The correspondent clearing world keeps getting smaller as firms continue to merge, but E-Trade still sees opportunity in the space–even as its plan to begin clearing for other broker-dealers starting in late 2003 has been postponed for a year.
Michael Curcio, executive vice president of retail brokerage at E-Trade, said that the firm has begun clearing trades for some institutional customers and is busy soliciting other kinds of business. Since then E-trade has starting allow trades for penny stocks.
“Additionally, we are currently in discussions with a variety of firms, including financial advisory firms, hedge funds, money managers and fully disclosed broker-dealers, in preparation for a full launch of correspondent clearing slated for the end of this year,” he said.
The delay stems primarily from E-Trade’s conversion to the ADP SIS securities processing platform from Beta Systems’, a shift that has taken longer than expected. That migration was also expected to be completed by late last year, and now is scheduled to be finalized in the fourth quarter.
An E-Trade spokeswoman described the conversion to ADP as one of the largest technology projects the firm has ever pursued, and noted that E-Trade’s IT staff has been working on a number of other projects at the same time.
In addition to the firm’s continuing expansion into other financial arenas like mortgage and retail banking, and a broadening of its brokerage services beyond its active trading roots, it has recently unveiled initiatives such as providing its mutual fund investors with 50-percent rebates on 12b-1 fees.
It also recently announced a two-second guarantee on executions for trades of up to 500 shares, an offer that is particularly attractive to E-Trade’s more traditional active trading customer base. The move tops five-second guarantees made by competitors Ameritrade and Fidelity Investments late last year.
Ameritrade also got its start in the active trading arena-a history that came home to roost when the Securities and Exchange Commission recently fined it $25 million for the margin peccadilloes of Datek Online, a broker-dealer catering to day traders that it acquired.
Curcio said the two-second guarantee would be available to correspondents, and they would decide whether to market it, in turn, to their customers. The spokeswoman said the same holds true for the 12b-1 rebates.
Curcio noted that the two-second guarantee was the result of E-Trade continuing to develop its front-end offering.
“We’ve continued to improve our proprietary order routing technologies, which allow us to deliver the two-second guarantee,” he said, adding that orders are routed to a variety of market centers, including its own.
The firm chose the 500-share limit because that “represents the typical order flow for self-directed investors.” E-Trade is providing the guarantee to all of its customers, which receive trade confirmations detailing the execution speed of their orders within 24 hours. If E-Trade fails to execute a trade within two seconds, the firm will wave commissions on future trades.
Curcio declined to name existing institutional customers or other clearing prospects, and he emphasized that the firm plans to offer a full-range of correspondent services.
“Given the superiority of our platform, we feel we will have a competitive advantage across the board compared to other players in this space,” he said.
E-Trade’s decision to switch to ADP coincided with the firm’s plans to consolidate its more than 10 back offices worldwide into one primary facility in the United States and two others, in London and Hong Kong.
ADP’s scope also extends beyond securities to other financial arenas, allowing E-Trade’s banking unit, for example, to handle the cash management business arising from its brokerage unit.
E-Trade had used Beta since 1996 for functions like books and records, order routing and order vetting. E-Trade will continue to handle most of the back-office functions that touch customers, like customer information and front-line vetting, through its own clearing operations.