The Evolution Of The Online Brokerage Business

summer job. And then I and then in what was your summer job? I don't really remember what I did, to be honest, I think I had all that. You only remember. You don't remember the normal job, remember the normal stuff. But I remember having two thousand dollars from a summer job, you know, the late nineties, and everyone was super interested in stocks and markets because there was

a bubble going on. And I invested that money and tried to trade, and I grew a tenfold, so I grew it to twenty dollars and I've been hooked on markets ever since. Okay, so that's a total humble brag. But let me just ask you before I start asking about your training strategy. How did you even know to start trading stocks? I don't remember. It was just what people were doing, Like that was the thing. I think

that like people don't necessarily remember. They look back at the bubble of the late nineties and they know that the stocks went up, but I don't think they remember like how pervasive it was as part of the culture. And it was just like what people were doing was what people were talking about, very similar to say, like people talking about cryptocurrencies in anden. It just became like this cultural phenomenon. So here's my other question, how did

you actually trade? And you know, full disclosure in I would have been in middle school, but I would have had no idea exactly how to get started. Well, I had a good friend he worked for his father's investment company. But I remember there were just ads on TV for all these online brokerages and there was this one I

actually used, this website called short Trade. I'm not really sure what happened to it, but I think they had these ads on TV for seven dollars a trade, and I just signed up and filled out some paperwork and stuff like that, and next thing, you know, there you there you went. You can just buy and sell stock. Next thing you know, you have twenty exactly. That's pretty good. I got really lucky because I studied abroad my sophomore year in college, and so I didn't lose all my

money because I stopped trading. Otherwise I definitely would have gone to zero because I would have just been like everyone else. So I did. I did end up slightly positive for the bubble. And you weren't tempted to start currency trading while you were abroad. I didn't anyway. The reason I bring this up is not just to brag, but because day we are going to be talking about the online brokerage business, which was a huge part of

what made that period so special. Was this idea, as you put it, that you didn't really need to know anything. You could just go to a website and start trading. It was much simpler and cheaper than it had ever been before. And that business obviously is still around and grown. But that really is like when it's sort of got going. Yeah,

and this still crops up nowadays. You know, you see people pointing to certain advertisements coming out of various of the big internet brokerage his and people say, oh, well, this is evidence that the stock market rally has gone too far. You know, people are just coming in to make some easy money now, So brokerage is still play an important part when it comes to measuring sentiment around

the stock market. Yeah, and what's interesting to me and what I want to get into on today's episode is back then, in the late nineties, there was this sort of like obsession with individual stocks and the internet stocks and Yahoo and eBay and Amazon and all these stocks that are making people of fortune. These days, there's such a mantra around don't try to beat the market, just

focus on reducing fees. Passive is best. And so the message that people at home are being sent in terms of how they should think about investing UH is very, very different than it was two decades ago. Nonetheless, people do still trade, and they trade through these retail brokerages and online at home. So I'm very interested in sort of learning about how that world has changed since then. Yeah, so am I. And as you put it, it is

a really interesting flip. Like if you go online nowadays to personal finance message boards, no one's saying by this particular stock because it's going to make you rich, they're saying, put all your money in a passive index fund and just right that all the way up. Yeah, exactly right. All right, Well, with us to discuss the evolution of the online trading business is a a veteran of the space we have with us today on aud Chris Larkin.

