4500 Bohannon Drive
Company Perspectives:
The ability to empower customers is the soul of E*Trade Financial and our spirit is defined by our ability to champion the needs of each customer. As a team, we will embrace market dynamics as they unfold to define true value for our employees, customers, and shareholders.
E*Trade Financial Corporation operates as a diversified financial services holding company. Considered a pioneer in the online trading world, E*Trade was forced to expand its services when the dot-com bubble burst--an event that left many pure play online companies scrambling to shore up revenues and profits. As such, the firm not only offers online investing and trading to its four million customers but a host of other financial services related to wealth management and banking. E*Trade touts its products and services to retail, corporate, and institutional customers. Its clients can access account information online and through E*Trade Centers and automated teller machines located throughout the United States. Christos Cotsakos led the company through its stellar growth period in the late 1990s but stepped down in 2002. Mitchell H. Caplan was named his replacement and is leading the charge to transform E*Trade into a multi-faceted financial services concern. In 2003, the company changed its name from E*Trade Group Inc. to E*Trade Financial Corporation.
Fomenting the Brokerage Revolution in the 1980s
When William Porter formed TradePlus with $15,000 in startup capital in 1982, the online investment revolution was already underway. The first online service, called Tickerscreen, was initiated in May 1982 by Max Ule, as a division of Rosenkrantz, Ehrenkrants, Lyon & Ross, Inc. A bulletin-board system, Tickerscreen enabled customers to place orders after the markets were closed, which would then be transacted by the brokerage house when the markets opened again the next day. Porter, who had held management positions with General Electric and Textron, after earning an MA in physics at Kansas State College and an MBA in management from the Massachusetts Institute of Technology, saw an opportunity to take online investment services further--by automating the full transaction process.
Porter's TradePlus "vision" combined two emerging trends. Already trading under his own account, Porter also looked at cutting the cost of trading. By then, a new breed of discount brokers, such as Charles Schwab, had arisen to challenge the full-service brokerage houses. By the mid-1980s, discount brokers amounted to 9 percent--up from 2 percent at the start of the decade and rising--of all stock transaction commissions. Porter, however, believed that he could cut the cost of trading even deeper than the discount brokers, who still charged as high as $100 per transaction. The second trend was the appearance of the first personal computers in the early 1980s. Porter immediately recognized the potential of this new electronic market, foreseeing that personal computers--equipped with their own modems--would soon become commonplace office and home equipment.
In 1982, TradePlus contracted with C.D. Andersen & Company to create a computerized order entry system. That system went online in July 1983. TradePlus enabled its customers to access market information and conduct trades during market hours, while offering 24-hour-per-day portfolio management capability. By paying a premium on the basic service charge, customers could also receive real-time stock pricing and portfolio updates; otherwise, they received information after a 20-minute delay. Customers paid a sign-up fee, ranging up to $195, and monthly subscription fees of $15, which gave them one-hour of connect time per month. Use of the service beyond that cost $24 per hour during market hours and $6 per hour when the markets closed. For the premium, real-time service, nonprofessional customers paid $75 per month and professional investors paid $135 per month, fees established by the National Association of Securities Dealers.
By 1984, C.D. Anderson counted some 500 TradePlus customers, who contributed as much as 12 percent of the firm's commissions. In that year, the Anderson's exclusive agreement with TradePlus ended, and Porter began marketing the company to other discount brokers, signing on Fidelity Brokerage Services, of Boston, and Texas Securities, Inc., of Fort Worth, by the middle of the year. By then, TradePlus was not alone: several other discount brokers had begun to offer their own online services. Nevertheless, TradePlus continued to build, in 1985 signing Quick & Reilly, then the nation's third-largest discount broker, to offer TradePlus through the Compuserve Information Network. The following year, TradePlus services were also added to another large database service of the time, Dialog Information Retrieval Service. The concept of online investment transactions was catching on, although individual investors were still burdened by monthly subscription charges. Toward the late 1980s, that changed when Donaldson, Lufkin & Jenrette introduced its PC Financial Network, which was incorporated into the standard services of such online businesses as America Online and Prodigy. TradePlus's primary customers, meanwhile, included a growing number of discount brokerage houses, conducting their activities via the TradePlus system.
