Tuesday agreed to join the
electronic communications network consortium after it wasn't able to close a deal with the competing
Terms of the RediBook deal weren't disclosed.
"We have the opportunity to participate in an ECN that has the potential to attract enormous pools of liquidity," TD Waterhouse said in a press release. "That liquidity will be supplied by some of the industry's largest online brokerages, market makers and institutional firms -- all of whom are working with RediBook ECN."
TD Waterhouse said it signed a letter of intent to join RediBook after it was unable to finalize a deal with Island ECN "due to an inability to reach agreement on issues of corporate governance and valuation."
Members of the RediBook consortium include
Donaldson Lufkin & Jenrette
Spear Leeds & Kellogg
The following story was posted at 7 a.m. EDT Oct. 12:
TD Waterhouse May Pull Out of Deal for Stake in Island
Conventional wisdom holds that Wall Street can't get enough of electronic trading systems.
Nearly every month brings some new deal between brokerages, ranging from newfangled cyber types like
to traditional players like
, and electronic trading systems. The brokers figure they have little choice but to jump into electronic trading because it's ushering in huge changes in the market, like after-hours trading for the retail crowd.
But now it seems that even if some online traders like a good gamble, not all brokerages do.
may be the one that bucks the trend by pulling out of a proposed deal to take a 12.5% stake in
, an electronic communications network majority-owned by
Datek Online Holdings
, leaving it with no investment in an electronic platform. Four months after the two firms first agreed to the deal, Datek says it may not go through, and TD Waterhouse declines to discuss it. A statement from TD Waterhouse is expected this week.
TD Waterhouse still is working on technical links with Island and is sending orders there, according to one person familiar with the discussions. And Stephen McDonald, who heads TD Waterhouse, recently told
that having such a link to an ECN was enough.
But without a stake in an electronic trading platform, TD Waterhouse could find itself behind competitors like
, which has a stake in ECN
. Investors already have beaten up on Waterhouse stock, pushing it down more than 50% since mid-July. Schwab, by comparison, has fallen about 36% and E*Trade has dropped just under 30%. Investors are worried in part about falling trading volumes among online brokers.
For Island, TD Waterhouse could provide order flow given its place as the third-biggest online broker. "The important thing for us is getting orders," says Matt Andresen, Island's president.
Electronic trading systems -- which match buy and sell orders through computers -- have become hot in part because of online trading and growing interest in after-hours trading. For online brokerages, creating links to these ECNs will allow them to execute trades quickly during the regular session and during after-hours trading. It also could create a new revenue stream.
For example, TD Waterhouse's average daily share volume in the third quarter ended July was 109,000, more than Island's average daily volume. That liquidity is important because while ECNs can be accessed through
system or direct links, profits increase when they match orders in-house. Unlike Nasdaq market makers, which make their money on the spread (or the difference between the bid and the ask), ECNs charge a commission on each share.
James Punishill, an analyst for Boston-based
, says TD Waterhouse is "leaving a lot of money on the table" if it doesn't invest in an ECN. Changing revenue models makes diversification a pressing issue for online brokerages, Punishill explains.
"Payment for order flow is going down. It's going away. We all know it's going away," he says. "There's a little commission war heating up again. Competition is heating up with the full-service firms entering.
Brokers have to find new sources of revenue."
Which brings the question back to why TD Waterhouse would pull out of the Island deal.
For one thing, there's money. Although TD Waterhouse raised $1 billion in its June IPO and recently sold about $200 million worth of stock in market maker
, the person with knowledge of the agreement says Island's valuation -- $25 million for the 12.5% stake -- became a point of contention.
And there's the history of
regulatory problems at Datek. Last week, its founder and head honcho Jeffrey Citron stepped down to make way for Ed Nicoll, a move seen as an attempt to distance the firm from a troubled past that scared investors, including Paul Allen's
, which pulled out of a financing agreement for Datek and Island in July.
Then there's the management situation. Nicoll, who moved to Datek in January, was a Waterhouse founder and spent more than a decade there. In March, he brought over another Waterhouse manager, John Mullin, in a move to shore up management. The deal between Island and Waterhouse was announced a couple of months later.
During that same time period, Waterhouse became TD Waterhouse and McDonald came down from Canada, home of majority owner
, to replace Waterhouse's Frank Petrilli at the brokerage's helm. Petrilli then left TD Waterhouse in July for E*Trade but
returned after a week there.
Petrilli may have found the differences between the brokerages wider than anticipated, but TD Waterhouse has resembled E*Trade and other brokerages in the past, including by having taken part in their bet on order-execution systems. For example, E*Trade,
, TD Waterhouse and others invested as a consortium in 1995 in Knight/Trimark, hoping that Nasdaq trade executions would eventually deliver hefty returns.
When Knight/Trimark went public in 1998, TD Waterhouse ended up with a winning hand. Now the question is whether TD Waterhouse is making another smart move by walking away.