He's the senior vice president of trading at the Trade, one of the long time stalwarts of the industry, and he's been in the space for a long time, and so we'll learn about all this stuff and get some perspective about how things are the same and how things

have changed. Chris, thank you very much for joining us, Thanks for having me, and thanks for making me feel very old as you guys tell your stories and I kind of go farther back and I'm thinking myself, Okay, I try to feel young, but today I feel old with the two you talking. When I said is like, oh, that's been two decades since then. It hit me really hard even when I said that. But why don't you tell us how you got your start of the space and what you you're sort of your career path in

the world of online trading. Yeah, my my first job at a college was with a firm called Waterhouse Securities. It was a small discount brokerage firm which offered you know, self directed clients to call in and place trades for

individual stocks, mutual funds in those products. At the time, ETFs weren't really around, so they were sort of new and Charles Schwab and Waterhouse was sort of the bigger firms that were out there at the time, and we were just at the when you thought about the technology at that given point in time, was the Internet was just starting to come to light, so it was still a little bit early. At that point in time. Everything

was very manual. So just think about how a client had no information they had a calls for a quote on I b M. There's no other way to get one unless you just saw the paper the next day they had called the place orders they had to get. Everything was done manually and what year was this, So you know, the period between nineties six it was very manual. Then things really took off when technologies started to come together.

So how much did the sort of development of online trading platforms and brokerage is how much does that owe to the big tech bubble that we saw in the late ninet nineties and the excitement around stock trading that Joe was describing. Yeah, I think I think it's an accessibility. I think, you know, in terms of the ability that the information was now starting to come to light. So, like I said before, if you wanted to get a quote on a stock, you had to call someone up

to get that quote. In the sort of the nineties, you started to get the ability, you know, via computer that you could get real time quotes, whether you get it through the website or they're starting to get some more applications where you can get streaming quotes from as well. These were things that would be unheard of and only available to institutional investors that started coming too retail clients. So there was just the ability to get the information

was much different than it ever was before. I remember, like even the idea of real time quotes versus fifteen minute delayed quotes was this huge thing back then. And you know, having access to an online brokerage versus just sort of like a normal like public facing website like Yahoo Finance was pretty big at the time. It was a really exciting thing about being at some sort of paid service. Just the ability to not have something to be to by twenty minutes. Yeah, I mean, I think

that's that was the big thing. I think the thing that was missing at that point in time. So even when you were entering and place in your first trade, that really all you had was real time quotes. Uh. You didn't have research or news or access to a lot of things that eventually came over time as more and more people signed up and people started to enrich

their offerings. Uh, they started to add more of the tools and services, which is you know again played a very big part in the evolution of the particular you know, online investing industry. Was there any resistance to the availability of internet trading or people sort of distrustful of the notion that they could buy and sell stocks online. Did they think, oh I should be doing this through you know,

an actual person in the old fashioned traditional way. Yeah, I think there's I think it really in two ways. One is that I think, you know, technology is starting to come together at that point in time, and people weren't quite sure was it secure like I made my money somewhere, Like was it secure if I go online in place a trade? So there were some people that were concerned, but again there was a lot of things that we put in place to make sure that the

security was very solid at that point in time. The other thing was that he also had the you know, the full service industry at that point in time. I think they spent a lot of They spend a lot of effort in terms of saying that you can't do it on your own. You need us, this is a this is Wall Street. You need a professional to help you with your money. Going out there and doing your own you can never be successful. So I think, you know, they saw the threat. There's a lot of you know,

the instues growing, there's a threat to their business. So you saw a lot of people trying to say that there's no way someone could do this on their own. Tell us a little bit more about your career. You mentioned you're at Waterhouse in the very early in nineties. When did you get into what we now recognize as

the online trading business. Yeah, I think so at that point time when I when I left Waterhouse, I went to the institutional side of the business, and I was working for IG Bearings, which was a full service firm for on the institutional side of the business as a sales trader. We went through some tough times during the Asian crisis, and when I was trading, what I saw was there was firms like Bloomberg and instant It were stored the forefront of technology from an execution standpoint for

buying and selling stocks for institutional investors UH. At that point in time, I thought, I need to get in front of this, so I did join. I joined Bloomberg at that point in time to be part of a very successful UH firm. But then when things really started heating up. You know, someone who was a the number two over Waterhouse had become the CEO at Daytech Online, which was a very small but very fast growing firm. What happened to them? I remember day Tech and that