Online trading continued to build momentum. By the summer of 1987, TradePlus reported that its servers were in use nearly every minute, often by several people at once, 24 hours per day, including a large number of international customers as well as domestic customers. By then, in addition to Quick & Reilly and C.D. Anderson, two banks began offering TradePlus as a brokerage gateway. Bank of America's Home Banking service gave customers access to Charles Schwab & Company using TradePlus's computers, while Chemical Bank's Pronto customers could place orders through TradePlus to Quick & Reilly. Electronic trading seemed on its way to becoming a competitive force in the investment community. Then, in October 1987, the market crashed. Trade volume contracted, and the online trading services, TradePlus included, withered.
Reborn in the 1990s
Trading picked up only slowly as the 1990s began, crippled by a national recession and then by the U.S. entry into the Gulf War. In 1991, however, Porter, still active with TradePlus, again showed his visionary side. With several hundred thousand dollars of startup capital from TradePlus, Porter established a new company, E*Trade Securities, Inc., providing deep-discount brokerage services. Instead of the monthly fees charged by TradePlus, E*Trade offered flat-rate trading and free information services via the online services, including America Online and Compuserve. By the following year, Wall Street had recovered from its slump, entering the bull market of the 1990s. At the same time, interest in the online services began to build, while advances in modem technology and falling prices among computer equipment in general, were providing faster access to a widening range of people.
E*Trade quickly dominated this new investors market. As trade volumes continued to build, interest in investing--particularly among the Baby Boom generation--was also rising. By the mid-1990s, more than 20 percent of the nation's population was investing in stock, compared with less than 5 percent the decade before. By 1992, combined revenues at TradePlus and E*Trade neared $850,000. The following year, revenues--based on E*Trade's $40 per transaction charge--topped $2 million. The company also turned profitable, posting $100,000 in net earnings. The new availability of investment information, accessible by the online services' customers 24 hours per day, added to the popularity of investing, and particularly self-directed investing by the growing numbers of computer-literate customers. Both America Online and Compuserve were undergoing their own growth boom during this period. By 1994, the two companies counted some two million customers between them. In less than three years, America Online alone would count more than eight million customers.
The year 1994 proved significant for E*Trade as well: revenues exploded, nearing $11 million, making TradePlus and its E*Trade subsidiary the fastest-growing private company in the country. E*Trade quickly outpaced its parent, and the company would eventually be reorganized as the E*Trade Group, with E*Trade Securities remaining its principal subsidiary. The company, which counted 44 employees in 1994, scrambled to keep up with its own growth, adding more than 200 employees in one year and expanding its office space from 4,800 square feet to more than 20,000 square feet in 1994. By the end of 1995, however, E*Trade was forced to move again, to new quarters with some 48,000 square feet.
By 1995, the new American information revolution was firmly underway. The appearance of so-called multimedia PCs, which bundled sound, video, and--particularly important for E*Trade--modems into relatively inexpensive and easy to install packages, brought a whole new wave of people to computers and online services. E*Trade soon found itself joined by competing online investment services, forcing it to drop its transaction rate to $19.95. However, the company had already taken the lead among the growing home investors community, which was also served by such popular online services as America Online's Motley Fool investment information area. E*Trade found its system overloaded with customer calls, and in the summer of 1995 was forced to quadruple its systems. By the end of that year, the company's revenues had doubled again, reaching $22.3 million and generating a net income of $2.6 million.
The online services proved merely a taste of things to come. By the end of 1995, the Internet--and more specifically its graphical World Wide Web interface--had become the buzzword of the country. A new range of service providers sprang up, countering the hourly charges of the online services with unlimited access at flat-rate monthly fees. E*Trade quickly set up shop on the World Wide Web as well. Within weeks after the company's entry on the Web, the Internet accounted for more than 13 percent of the company's sales.
Riding the Dot-Com Wave in the Late 1990s
In early 1996, E*Trade began preparing its own initial public offering (IPO). Porter stepped aside, bringing in Christos Cotsakos to lead the company. Cotsakos, a son of Greek immigrants from Paterson, New Jersey, had been a decorated Vietnam veteran--a volunteer awarded the Congressional Medal of Honor for his actions during the Tet Offensive--before joining the early 1970s startup Federal Express. Beginning at an hourly wage of $3.50, Cotsakos worked his way up the Federal Express ranks over nearly 19 years before becoming president and CEO of Nielsen. With Porter as chairman, Cotsakos was named president and CEO in April 1996 and led E*Trade into its IPO that summer.
