatever stock-picking system the author is trying to hawk). Dumb Money contains inverted elements of both. But it works them in along alternating plotlines that are far more entertaining than what you'll find in a financial Chick tract or a "Winning Ways of Wall Street"-style finance manual. At the personal testimony level, we have the story of Anuff, stuck in that state of muted frenzy unique to apartment dwellers with internet connections, learning the ropes of the financial markets while gaining or losing small fortunes. The economy of local detail helps explain immediate situations, but keeps the reader at bay in terms of back story or overarching logic: We are given the time of day but never the day itself; we learn what happened to a stock a few weeks ago, but only as a way to give emotional currency to the immediate play our day-trading antihero is making. "One hour into the trading day the word spreads," one chapter begins, "E*Trade is down." As scene-setting, this is minimalism at its best, eschewing unities in favor of a constant anxiety of the moment.

Significantly, though, the book is labeled as a day trader's "adventures" rather than "confessions," and while the authors revel in gaffes, fuckups, and financial regrets, they approach the material with cheerful self-deprecation. "[An advertisement for Discover Brokerage] shows an angelic child whose face is awash in the glow of a computer screen," the authors write. "The caption says: 'We've made investing so easy even a child can do it. Perhaps we've gone too far.' I am that child, beating the market up and down from the peace of my crib." Anuff wrote the bulk of the daily essays during Suck.com's first year of existence, and this book is a good reminder of how much the distinctive Suck voice -- merry, slippery, melodramatic, postethical, elusive and allusive by nature rather than by effort, unwilling to distinguish between an insult and a compliment -- was his creation. Thus it is surprising that what slightly hamstrings the narrator as a day trader (we are allowed to surmise that his year-long odyssey netted him a solidly unspectacular sum somewhere between $50,000 and $100,000) is his unwillingness to go over to the dark side -- to develop the short-selling skills that appear to be the most significant weakness in his game.

At the level of broader history, Dumb Money provides a concise and entertaining summary of the birth and growth of the day-trading "phenomenon" we keep hearing about. The bulk of recent financial news coverage has treated the rise of personal day trading as a simple conjunction of a hot stock market and the popularity of the Internet. Some of the best material in Dumb Money covers the evolution of the Small Order Execution System, small brokerages like Datek and electronic communications networks like Instinet and Island -- organizations that collectively pounced on the bid-ask inefficiencies that once kept the monolithic stock market so fat and happy, and conversely helped generate the long fever that finally broke last week.

Since much of this involves the opening and settlement of new financial territory, and the narrator's experience in the late period of that settlement, Dumb Money inevitably becomes something of a frontier adventure, where the digital everyman packs up the wagon and heads into the wilderness, not knowing until the last page (203) whether he will make it through to Sutter's Mill, get scalped along the way, or turn back in defeat toward his shabby village in the lower Caucasus. There's even a frontier villain in the form of Amr "Anthony" Elgindy, whose experiences have twisted him, like James Fenimore Cooper's Magwa, into a predator of the wilderness. A defrocked broker-dealer turned embittered short seller, Elgindy outwits hapless long players and then talks trash at them on message boards, holds a view of the market that is "uniformly black," and even gives Frank T. J. Mackey-style seminars in which he coaches timid day traders to unleash their inner marauders. At the opposite end of the spectrum, an investing coach sunnily advises the narrator that it's possible for everybody to make money on every trade.

With such an amusing cast it would be a shame if Dumb Money gets lumped in with the current wave of lugubrious volumes bearing ominous titles like Irrational Exuberance. Wolf and Anuff are neither boosters nor preachers; they are willing to accept the absurdities and stupidities of the DIY stock market, even on those occasions when the game turns on them and the authors end up wearing the dunce caps. It is as rare for a stock trader to be sporting as it is for life to be fair, and this rare quality of equanimity is what puts Dumb Money ahead of the pack of truly dumb books on the brave new market.

Tim Cavanaugh is the editor of Suck.com, the humor site that just happens to have been created by Joey Anuff.

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