Beyond Cool

Online trading goes mainstream as quality rises and commissions plunge

By Theresa W. Carey

Move over, propeller-heads. Trading stocks on the Internet is no longer the sole province of the computer cognoscenti. And that marks quite a change from our first two years of doing this survey, when the ranks of online traders seemed to be dominated by gadget freaks, early adopters and bargain hunters. This time around, it seems that those folks have been joined by hordes of mainstream investors.

Last year, in fact, online customers accounted for an estimated 17% of all retail stock trades, more than double the previous year's level. This surge in volume was helped along by improved quality at almost all brokers' World Wide Web sites, not to mention sharply lower commissions.

Reacting to investors' wild enthusiasm for online trading, dozens of brokers have gotten into the game. Right now there are more than 50 brokerage houses offering online trading, up from a mere 12 when we first did our survey in 1995. And they aren't standing still. Virtually every one of the sites we ranked a year ago underwent significant upgrading during 1997.

Clearly, one of the attractions of online trading is the vast amount of free financial information that can be had online. While the Internet may have fallen short on a lot of its promise, that isn't the case in this area. The simple fact is that any investor with a modicum of market savvy can mine all the data needed to make trading decisions -- and execute the trades. The challenge to full-service brokerage houses, of course, is that all this can be done without the services of a high-priced customer's man.

Indeed, the plunge in online commissions has been enough to shake up some of the discount brokers, let alone the full-service shops. By the fourth quarter of 1997, the average commission charged by the top 10 online firms was slashed by more than half, to $15.95, down from $34.65 a year earlier, according to Bill Burnham, an analyst with Piper Jaffray.

Today there are an estimated three million online-trading accounts, according to Forrester Research (www.forrester.com), and that number is expected to grow to 14.4 million by 2002. Forrester's figure would be even higher if so many people weren't abandoning proprietary, dial-up trading systems. These old packages are being supplanted by firms that allow customers to trade on the Internet. One of the important advantages of the 'Net is that it doesn't require installing a separate program on a customer's computer. That's not to say that stand-alone packages will disappear altogether; Forrester estimates that about a quarter of online traders still are using proprietary programs. But the firm projects that stand-alone software usage will dwindle to less than 3% of online investing accounts by the turn of the century.

The initial push into online trading was led by discount brokers who simply gave existing clients electronic access to their funds. Then along came upstarts like E*Trade and Lombard (now Discover Brokerage), and they stole customers from the traditional discount brokerages. Discount giant Charles Schwab still dominates. Piper Jaffray estimates that of the 153,000 daily trades executed online during the fourth quarter of 1997, 30% went through Schwab, with E*Trade picking up 14%. Waterhouse Securities and Datek tie for third place with 8% of the market, with Fidelity, DLJDirect, Quick & Reilly, Ameritrade and Discover queuing up right behind them. Julio Gomez of Gomez Advisors noted in an interview with PC World Radio that an "establishment" is now emerging in online investing, thanks to the huge investments made by DLJDirect (formerly PCFN), Schwab and E*Trade, in addition to the long-awaited debut of online trading for Merrill Lynch account holders. Last year's bumper crop of online brokerages will, most likely, shrink by year-end, opines Burnham of Piper Jaffray. Burnham expects consolidations in the latter half of the year, once growth in trading volume levels off and brokers realize what it's costing them to attract new customers.

What seems likely to happen as the industry matures is an increasing effort by various brokers trying to target different segments of the online trading market. Craig Prickett, Schwab's director of electronic brokerage marketing, observes, "The early adopters were the more active traders, but now we're approaching this area where our online customer looks like our average offline customer. Schwab customers aren't as price-sensitive as the customers of the deep-discount brokers." Other firms, meanwhile, are likely to target the active traders who tend to look for rock-bottom commissions. Barron's readers want it all, of course. Price is an important criterion, but only one. Our top four brokers this year -- Discover, Web Street Securities, Datek and DLJDirect -- offer enviable combinations of service and price. Discover, once again ahead of the pack in our rankings, has just undergone the latest upgrade of its site. If you can overlook the color scheme -- shades of Discover pumpkin combined with Lombard teal -- you'll find a site that's packed with data and up-to-the-minute information about your account.