E*Trade was adding some 500 customers and as much as $10 million in assets per day; by May 1996, the huge increase in trading volume--in the first half of that year alone volume had tripled, from 50 million shares traded to more than 170 million--proved too much for the company's system, crashing the company's computers and leaving its customers stranded for some two hours. For that two-hour period, the company paid out $1.7 million to cover its customers' losses. A second, more limited glitch occurred in July. By then, however, the company had already begun to prepare for such an event, having leased a 53,000-square-foot space in Sacramento, California, to install a redundant hardware and customer service facility. The growth of its competitors, including the arrival of Schwabs' e.schwab service, forced E*Trade to cut its transaction rate again, to as low as $14.95.
E*Trade's growth pace continued, seeing revenues more than doubling again to near $52 million for 1996. The company also began expanding its services, offering investors the opportunity to buy shares in IPOs and purchase equity in private offerings. Trade volume continued to grow, reaching 8,000 transactions per day, with the Internet accounting for more than a quarter of all transactions. The company also formed a subsidiary, E*Trade Online Ventures, to search for other directions in which the company could expand. One such expansion was the company's agreement with Versus Brokerage to extend the E*Trade brand name to Canada's financial market. A similar agreement would bring the company to Australia in May 1997. In June 1997, E*Trade and leading World Wide Web search engine Yahoo!, which recorded some ten million "hits" per day, announced an agreement which added a direct link to E*Trade's Web site from the Yahoo! site.
With an estimated 40 million Americans online by mid-1997, and a total online community of some 60 million worldwide, E*Trade's future appeared electric. Analysts expected the online investment market to grow from 1.5 million in 1997 to ten million or more by 2000. E*Trade looked forward to becoming the top brand name of this new investment era.
Indeed, during the latter half of the 1990s E*Trade continued its upward climb. The company expanded its services to customers in Australia, Germany, Israel, and Japan. In 1999, revenues increased by 132.4 percent over the previous year to $662.3 million. Despite E*Trade's success, Cotsakos was not satisfied and continued to pursue growth options. Adding to its strong presence in online trading, E*Trade began setting its sights on becoming the world's first digital financial media company. An August 1999 Fortune article reported that "Cotsakos wants every piece of every financial transaction, and he wants it done without any human interaction. He wants E*Trade to tell you how to invest, what it means to invest, and where to invest, and then take a cut from both you and the market maker. He wants to take your company public, insure your car, manage your employees' options, and sell you books about golfing."
True to form, Cotsakos set his sights on acquiring Telebanc Financial Corporation, the largest online bank. Cotsakos met with Telebanc CEO Mitchell Caplan in 1999 and shortly thereafter announced that E*Trade would acquire the bank in a $1.8 billion deal. The transaction was completed in January 2000. That same year, the firm added Electronic Investing Corporation to its arsenal. Cotsakos' strategy appeared to pay off as revenues surpassed $1.36 billion.
Overcoming Hardships in the New Century
By this time, however, the dot-com frenzy of the late 1990s was starting to show signs of deterioration. In fact, in just one short year, E*Trade saw its revenues drop and profits plummet, with the company posting a loss of $241.5 million in 2001. By 2002, the company's stock was trading at $8 per share, down from nearly $63. To make matters worse, E*Trade and its formidable leader Cotsakos took center stage in a public relations disaster in April 2002 when the company disclosed that its CEO had been paid $77 million in 2001. In an attempt to appease angry shareholders who believe he had been paid an exorbitant amount, Cotsakos returned $21 million to E*Trade and signed a renegotiated contract that eliminated a base salary in favor of a bonus structure based on performance.
Despite the challenging business environment, E*Trade forged ahead with its expansion and diversification plans. To lure new customers, the company opened small financial zones in 26 Target stores and larger financial centers in New York, Boston, Denver, San Francisco, and Los Angeles. The firm also branched out into automated teller services, staking its claim on the third-largest ATM network in the United States. In June 2002, the company acquired Tradescape Corporation in a move that nearly doubled the number of its brokerage transactions.
