ETrade’s Sale Is the Death Knell for Discount Brokerages

(Bloomberg Businessweek) -- Throw dirt on it. The era of independent online brokers is over.

It was Charles Schwab Corp. that plunged the knife in, but the sale of ETrade Financial Corp. was the last gasp. Schwab’s purchase of TD Ameritrade Holding Corp. to create a $5 trillion monster serving customers who trade stocks in their pajamas for free made it impossible for ETrade to continue as it was. Morgan Stanley swooped in, and for $13 billion in stock it gets to clothe itself in ETrade’s digital street cred, attracting younger, tech-savvier clients to a bank whose reputation is staid even by Wall Street standards.

Of course, newer fintech trading platforms, such as Robinhood, which was charging zero commissions before it was fashionable, have threatened to render ETrade yesterday’s news. That doesn’t seem to matter to Morgan Stanley. Its mission is to absorb ETrade’s customers. Morgan Stanley Chief Executive Officer James Gorman said in a conference call Thursday that he expects ETraders—perhaps after they get better jobs, rack up some debt, and put on a few pounds—to sign up for financial products geared toward the more standard Morgan Stanley customer. That is to say, an older and wealthier investor.

“It was an act of desperation by Morgan Stanley,” says Jack Ablin, chief investment officer of Cresset Capital Management, a Chicago-based wealth-management firm. “Anyone who has a Morgan Stanley account probably still has a full cable-TV package.”

ETrade, founded in 1982, had its peak success during the dot-com bubble of the late 1990s. At the time it was among a group of upstarts rankling the financial establishment, challenging the notion that it should cost big bucks just to place a stock trade. Its TV commercials, featuring dancing chimpanzees and toddlers trading on mobile phones, poked fun at companies like Morgan Stanley, for whom jacked-up fees were considered a divine right.

In the beginning, ETrade’s startup environment was as wacky as they get. Christos Cotsakos, ETrade’s CEO through 2003, used to say its culture had “a lust for being different.” He’d make employees carry around rubber chickens, wear propeller beanies, or stand on a chair and reveal something intimate about themselves to colleagues.

But the company made a series of stumbles as the industry shifted. In the early 2000s, ETrade charged $14.95 for trades when competitors had dropped the price to $8. In 2007 the hedge fund Citadel bailed the company out, injecting $2.5 billion in cash into its balance sheet and purchasing its $3 billion in toxic asset-backed securities for 27¢ on the dollar.

More recently, ETrade decided to tough it out alone even as consolidation took hold among its peers. As one of the smaller brokerages by market value, it was long seen as a potential acquisition target for a firm such as TD Ameritrade, which bought Scottrade in 2017. When ETrade executives wrapped up a detailed review of its business in October 2018, they surprised analysts and investors by recommitting to remaining independent. ETrade may have fetched a higher price then, when its shares were trading higher. “They missed an opportunity,” says Rich Repetto, an analyst at Piper Sandler & Co. ETrade did not immediately respond to a request for comment. 

Schwab brought down the hammer a year later. The pioneering online brokerage pushed trading commissions to zero, forcing  ETrade and others to do the same. Although commissions didn’t account for quite as large a share of ETrade’s revenue as they did at its competitors, the change still came as a blow, eliminating a business line that accounted for about 15% of net revenue at the company in 2019.

The Wall Street establishment was once the enemy for ETrade, and Morgan Stanley the worst example its chimps mocked in TV ads. But it’s time to blow taps. That world is over. To ETrade, the old-guard institution now looks like something very different: a lifeline. — With Melissa Karsh, John Gittelsohn, and Amanda L Gordon

To contact the editor responsible for this story: Bob Ivry at bivry@bloomberg.net, Sam Mamudi

©2020 Bloomberg L.P.