The next tier of brokers offers a different set of strengths: Day traders will prefer Datek and Web Street Securities, while traders looking for one-stop shopping and plenty of opportunity to talk to a live broker will prefer DLJDirect and Waterhouse.

What stands out most in this year's review is huge leaps forward in quality, for the entire group. Every site has more research available, and more online help as well, and our rankings reflect this. In 1997's survey, several of the brokerages reviewed inspired cringes of apprehension; this year, only one of the brokers in the pack looks like it's not worth the commissions being charged. That's not to say that online nirvana has been attained. Remember that during last October's high-volume market crash, customers complained loudly about an inability to execute trades or to get touch-tone alternatives. But the online brokers say they've learned from that experience and will do better next time.

In this roundup, we're focusing solely on Internet brokers, and have examined 19 offerings in depth. We narrowed our focus to include Web-based brokers who are in the Piper Jaffray top 10 in terms of market share, as well as those who rate highly on Julio Gomez's Internet Broker Performance Monitor (www.scorecard.com). We also required brokerages to provide us with a way to test the actual execution of trades.

We ranked the brokers in five key areas on a scale of 1 to 5, with 5 being the highest.

This year we included a trade execution category, in large part because our readers wanted to know what they were likely to experience in this area with any given brokerage. As it turns out, some of the sites have surprisingly clumsy trading screens, initially complicated by the number of mouse clicks it takes to get there in the first place. Some brokers make you get a quote from another place on the site, then remember the prices you saw, return to the trading screen and fill in a bunch of boxes. Then you have to click on a button that takes you to a confirmation screen, which may or may not provide an updated quote. Finally, after verifying that you punched in the right information, you can go ahead and enter the order into the broker's system. After you're done with data entry, you have to figure out whether your order was executed, and at what price. Some brokers do not make this information readily accessible. After experiencing this version of computer hell, you sometimes have to wait a day to find out your account status and to get portfolio reports to reflect your trade.

During our testing, we realized the perfect site does not exist. Some come close, but so far none has reached our trader's Valhalla, which would minimize the number of verification screens by checking data field-by-field as it's entered, while maximizing the amount of data available at the time of the trade.

A real-time quote, presented before the order is entered, is essential. Also, drop-down list boxes that eliminate the need to do a lot of typing are very helpful. For example, if the trader selects "Sell," there should be a drop-down box that contains the ticker symbols of issues available, thus avoiding data-entry errors and inadvertent short sales. An easy-to-read verification screen that does more than just echo back the data entered is necessary. Finally, an instant link to the status of the order, followed by real-time updating of the trader's portfolio, is also vital.

We did not take a stopwatch and time the execution of market orders, mainly because we'd need quite a few more computers and phone lines than we had available during the testing. We executed equity trades on all 19 of the ranked brokers during market hours, performing a market buy and a limit sell of a Nasdaq stock. Following the market buy, we evaluated the execution and portfolio reports. After the limit sell, we examined the open order reports and looked at ways the trader follows the progress of the order. A "5" in this category means the order entry and execution process flowed easily from one step to the next, with real-time information available when needed. Perhaps unfortunately, we also couldn't arrange for a manic market meltdown such as the one last October 27 to test the sites under battle conditions.

Ease of use: How easy was it to navigate around the site? Does the layout of the site make sense and minimize the number of mouse clicks it can take to get from one place to another? A "5" in this category means the site was well designed and simple to use.

Reliability and range of offerings: Was the site accessible every time we loaded it? Did the graphics snap onto the screen, or did they crawl? We looked at two industry surveys, Gomez Advisors' first-quarter Broker Performance Monitor scores as well as Don Johnson's Discount Brokers Ranked from January, to help determine reliability. The range of offerings was more important the past two years; almost all of the sites ranked offer equities, mutual funds, options and fixed-income securities now. A "5" in this category means the site is reliably accessible at reasonable speeds, offers a wide range of tradable investments, and lets you reach a live broker or make a trade via touch-tone telephone, if desired. Research and other services: Can you get quotes, charts, news and analysis? Is it easy to see how your holdings or other issues you're watching are performing? A "5" in this category means a broker has a wide variety of proprietary information, along with real-time quotes, available free for trading customers, or has links to data from other providers at no additional cost.