Cotsakos resigned in January 2003, leaving Caplan to take the helm. That same year, the company adopted E*Trade Financial Corporation as its new corporate moniker, a sure sign that the company's strategy of focusing on brokerage, banking, and lending was alive and well. While the company continued to battle a weak economy, it appeared to have weathered the dot-com fallout better than most and seemed to be on track for future growth. In a 2003 Money magazine interview, Caplan was asked if people recognized that E*Trade was more than just a broker. He responded, "That's one of the things I'm going to work on. I'll be happy the day I die if people refer to us as a diversified financial services company."
Principal Subsidiaries: ATM Ventures, LLC; BRE Holdings, LLC; CCS (Canada), Inc.; Canopy Acquisition Corporation; Capitol View, LLC; ClearStation, Inc.; Confluent, Inc.; Converging Arrows, Inc.; Dempsey & Company LLC; Deutsche Recreational Asset Funding Corporation; E TRADE Systems India Pte. Ltd.; E*TRADE Access, Inc.; E*TRADE Advisory Services, Inc.; E*TRADE Asia Ltd.; E*TRADE Asset Management, Inc.; E*TRADE Australia Ltd.; E*TRADE BBH, Inc.; E*TRADE Bank; E*TRADE Bank AG (Germany); E*TRADE Bank A/S; E*TRADE Benelux SA (Netherlands); E*TRADE Brokerage Holdings, Inc.; E*TRADE Business Solutions Group, Inc.; E*TRADE Canada Securities Corporation; E*TRADE Capital, Inc.; E*TRADE Capital Holdings, Inc.; E*TRADE Clearing LLC; E*TRADE Europe Holdings B.V. (Netherlands); E*TRADE Europe Holding Ltd.; E*TRADE Europe Securities Ltd.; E*TRADE Europe Services Ltd.; E*TRADE Financial Corporation; E*TRADE Germany Communications GmbH; E*TRADE Global Asset Management, Inc.; E*TRADE Global Research Ltd.; E*TRADE Insurance Services, Inc.; E*TRADE International Equipment Management Corporation; E*TRADE International Holdings Ltd.; E*TRADE Italia S.r.l. (Italy); E*TRADE Japan K.K. (36%); E*TRADE Korea Company Ltd. (10%); E*TRADE Mortgage Corporation; E*TRADE National Holdings, Inc.; E*TRADE Nominees Ltd.; E*TRADE Nordic AB; E*TRADE Online Ventures, Inc.; E*TRADE Professional Trading, LLC; E*TRADE Re, LLC; E*TRADE SARL; E*TRADE Securities Corporation; E*TRADE Securities Ltd.; E*TRADE Securities LLC; E*TRADE Svierge AB; E*TRADE Systems Holdings Ltd.; E*TRADE Technologies Corporation; E*TRADE Technologies Group, LLC; E*TRADE UK (Holdings) Ltd.; E*TRADE UK, Ltd.; E*TRADE UK Nominees Ltd.; E*TRADE Web Services Ltd.; E-TRADE South Africa (Pty) Ltd.; eAdvisor; EGI Canada Corporation; Electronic Shares Information Ltd.; Engelman Securities, Inc.; ETRADE Asia Services Ltd.; ETRADE Finance (Hong Kong) Ltd.; ETRADE Securities (Hong Kong) Ltd.; ETRADE Global Services, Ltd.; ETRADE Securities Ltd.; GVR Company LLC; Ganis Credit Corporation; Momentum Securities Partners, LLC; Telebanc Capital Trust I; Telebanc Capital Trust II; Telebanc Servicing Corporation; Telebanc Mortgage Funding Corporation; Thor Credit Corporation (50%); TIR (Australia) Services Pty. Ltd.; TIR (Holdings) Ltd.; TIR (Holdings) Brazil Ltda.; TIR Securities (UK) Ltd.; Tiresome Nominees Pty. Ltd.; Tirade Nominees Pty. Ltd.; TM1 Funding LLC; TM2 Securitization LLC; TM2 Securitization QSPE LLC; TradePlus Brokerage, Inc.; Tradescape Momentum Holdings, Inc.; Tradescape Securities, LLC; Tradescape Technologies, LLC; Tradescape Technology Holdings, Inc.; Tradescape Trading, LLC; U-2 Dynamics, Inc.; VERSUS Brokerage Services (U.S.) Inc.; Web Street, Inc.; Web Street Securities, Inc.; Webstreet.com, Inc.; W&L Aviation, Inc.
Principal Competitors: Ameritrade Holding Corporation; The Charles Schwab Corporation; TD Waterhouse Group Inc.
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