was like a big name at the time. Where did they go? I don't They ended up getting acquired by a merritor trade in two thousand and two three in that area. But they were truly a disruptor and industry at that point in time. You know, online trading was available, but there was beyond just the idea of being able

to you know, buy and sell stocks online. There wasn't a true disruption, but they took was a true innovator and disruptor in the in the business and so, uh, they were growing at a massive rate at that point in time, like others as well. So how did execution on those platforms work At the time, We're orders being

sent basically through you know, the traditional market makers. Well, if you go, I'll just go back in time just for just a quick thing to give you just you know, an idea is that when someone called up and they were at Waterhouse Securities and you wanted to go by you know, hundred shares of IBM, you call up and you put in a market order, you would hang up

the phone and we would call you back. At some point in time we got an execution that could be an hour or two later, so you would eventually get it back. By the time it was execute got down, their executed came back, we had to call you back. It was pretty rare to get the execution on the phone. At date Tech, we were the ability to to route orders to other destinations beyond the exchange was starting to become available. We owned an e c N called Island d c N UH and that that was again an

innovation and you know a differentiator for us. What did e c N stand for? It's electronic communications network, right, and you know at that point time we're going to utilize that in order to get very fast executions back. But when I say fast executions, uh, we had to guarantee a trading guarantee. So we guarantee your market or would be executed in less than sixty seconds. So nobody in the industry could match that. Nobody, so we had a pure advantage over other people when it came down

to executions in the speed of our executions. We would execute in the sixty seconds or your traders are free. Uh. Today you get micro seconds before your order is executed, so it's less than a second if you put in a market order, it's less than a second if you get executed. You can't even refresh your screen fast enough by the time that order is executed. So you could just see how technology has become, you know, a game changer,

I guess when it comes down to executing orders. So just to be clear, what was it that day Tech had structurally that allowed it to may be able to make such a promise The c N, I think the differentiate was easier and so we could route orders directly to the c c N and match a buyer and seller and get a report back immediately. And so when you were going to the exchanges, we were you know,

we were pushing them. But if you take an idea like say the et F. Let's say at that point in time the q q q s were were available. If you put a more market for q c s and sent it down to the American Stock Exchange, you might wait two minutes for an execution back three minutes, four minutes. We started moving our orders onto the UH the Island d c N and you'd have an instantaneous execution.

So people are very frustrated. They were not you know, technology was starting to really accelerate and it was becoming unacceptable to get an execution in you know, three or four minutes. People wanted to get a very good execution, and they wanted it quickly. Okay, So customers are now executing trades at sixty seconds or less on the online platforms.

Other people are doing it in two or three minutes, versus you know, in the early nineties or nine eighties, when it might take a couple of hours even to get your trade actually executed and confirmed. Did that change trading behavior in your opinion? Did people start trading in a different way now that they had virtually instant haineous execution. I think that's part of it. I think the you know,

it's a culmination. I think of a few things. Obviously, the executions were becoming better, so the access was much better and the information was much better. Obviously, when you think about as time were revolving, you've got the real time quotes at this point in time. You know, Daytaud been the first broken to offer free real time streaming quotes. That you had a a quote terminal, you know, per se where you could put a watch list together and

watch a whole bunch of stocks. And then I think the when you think about sort of what was happening at that point in time, you know, the market was going up, and there's there is a flock mentality when things go up. You talked about bitcoin before. I don't think it. You know, people all of a sudden had a passion for digital currency. It's that people were making money, and there's this like I don't want to be left

out type of a thing. So people start getting involved and saying I want to find a way to make money, just like you know, my neighbors making a whole bunch of money, so they don't never want to be left out. So there was you know, the flock mentality was going on that point time, and people were making, you know, irrational decisions, was pushing companies that were not making money to these lofty levels. But when you have a whole bunch of all coming in, it certainly contributed to sort of, um,

what was happening at that point in time. But we're also that we're also starting to add in other things like education news. These are things you could you when you wanted to buy a stock back in the eighties or early nineties, you called up your full service broker and you'd be lucky if they soldion. And like an end of report that was like eight months old, like

there was no information. You can literally you can now find a whole bunch of you know, data, whether it be fundamental analysis or technical analysis, right, you know, from your computer terminal. In early two thousands, when the sort of the number of new people entering the market daily, I mean it got so big that it overwhelmed the systems, right. There started to be outages at that part because it's just the infrastructure still at the time had a hard time.