Commissions: What's the bottom line? A "5" here indicates a commission of under $10. A "4" is awarded for trades of $10-$15, "3" for commissions ranging from $15 to $20, "2" if the charges are $20-$30, and "1" if the commission is over $30 for an equity transaction. We narrowed these ranges this year to reflect the overall falling prices in the online trading world.

As noted, Discover (****) this year repeats in grabbing the No. 1 spot, with its overall quality giving it a slight edge over the others in the top tier. What Discover does right is give the trader instant access: to quotes, to execution reports, and to portfolio updates. Research reports are nicely linked to the trader's portfolio, and moving from a quote screen to the trading area takes a single mouse click. Thanks to the efficient design, you're never more than two clicks away from the amenities offered to clients on the site. After spending the last year in a relatively quiet mode, Discover has added extensive customizing ability so that clients can design their own investment-information centers according to their own interests. Best of all is Discover's trade entry screen, which displays a real-time quote along with a tick trend indicator showing the price direction of the last eight ticks with +, - and = symbols. Traders get an instant feel of the current momentum of what they want to trade from the order entry screen. Once an order is filled, the positions and balance reports reflect the trade right away with the current day's activity highlighted in italics. V. Eric Roach, Discover's president, says it's put a back-up system in place in Salt Lake City. If there are problems getting on the Internet site, customers can trade via touch-tone or live broker as well. Roach also promises a wealth of research and improved real-time bond trading to come, thanks to its parent company, Morgan Stanley Dean Witter.

Web Street Securities (****) has designed a site that is dynamic and flashy, and will please the peripatetic trader. In terms of overall design, it couldn't be more different from the muted colors and calm screens offered by Discover, but it's still a site where all the pieces of research and trading are easily accessible. Basic information about a customer's portfolio is displayed on a single, constantly updating and busy screen, which may bewilder the occasional trader, but will please the day trader. Account information is updated in real time, using real-time quotes. If you're still in the site when a trade executes, the fill report pops up on the screen. From that same screen, you can check your balances, positions, news, and get more real-time quotes. Web Street customers can get Nasdaq Level 2 quotes for $50 per month, which show tick-by-tick prices and pending orders from market makers, a plus for aggressive traders. No wonder the average Web Street customer is currently trading four times per month, according to Web Street's president Joe Fox, which is double the average many other brokers report. Datek (****) recently redesigned its site as well, adding a slick Java-based order-entry system that gives you all you need to enter an order in a single line. No need to scroll down through a long screenful of trading options; everything is there in one place. A real-time quote is available upon request on the order entry screen. Research is integrated into the customer's portfolio, so it's easy to see when something's happened to one of your holdings. You can still opt to use the non-Java interface, which is useful if you're logging in through a commercial service like CompuServe or AOL. You can't trade options or bonds online with Datek currently, and there are only 1,000 mutual funds available. Many traders might rather have Datek's quick access to the Dilbert Ticker.

Datek, like Web Street, is definitely aimed at the busy, self-directed trader who wouldn't want to talk to a broker unless it was a social call. Piper Jaffray notes in its fourth-quarter 1997 online trading update that Datek shot from nowhere a year ago to the No. 5 spot in terms of number of daily trades, using only Internet-based advertising and word of mouth. The buzz among subscribers to Don Johnson's discount broker rankings, however, is that Datek is slow to answer E-mail, but the $9.99 commission provides some compensation.

DLJDirect (****), another company that changed its name (formerly PCFN), now more clearly shows its ties to parent Donaldson Lufkin & Jenrette. DLJDirect's site navigation is a combination of the frame used by about half the online brokers, and the menu at the top or bottom of the screen used by the other half. Clicking on one of the main menu items at the top of the screen (Portfolio, Trading, Market Monitor, Quotes and News, Research and Ideas, and Customer Service) changes the menu choices on the left-hand frame. The trading screen is simple, and allows you to get a real-time quote upon request before placing your order.

One of DLJDirect's strengths is its ability to access the trading area not only from the Internet, but also from within the major commercial online services (Prodigy, America Online, CompuServe) plus via touch-tone telephone and real, live brokers. You can also trade a wide variety of investments here, including a large selection of mutual funds (7,000), Treasuries and options.

