24/7 Wall St. Interview With TradeKing CEO Don Montanaro

March 5, 2008 by Douglas A. McIntyre

24/ Wall St:. If the economy continues to drop and the markets sell off another 10% will there be a significant impact on discount brokerage earnings? What could the magnitude of that be for the publicly-traded firms?

Don:The answer differs from firm to firm.  Not all “discount brokers” are alike.  Some firms rely more on an “asset-gathering” strategy than a transaction-oriented model.  A firm like Charles Schwab, for example, derives a smaller portion of their revenue from trading-related revenues, and more from their share of the interest they keep on the client assets they hold.  So, if the effect of a market decline is less retail trading, that piece of the revenue pie shrinks for all, but matters to some more than others.  Similarly, reduced ability to make money from interest revenue due to the compression of those rates hurts players focused on that strategy more.  A further factor is the type of client each firm attracts.  Firms like TradeKing who cater to the needs of retail options traders, especially, have an army of clients that know which plays to run to make money in not only up, but sideways, volatile and down markets.  Finally, private firms, like TradeKing, are not under quarter-to-quarter pressure from the public markets to deliver X pennies per share earnings, so we enjoy the freedom not to have to change advertising or strategic course during a rough patch in order to make the next earnings announcement.

24/7 Wall St. You have built a lot of the attraction of TradeKing around community One of the things this includes is a list of top traders based on performance. Is there any concern that some of these traders are investing in penny stocks and using their exposure on TradeKing to "hype" these shares?

Don: We remain vigilant about this issue, and will continue to review all posts to our Community to ensure that they comply with our Terms of Service, which specifically prohibit the kind of illegal “pump” schemes you allude to.  The fact is, however, that we have been doing this for over 2 years now, and have had to pull a grand total of three (3) comments/posts during this entire time for crossing that line.  The reason for this is that the TradeKing Community would be the dumbest place on the planet to try to effectuate such a scheme. As a FINRA (formerly NASD) regulated U.S. brokerage firm, everything we oversee that is published on the web must meet a very high standard.  Furthermore, it is very evident what type of Community user is posting a particular bit of content.  Every user has either a “Brokerage Account Holder” or a “Community Account Holder” or a “TradeKing Staff Member” badge prominently attached to their profile.  The Community naturally treats the comments and posts of real account holders with more credence, as they should.  While all users can pick an anonymous display name as their “public face” in the Community, if you see someone with that “Brokerage Account Holder” badge, that gives you a sense of security – you know that TradeKing knows who this person is, that they are a real person whose identity we have verified.  We know our customers, as we are required by law to do.  We also cooperate enthusiastically with the regulators who help us keep trading the safe and trustworthy pursuit it is in this country.  If anyone was ever so stupid as to try to do something illegal, such as “pump” a stock within the TradeKing community, it would be a fast trip to jail for them, as we cooperate with the authorities.  Thus, we believe we have built the safest, most trustworthy, and truly valuable investing community on the planet.

Furthermore, we offer the ultimate transparency – you can see if a TK client actually owns the stock or option they are talking about, or not, and decide to trust their analysis more or less based on what they have chosen to reveal and share about their trading and holdings – it’s all out in the sunshine.  Remember, it isn’t illegal for Jim Cramer or some of the more sedate analysts you see on CNBC to say, for example, “I bought stock XYZ.  I like it, … I like the technical indicators, I like the sector right now, I like the fundamentals and management of this firm.  I bought in.”  There is nothing wrong or even close to wrong about such a statement, when made with full disclosure.

What we are seeing here, via TradeKing, finally, is the wisdom of individual traders – real retail investors like you and me – revealed and given the same attention and analysis, and credit for smart picks, that the “experts” get on CNBC or elsewhere, where ROI stats of “pros” are touted all the time.

To illustrate this point, and to demonstrate the truly helpful vibe that has emerged over the past two years as the norm in our Community, check out something that occurred recently within the safe confines of our TK Community:

We recently had a new TradeKing client start a forum with our Community, entitled “Penny Stocks”.  Innocently, this new investor asked, “Are penny stocks a good place for a new investor like me to get started and make money?”  If that client had posted a message like that on, say, a Yahoo message board, or in some similarly anonymous, non-regulated place, they would have been SWARMED with recommendations for this or that penny stock that is sure to shoot to the moon.  Instead, within our Community, numerous fellow TK clients chimed in to warn of the dangers inherent in playing with penny stocks, and offered suggestions and resources to steer this beginner to various other more responsible investment approaches.  You can follow the thred here:http://community.tradeking.com/forum/topics/268/forum_posts

24/7 Wall St:. There is still a battle of investment "tools" going on among the discount brokers
with more and more research and software being pushed. Has this gotten to the point where even very active traders are overwhelmed by the number of offerings?

Don: The dizzying array of tools and services available can be a lot to grasp.  At TradeKing, we call this battle the “arms race”, because we have been involved in it so long as a management team that cold war references are still relevant to us.  😉  I would say, given our perspective, that what we are seeing now is a repeat in many ways of what went on in the 90’s – then with stock trading resources, while this time the battleground is more in the options trading arena.  The general notion in both areas is that what starts out as a function or a feature only available on a professional institutional trader’s work station one year, morphs and moves “downstream” to a web-enabled retail product or capability at a faster and faster pace all the time.  This is great for self-directed investors, as it finally and truly delivers on the promise of the fabled “leveled playing field” we have all sought for fairly pitting retail traders amongst and against the pros.  The key for any self-directed investor is to pick the firm that has the right mix for you, and one that you can grow into, as well.  At TradeKing, we strive to be a friendly destination for both beginning and expert traders, with the same flat rates applied to everyone, large and small.  Importantly, our first and last focus is always top-notch customer service – we aim to provide the fastest, friendliest, most knowledgeable service in the brokerage business, bar none.  The level of commitment a firm makes to you to back their tools with service will tell you a LOT about the kind of people you are trusting with your money. 

24/7 Wall St:. In an economic slowdown does the issue of cost per trade become more important?
Are discount brokers with low fees at an advantage in this environment?

Don: During the last slowdown, which was a sustained trading slowdown after the “bubble bursting” of 2000-2001, some of the larger firms engaged in what might be seen as predatory, or certainly opportunistic, practices such as buying up firms with lower pricing, and then closing those firms and converting their clients to a higher-priced platform.  This time, the market has some stronger independents, like TradeKing, offering fantastic value.  I certainly hope all value-seeking clients will realize TradeKing is a great destination for them, and I do believe we could stand to benefit from these clients feeling even more “pinched” when they overpay for a trade elsewhere in an even tighter economy.

Douglas A. McIntyre