Datek Takes the Top Spot by a Nose

Author:
Publish date:

After a tight six-month online-broker derby, the latest

TSC

reader survey shows

Datek

still first to the finish line, but only by a nose.

The firm that designed its online service with day traders in mind,

Datek

pulled in the highest overall score by meeting the challenging pace of improvement set by its competitors.

That overall score was based on the brokers' ratings in 10 features, features that were weighted based on how important readers told us they were.

Datek came in first overall in our first

survey too, based on a slightly different weighting of features. Its lock on winning performance shows its emphasis on execution, confirmation and easy trading, along with its low commissions, makes for a strong combination.

Wrote reader

Andrew Gibson

: "Very pleased with Datek. Easy to use, low commission price, they do not nickel-and-dime you to death for extra service."

Alex Mayrand

said: "Fast executions and low commissions make Datek Online the place to be for day-trading activity."

Ameritrade

came in last with a pretty dismal score -- arriving at or near the bottom in over half the 10 categories. Generally, the respondents awarded brokers better scores than in our first survey in the spring -- scores that were pretty low -- and noted much-needed improvement in most of the top brokers.

Although the top and bottom brokers are repeats from our April survey, the overall rankings continue to mask the wide differences in individual brokers' performance feature by feature. Just because Datek came in first doesn't mean it trumped its competitors in every category. Similarly, Ameritrade didn't trail in each of the 10 categories that counted toward the total score. (We'll examine individual category rankings in a story on Tuesday.)

Datek Rides Execution Focus to the Top

In addition to top marks for commissions, where it won the highest score, Iselin, N.J.-based Datek's strong points continue to be order execution (it scored a category-topping 4.1) and order confirmation and account administration (both 4.5) and the site's ease of use (4.4). (Please see our

write-up of the firm from our April survey.)

Those are key features that facilitate quick trading, what active traders need to move in and out of particular stocks. Datek might not offer institutional research or great customer service (more on that later), but its streamlined trading makes it an active trader magnet.

Indeed, although only about 5% to 10% of its customers are what Datek calls active traders, its average customer trades about 4.5 times the volume of an average industry account, according to

Piper Jaffray

. (In our survey, Datek was the fourth-most popular firm among folks who identified themselves as "active investors," seventh among "long-term investors" and first among day traders. Please see our methodology

piece.)

Datek's speed and quality comes in part from the fact that it doesn't sell order flow to third parties (that is, it doesn't direct a portion of orders to market makers in exchange for payment). Also, its proprietary electronic communication network, Island, lets it match many trades electronically. Its performance has helped it grow its share of the online-trading market to 8.4% in the third quarter from 6.8% in the first quarter, according to an analysis by

Credit Suisse First Boston

. (Of

TSC

survey respondents, 9.5% said Datek was their primary broker.)

"The way we process orders and the way we built the system to process trades, we built it for the Internet," says Robert Bethge, vice president of marketing for Datek. "That's the area we're most proud of."

And many Datek customers single out Datek's order execution.

Crystal Provost

, a recent convert to Datek, gushed: "My first trade was executed before I could pull up the open orders screen!!!!"

Reliability Still a Problem

But there are several aspects of Datek's service that continue to rankle traders. It scored toward the back of the pack on reliability with a score of 3.5, compared with 4.1 for category winner

DLJdirect

, a unit of

Donaldson Lufkin & Jenrette

(DLJ)

unit. A common complaint involves difficulty trading with Datek after the open. This comment from

Steve Williams

is not unusual: "Been using Datek for five weeks now. Totally unable to access my account from about 9-10 a.m. at least three days a week."

Datek says 12% to 18% of its daily activity comes in the first 20 minutes of the trading day. "When everyone's doing the same thing at the same time, there's going to be some conflict of resources," says Bethge. He says that while every broker is strained around the open due to lack of liquidity, the situation is worse at Datek because of its proportion of highly active traders, who often start trading right at the open and who tend to be extremely demanding about execution speed. He says there's only so much Datek can do, although the broker is constantly looking at different ways to route orders and working to improve the technology.

Customer Service and Options

On customer service and taking phone orders (the latter was not one of the 10 most important features), Datek also falls down and knows it. Datek scored 3.5 compared with

Fidelity's

winning 4.4. Bethge says Datek has grown its customer support group to about 100 people from 20 in the past year and has focused more on training reps. It says that next year it will implement a touch-tone order system, a staple at many brokers.

As for options trading, Datek doesn't even offer it, leaving the firm leagues away from

Morgan Stanley Dean Witter

(MWD)

unit

Discover Brokerage Direct's

top score of 3.9. (Many respondents gave Datek an "N/A" in this category, which didn't count, but some just gave the firm a low score.)

For a firm that attracts active traders, the lack of options trading is a big hole. Datek has been looking to add options trading for quite a while but says options trading requires a different interface, different data feeds and changes in how trades are processed. Bethge says the broker will start to offer options trading in 1999, though he can't give a specific timetable. (Please see our separate focus on options trading Wednesday.)

Past Legal Questions

Legal questions about Datek came to the fore in the spring, although not about the firm's online brokerage operations.

In May,

The New York Times

reported that the

Securities and Exchange Commission

was investigating whether

Datek Securities

had been part of a stock manipulation scheme and that the Manhattan district attorney's office was looking into whether the firm engaged in money-laundering.

Both the SEC and the DA's office last week said they could neither confirm nor deny ongoing matters. A Manhattan DA spokesman said last week that no charges had been filed against Datek. On Sept. 24, the SEC announced an administrative proceeding (in which the agency files a case that is heard by the commission's judges rather than an outside court) against a former branch manager of Datek Securities to determine whether he failed to reasonably supervise a broker. The broker allegedly executed unregistered distribution of a stock. Datek says the firm is not involved in the proceedings.

Before that May

Times

story, Datek had sold off its trading operations, where these problems occurred. Datek restructured in early 1998, morphing from Datek Securities into Datek Online Holdings.

None of the actions above is related to Datek's online brokerage operations and the

National Association of Securities Dealers

has no disciplinary actions on file for the online broker this year. The primary units of Datek Online Holdings are Datek Online brokerage services (the online brokerage business), Big Think (the product development group), Datek Online Clearing (which clears for the online business) and Island ECN.

So Datek online brokerage users' biggest concerns remain reliability, customer service and a lack of options trading. Datek deserves applause for its clutch on the top spot. But every broker has something to work on. No mortal lock yet among this bunch of brokers.