Um keeping up with it. Did you were people worried about that? Were people inside the company or in company is like worried about like, Okay, when this bubble bursts or when this can't be sustainable, and then there's gonna be a lot of people who their first introduction to the stock market is going to be a pretty tough one. Yeah, I think that's a word of everybody today. I mean, we've we we've obviously gotten much better in the ability to stabilize all the systems and be able to handle

the scale that's that's been going on. But back then it was a big issue that you know, an outage was not an abnormal thing to happen once a week, especially during the very busy times, And it's all about how quick you can recover and to make sure that

your clients were taken care of. And I think that's the main thing when when things there there's an expectation at some point in time that systems will go down, but what what our clients want or us to stand behind that and make sure that we make any adjustments necessary if there was a problem. Alright, So Joe and I alluded to this in our intro, but one thing I'm really curious about is who is trading individual stocks nowadays, because again and again, you know, the emphasis all seems

to be on passive investing on index funds. Is anyone still trading actively in individual stocks? Well, I would say, you know, one thing is that we've just come off for record year last year, So I think that you know, the idea that the last two years, two thousand seven team was a record for US, I would say for the industry, and I don't want to just speak just on you know, each trade alone, but it was a record for two thousand seventeen, two thousand and eighteen, we're

both tremendous years for the industry in general. So clients are definitely still trading online. Um, I think the word actively is you know, you can debate what actively actually means when you talk about passive investing passive investing. I would say, in general, the average customers a passive investor, we you know, are our client, you know base, A very small number of them are what you would define as an active trader or a day trader that some

people might want to put in there. Most people are actually actually just putting together a portfolio and buying an holding and making slight adjustments throughout the year. Nonetheless, there is still interest in individual stocks. So do you see any are there any sort of demographics or anything that you could say about the people that say, like, no, I don't want to just put half my money and spy and have my money and a bond fund and

let a ride. Like who are the people that sort of don't accept this idea that they just have to have a passive portfolio. Yeah. I think if you think about you know, you take the different I would call them like generations that are out there. So self directed clients cover everyone from like eighteen years old only up to you know, there are eighties and nineties that are that are self directed trading, And I think what you get is just there there's a different interest in the

stocks that they may or may not like. You know, if you get the older generation, a lot of the you think about sort of the staple stocks that they're familiar with when they grew up, you know, the IBM s and that those companies are very familiar with. And then you kind of go into the the other side and you think about like a twenty year old or twenty four year old that's buying and selling stocks. Uh,

they're interested in other things. It could be you know, water stocks or some type of you know, social type of thing, or netflix, things that they're familiar with like Facebook. I think the older generations some just don't are not using things like this. They don't really care about it. It's not going to trade it. So it's about the things that they use. Has always been the interest of no matter how you know, how young or old you are.

Has that always been the case that you see this sort of demographic segmentation of the family of stocks that people buy or is that something kind of new in which if you like break it down by age group, whether it's millennials versus older people, you can actually just see a very like just different pool of stocks that they're Again, I think a lot depends and mostly because

we've got millions of customers. It's you know, it's hard to kind of really hone in on one particular thing, but if but if you think about the stocks that they're trading, that's one element. There are things depending upon the trader you are. Are you know, are you are you an active trader? H and do you take advantage of volatility? Now you're looking for stocks that are volatile, so you don't really care about the name. You really care about the volatility in the stock, and that's what

