Online Broker Stocks - Investing (Canada): 4/2/1999

Online Broker Stocks

Dateline: 4/2/99

Although there are a number of online brokers, most of them run as adjuncts to other businesses - either conventional brokerages or banks. But two companies stand out. One of them is the Canadian licensee of E-Trade, Versus Technologies. The other is, in fact, a bank - the TD Bank - which announced this week that it plans to sell 10% of its discount brokerage subsidiary in a public offering.

Versus Technologies

Last February I saw a display at the annual Vancouver Financial Forum for E-Trade Canada. The lady attending the booth told me about several of E-Trade's features, but one in particular interested me. I was pretty much a mutual fund investor at the time and paid my broker what I considered to be a reasonably cheap front end load of 2% on purchases. She told me E-Trade charged no fees on mutual fund transactions if you kept the fund for at least 3 months. Well, that got my frugal Dutch blood going! I signed up on the spot!

The transfer of my accounts took an awfully long time, coming in dribs and drabs until the final transfer in on May 13. That was almost three months from the day I joined, a little too long for my liking. But true to their word, mutual fund transactions for funds they trade (and they trade all the major funds and many of the smaller ones, over 900 in all) have cost me nothing. There have been occasional charges for funds they do not deal with, including bank and trust company mutual funds.

But the best thing about E-Trade has been the convenience of trading over the Internet. It is simply a superb service. Since moving to E-Trade, my focus has shifted from mutual fund investing to stock picking. With well traded stocks the transactions are carried out very quickly, often within minutes. Thinly traded stocks can take a bit longer. Mutual funds are traded at the closing price of the day of the trade.

I won't go into more detail here on my experiences with E-Trade, but suffice to say I am a satisfied customer.

Versus Technologies is the parent company of E-Trade Canada which it operates through its subsidiary, Versus Brokerage Services. It also "provides institutional investors and investment dealers with automated trade execution products and services as well as specialized information management, trading and analysis tools" throughout North America.

Working to expand its business through online alliances, E-Trade Canada announced March 18th that it had reached agreement with Sympatico, Canada's largest and most widely available Internet Service Provider, to provide investment tools and research to Sympatico's comprehensive personal finance area.

Naturally when Versus Technologies went public I followed it with interest. It came out on March 2 at an IPO price of $11.50 but instead of opening at a large multiple as so many American Internet stocks have done, Versus drifted down, down, down to $8.25. It subsequently traded as high as $12.45 and closed April 1st at $11.70 - just 20 cents over the IPO price. This will be an interesting stock to watch.

TD Bank

The Toronto-Dominion Bank is only the fifth largest bank by assets in Canada, yet it has the second largest capitalization. "Why?" you might ask. It's because TD Bank also is the largest discount broker in Canada and the second largest in the world. Yes, you read that right - the second largest in the world! It handles over 12% of all daily U.S. trades.

TD's global discount brokerage consists of Waterhouse Investor Services, Inc. in the U.S. and Green Line Investor Services in Canada, Australia, the U.K. and Hong Kong. All combined have more than 2.3 million client accounts and over C$135 billion in assets under administration. All have online Internet trading.

Investment analyst Pat McKeough has had TD Bank as his favorite bank stock for several years. In the February issue of The Successful Investor he reiterated his buy rating calling it our "favorite bank and Internet stock".

The March 30 Globe & Mail reported on TD's purchase of Trimark Financial Corporation's trust operation. The article also mentions that TD is capitalizing on "the recent craze in Internet stocks" with its Waterhouse Investment Services division.

"People are referring to us as TD.com," said TD vice-chairman Bob Kelly.

With the announcement March 31st of the planned sale of 10% of its worldwide discount brokerage in an IPO later this spring, the notion of TD as an Internet stock has been solidly cemented. The company will be called TD Waterhouse Securities and will be offered in both Canada and the U.S.. It may also be offered outside North America.

The Financial Post estimates the value of the brokerage to be US$5 - 6 billion and the bank could raise US$600 million with the IPO. "The proceeds of this offering, as well as a publicly quoted security reflective of the industry, will enhance TD's flexibility to aggressively pursue our clearly defined growth strategy for this business," says TD Chairman and CEO Charles Baillie.

I've added TD Bank to my Canadian Internet Stock Average and will replace it with the TD Waterhouse issue when it is launched if it is traded on a Canadian exchange.

In 1998 about 200,000 Canadians, less than 5% of Canadian investors, invested online. It is expected that this may increase by 50% this year and reach a million or more by 2003, so the potential for E-Trade Canada, TD Greenline and other online brokers is huge.

Versus Technologies

TD Bank

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