The site isn't flashy, but it gets the job done. The research resources are very deep, including the usual suspects (S&P, Zack's, Lipper) along with a wide range of proprietary information. Serious money -- at least $100,000 -- is the price of admission to the latter (after a 60-day trial) as well as to DLJ's initial public offerings center. Although DLJDirect waited to leap onto the Web, it has put together a solid product that will serve the cautious trader well. In the three-star group, which comprises the majority of the brokers surveyed, good service is the rule, but we found nits to pick. Each has its own particular strength, which will appeal to different types of traders. Net Investor, Fidelity, American Express and Schwab aim at long-term traders who want a lot of information before they make one of their two to 12 trading decisions per year. Waterhouse, Quick & Reilly, SureTrade (the cut-rate branch of Quick & Reilly), A.B. Watley and Wall Street Electronica are setting their sights (and sites) on the volume traders, though Waterhouse also has some appeal for the long-term crowd as well. Wit Capital is aiming its services at investors who want a piece of IPO and venture-capital action, though its low commissions also encourage regular trading. Waterhouse (*** 1/2 ) was in the process of upgrading its site as this article went to press. Opening day for the new site came after our deadline, so our review is based partially on the existing system and partially on the new one. We were able to test both interfaces, and trade in both locations. The trading screens are not fundamentally different except for the location of site navigation buttons. A real-time quote is displayed on the confirmation screen prior to sending the order to the Waterhouse review desk. Orders don't go straight to the floor, though few actually end up being handled by a human; however, there is a lag of a minute or so for execution of market orders. Our other criticism of both sites is the way the trader finds out about order execution. Market orders show up quickly in the order-status screen, but you won't be notified of the execution of a limit or stop order without checking the report manually. And for some reason, Waterhouse puts an extra screen in the way of checking the order status. The new system will provide real-time portfolio calculations, though the current one is based on end-of-prior-day prices and positions. The site itself is easy to get around in, despite the occasional extra mouse click it takes to get from one place to another. Waterhouse gets extra points for keeping commissions low, giving customers ways to trade if the Internet site is down, and managing the growth of their online business without too many technical difficulties. We noticed during our review process that you are logged off if you're inactive for a period of time (about 10 minutes), and then you have to type in your account number and password again. That's probably for security purposes, and to reduce load on the servers, but it could get annoying.

Dick Kahane, a retired federal official in McLean, Virginia, with whom we talked last year about Waterhouse, is still pleased with their service and with the ability to stop in and talk to a human when necessary. Recently he had to re-register all his accounts, and says, "The easiest thing to do was scoop up all the paperwork and head over to their office, rather than mailing, faxing and FedExing stuff back and forth. One of the major advantages of Waterhouse is the combination of inexpensive, efficient online trading with the ready availability of human beings."

E*Trade (*** 1/2 ) has a simple data-entry screen, with buttons at the bottom that give easy access to the rest of the site, including research links. Order entry, however, is plagued by a lack of up-to-date information. A 20-minute-delayed quote is all you get, and that's after you've passed through the trade confirmation screen. Then you can't get a position update until the next day.

On the plus side, you can go straight from the portfolio viewing screen to the trading area, and the site redesign and simplification made it much easier to get around. The main page is customizable, and though it's not as flashy as those of others, like Web Street, the page loads quickly and gives the user easy access to the various site components. E*Trade could move up to four-star status by bringing more real-time information to the trader during the execution process. E*Trade customers haven't had many complaints about crashes and other problems, though Ron Koyich, an international businessman who divides his time between Hong Kong and Manila, says he always specifies a price for his orders. Koyich, and others quoted in Johnson's report, complain that market orders seem to go through at a price that appears to be higher or lower than the market (depending on whether it's a buy or a sell). "I'm generally happy with E*Trade," Koyich says, "and have had great luck with my orders when I specify the price."