you're more concerned with. So I think a lot has to do with the type of investor you are, or a trader um whether using technical analysis or fundamental analysis, or there's an industry that you want to be in on and say, hey, I'm a little bit nervous about

the market today, I want to get more defensive. Let me go try to find some really high quality defensive stocks, and so you'll spend some time looking at them and saying, all right, which which is the best stock at this particular group that I actually want to buy from my portfolio. So I think it really depends, you know, with the

number of customers that we have. So has the shift towards passive investing spurred E Trade to to change anything about its business model or to provide, you know, certain services that are geared more towards passive investors. Yeah, I

mean our model has evolved every year, it evolves. I mean I think that any think about sort of the past investing topic is that, yes, if the growth of the ETFs demonstrates that there is a you know, a large interest in clients investing in low cost diversified products. So that's the data supports the fact that that's the case.

Part of that has been taking money from mutual funds in the e t f s, but the rest is just having the ability the access to some of these you know, great sub sectors that you can use in your portfolios diversified in different ways. So I think that you know, from from an et F standpoint that that's

a that's a big part of it. There are things you think about other products like let's call it like robo investing, So the ability to to put your money where you don't have to have a whole like five dollars to put it in a particular portfolio and will actually go back and realocate the portfolio. If the stocks become too heavily weight in the portfolio, it will be a readjustment get you back to where your risk tolerance is.

So these are the ideas that these are. These are products that are growing uh and there's definitely interest in it. And I think that the a lot of it's come from the movement of quite a few investors that are coming from the full service firms into the online trading firms.

What's next? You mentioned that the industry is always evolving the rise of robo in the last few years, a sort of auto matic portfolio allocation is big on the roadmap as you look ahead, what are what do you see around the corner for where the space is going to go? Yeah, I think technology continues to play a really large part in what's going on, you know, overall, And I think, you know, just when you think this industry gets commoditized, there's something that sort of helps accelerate

what's happening in a particular marketplace. I think that you know, as we you know, we look at our customers and I put them in three categories. One is do it yourself that the ones do it with me. So I need a little help, but I don't want to delegate my portfolio. Then there's sort of like how do I just delegate us? Want to give you my money and just I want you to run out of no time. It's the tools and the the tools and the ability to educate these clients is to me is the game changers.

Like we we want to we have an invested stake in making our clients successful. So everything that we do is all about risk management. How do we actually take and scale the educational offerings that we have two more

clients today is something that we're really pushing on. So I think education is really a big thing for us to make sure that we can make them very successful and teach them about great products like options, where you know, typically people are like, wow, those are very risky products, but actually they're very conservatives. Well if you use them properly. How do we educate them to help them generate income in their portfolio or protect their portfolio. They're worried about

the market going down. So I mentioned this earlier in the intro, but I'm really interested in what kind of data the retail brokerages like each trade l T, dumrrigrade get to see from their customers and how useful it is in sort of predicting I guess, the durability or

the fragility of a stock market rally. What kind of stuff do you get to see and at what point do you start seeing behavior or what type of behavior would suggest to you that investors are getting you know, a little bit too excited or a little bit to eu fork about equities. Yeah, we've had a good run. I mean there's been this has been a ten year plus run that we've had in the marketplace. So I

think that the enthusiasm still remains pretty high. And if you went into last year, it's sort it's the first year and ten years that we've had a downward market, but we still saw netflows coming into the marketplace at that point in time, so kind of clients were buying on dips in general at at e trade. So I think there's still a lot of confidence in the market place for from as a long term investor, we try to teach our clients that you know, from the short term,

make sure that your risk tolerance is properly. Your portfolio matches your risk tolerance. Uh. And if you look at them like let's say February five, when the market went down tremendously that day, uh, it's it's not It's an opportunity time for people to take a look saying were you comfortable with how your portfolio performed on that given day. If not, it's time to make some adjustments. Uh. You don't want to make them when the market is going down. You want to do it when things are a bit