Quick & Reilly (***), which was acquired by the Fleet Financial Group in January, gives its customers Internet access to trading via QuickWayNet. It seriously cut its commissions this year, and also introduced a low-cost subsidiary, SureTrade (** 1/2 ). QuickWay is organized around four drop-down list boxes that give quick access to the site's features. When trading, you can request a real-time quote before filling in the boxes, but the positions and balance reports aren't updated until the end of the day. Quick & Reilly offers a lot of research, but it's not linked directly to portfolio holdings. You can make trades with a live broker or via touch-tone phone if you're so inclined. SureTrade is a place for the investor who is completely self-directed. All the site features are accessible from the SureTrade Action Card, which lets a user move quickly from trading to research to account services, using drop-down lists and radio buttons. As with QuickWay, account balances are updated overnight, not surprising since the two share a parent company. SureTrade's $7.95 fee doesn't have any gimmicks, either: It applies to market as well as limit orders from all the major exchanges. Net Investor (***) gets this year's Most Improved award. A bare-bones basic site last year, it now lets users customize the Market Snapshot page, and navigate to all of the site's amenities via a frame on the left side of the page. The trading screen is simple, but you don't get a real-time quote until you move to the confirmation area. Reports reflect current trades, so you don't have to wait overnight to get the latest on your portfolio value. Net Investor also gives you access to a wide range of mutual funds. It's the priciest broker with this star rating, but will appeal to now-and-then traders who appreciate some personal hand-holding from a live broker from time to time. Wit Capital (***) is a bit of an anomaly in this group. It's the only Web site with a stated mission that involves long-term commitments on the part of its customers, rather than the portfolio churn that low-priced brokers usually pursue. Though DLJ Direct and some of the other sites also offer access to IPOs, Wit's venture-capital area sets it apart. It's less anomalous considering Wit's founder, Andrew Klein, was the first to do an IPO on the Internet when he took his microbrewery, Spring Street Brewing Co., public. Wit also lets its customers trade large blocks of equities with one another directly (rather than going through the market).

Wit's site is easy to get around, and the lack of bouncing balls and flashing lights means the pages load quickly. The order-entry screens get the job done but aren't spectacular, and you're not notified automatically of fills, nor are you updated about your portfolio in real time. But again, this is a site that favors long-term investors over day traders.

Fidelity, American Express and Schwab all score *** by offering solid, though pricey, trading sites. Fidelity made its online trading accessible to anyone with an existing account; just type in your Social Security number and some verifying information, and you can go play with your portfolio online. Fortunately, Fidelity recently upgraded its previously sluggish and disorganized site, and it's now easier to get around, though not a whole lot faster. Still, it's designed to appeal to mutual-fund investors who are not, by definition, day traders. There's an excellent mutual-fund screening tool. Fidelity's trading screens were simplified and streamlined, and it doesn't have the boxy feel of many of the other sites. The confirmation screen displays a real-time quote, but portfolios aren't updated until the following day. American Express also offers quite a bit of research, but the trading area is not geared for the frequent trader. After entering your order, a real-time quote is displayed on the confirmation screen. You're warned to hit the "Trade" button just once; multiple clicks, which you might be tempted to do during delays, could enter multiple trades. One option AmEx offers that doesn't show up elsewhere is "Trade at Close" as well as the usual market and limit order. When selling, you can specify a particular lot or shares, or first-in-first-out, another nice touch when you're trying to minimize capital-gains taxes. Account balances are updated daily, though, not real-time, and any stop/limit orders more than 20% away from the market are automatically rejected.

Schwab, the current market-share champion, has put together a site that does a decent job of presenting information about accounts and potential investments. On the order entry screen, you can get a current real-time quote displayed in a window at the bottom. The account balance screen, however, shows positions as of the end of the prior day, though the positions screen is updated every 15 minutes. Schwab's research and the ability to quickly swap among 1,400 mutual funds are pluses. Although cut last year, the still-high commissions drag down the site's overall rating.

Wall Street Electronica (***) wants to straddle the line between traditional brokerages and the online trading specialists. The site includes some impressive technology, including a ticker with live quotes running at the bottom of the screen. The trading area itself is not linked to the site's research capabilities, however, and no up-to-date quote is presented on the trading screen at all. It's difficult to make the transition from a research screen to the trading area, so you go into the trade lacking up-to-the-minute information. This site could use a remodeling with easier transitions in mind, building on the technological capabilities that apparently are already there. A.B. Watley (***) is focusing more on its stand-alone package, Ultimate Trader, rather than on their Web site, WatleyTrader. Off the Web, the service is impressive; it was the only firm to have a live broker answer the phone on the first ring. The company aims its Ultimate Trader program at those who trade daily, and focuses on the top 2% of traders. Still, the Web site isn't bad, though it doesn't ring any bells either. You get a real-time quote on the confirmation screen when trading, but account balances aren't updated until the next day. There's no proprietary research on the Web site, but there's a comprehensive list of links to other sites, available whether or not you're a Watley customer.