more rational. So I think that's a that's a time when people started to think about how they reallocate their portfolio. So I think for right now, you know, people are still very confident in the marketplace. That could change. But the one thing that's really changed, I think in the marketplaces the volatility, and the volatility has created, you know, again a bit more anxiety for some investors. Are they

comfortable being in that environment? How do we teach people bowl how to investor trade in a volatile market environment? So if you think about it, the market went up or down one percent sixty seven times last year. In two thousand seventeen it happened less than ten times. So you think about sort of the different market that we have today, will it become less you know, volatile? I

would argue will not. But we have to reteach investors how to stomach these types of movements in the in the stock market on a given day and still remain long term investors. From a business model standpoint, each trade started off is just an online trading platform, but it has everything now right, I mean, there's like you can get a mortgage there right, not anymore? Oh not anymore. No, it was a thing at one point it was until

until it wasn't a good thing. Okay, I was gonna ask, like, I mean, you see different um platforms sort of going to different degrees in terms of how much they want to be a full fledged bank. You have something like so far coming at it from the lending side. Now they're adding more online trading. Is there arranged for sort of different size and scope of the full financial services

or is everyone just gonna sort of eventually offer everything. Yeah, I think it depends on everyone and what they're trying to achieve. You know, at each trade, we have a bank. We had a bank since the nineties. It's and it's been part of our fabric of how we're doing. It's very integrated into our particular offering. Not everybody has a bank, you know, someone like TV Merrior Trade does not have a bank, even though they've got a large ownership in

that company in the Merry Trade. So everybody's got a different model of how they want to go about doing things. But I would agree that we're continuing offering. If the clients have a have a need, you will see more of the brokers find a way to offer it at

a lower price. So if there are some things that the full service industry or another industry is doing that's charging high fees for it, and we're able to break down the barriers and give access, whether it be hopefully online at a lower cost, and help the client style will always be looking for opportunities in that that area. Well, fascinating to have you here, Chris Larkin of Each Trade, Thank you very much for joining us. Thanks for confining me.

Dr Bloomberg, Welcome back, Tracy. This topic fills me with so much nostalgia and it really is fascinating thinking about how much is new and has changed in the last two decades. Like I know, I didn't know what an e t F was, Like I guess they existed when I first got interested in the market, but I certainly wasn't aware of them. The idea of things like education about portfolio risk or automated robo portfolios, like it really is sort of like bewildering how different this landscape is

than it was in the late nineties. It makes me sad, joke, because I feel like I missed out on the golden age of active individual equities trading and now it's really boring because it's just, oh, put your money in you

know this SMP five hundred index track her. Yeah. Well, you know, as Chris said, are still like people of our generation still buy stocks, Like I don't know how old you are, but you know people are at GE We could buy and IBM and Berkshire Hathaway, Like if we wanted to buy the stocks from our generation, we still could. Uh. I don't know if I want to

buy G at this point. Yeah. Um. But you know also this question of well, the thing that I find really interesting is whether or not the platform itself has influenced investor behavior. You know, you hear this all the time, like people talk about how E t F s you can buy them with a click of a button. And maybe that makes people, I guess, more accustomed to instantaneous gratification.

Maybe it makes people more unused to losses, because there may be kind of getting used to the notion that they can just get rid of their stuff very easily as well. I don't know. It's a sort of open ended question. No, absolutely, And I think that's a theme that we've hit multiple times on this podcast, like the sort of the connection between the vehicle through which one can buy the asset and then the price behavior of the asset again. You certainly saw it in a crypto

in seventeen. You see it in real estate. People are always sort of inventing new ways of funneling one's money into an asset class, and I think by definition that ends up changing how it trades and prices at the same time. Yeah. Absolutely, This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe Wasn't though.

You could follow me on Twitter at the Stalwart, and you should follow our producer on Twitter Toe for Foreheads. He's at Foreheads T, as well as the Bloomberg head of podcast, Francesco Leafy at Francesco Today. Thanks for listening.