National Discount Brokers (***) redesigned its Web site as well, and gives customers the choice of a high- or low-resolution look at their investments. The former initially takes much longer to load, but the screens are laid out in a way that makes more information accessible in one place. On the high-resolution page, you can trade in a window that takes up the left side of the screen while getting quotes in the top window and account balances in the bottom. The low-resolution view requires quite a bit of clicking to get from one place to another, though. NDB offers a wide range of mutual funds, and also dropped its rates by $5 per trade this year. And it has some technical analysis capability in its research area. Indicative of how much things have changed in a short time, a two-star rating would have put an online broker in the top half of last year's survey. No more. Wall Street Access (**) also lacks real-time portfolio updates, but it has an order-entry page that's easy to get to off the main page. You get a real-time quote on the confirmation screen, and your order shows up on the Review report within five minutes. It's a workable site, and the company also offers touch-tone trading along with a proprietary package. Ameritrade (** 1/2 ) is the amalgamation of eBroker, Ceres and Aufhauser. Accutrade (*) is owned by the same company; and offers similar services for much higher prices. Ameritrade charges just $8 per transaction, but the research available is skimpy and the site itself is stripped down to the minimum. Both Ameritrade and Accutrade have the same trading screens that feature three levels of complexity. Basic is for simple buy and sell transactions, while the Intermediate level adds sell-short and buy-to-cover along with stop and limit prices. Advanced trading adds time limits and other rules to the trade (all or nothing, fill or kill) as well as some confirmation options. But they've created a trading system that contains no more options than the very simple screens presented by Datek or Discover, so the three-level presentation doesn't make much sense. After filling in the screen, you get a real-time quote on the Preview screen. Positions and balances are not updated in real time. Some former Ceres customers complained at various investor Web sites about the problems they encountered after the service was folded into Ameritrade. Accutrade's high prices are mysterious, given its lack of online amenities.

There's no doubt that the online trading market will continue to grow as the Internet becomes an integral part of modern life, as much as the telephone did a century ago. At the same time, the major brokers are investing in technology to allow more of their customers online simultaneously, hopefully avoiding the system slowdowns and crashes that can occur on high-volume days.

So what's ahead? E*Trade is focusing on customization and personalization features, which Rebecca Patton, senior vice president for advanced products, thinks is the major trend on the Web for investors. Of its upcoming revision (not yet available but due this spring), she says: "We're building a major public destination site on the Web, with all our content available to anyone who comes to the site. We're putting three tiers in place: visitors, who can see a few things; members, who can track portfolios and customize news pages, and customers, who will have a broad range of new tools." The next version of the site is intended to look more like a packaged software program than a Web page.

While we expect to see continued improvement in features, notably order-entry screens with real-time portfolio updates, we also anticipate shrinkage in the numbers of Internet brokers out there. Consolidations and shakeouts seem all but certain in this crowded marketplace. Joe Fox at Web Street is openly in the takeover market, and says his company plans to expand by acquiring other brokerages this year. But as with everything to do with the 'Net, the hype can exceed the reality. Anthony Huston, executive vice president of marketing and new media at A.B. Watley, avers that Web technology may not yet be ready for prime time. "It's ready for the investor who wants to make a trade every few days or so, but it's not for the truly active trader," Huston says.

And commissions? They've dropped like a rock in a cold stream this year, but may be near the bottom. As Schwab's Prickett notes, "If price alone was the main factor, Motel 6 would be the top hotel chain in the country." Frequent traders are driven to find a way to minimize commissions. But for the average active trader, who may have a few transactions a month, commissions have fallen so much already that they may not be nearly as important as other factors. The difference between a $19.95 and a $9.95 charge hardly registers on a trade of 100 shares of Intel, worth $7,500. And either is vastly lower than the $100 or so a full-service broker might charge, or the $75 charged by a traditional discount broker.

Perhaps the safest prediction is for more of the same. In the intense battle for customers, online brokers will continue to provide more features and services without charging more and, if it's possible, maybe charging even less. And the only sure winner in this will be the object of all this competition -- you, the online investor.

Comments: E-Mail them to randall.forsyth@news.barrons.com