Goodbye Wall Street, hello Omaha

Kiplinger's Personal Finance Magazine, Oct, 1998 by Steven T. Goldberg

About the only thing full-service brokerages can still keep private are their own analysts' reports. But even that is changing. Some brokers are selling their research reports at Web sites such as www.zacks.com. Discover, the discount-brokerage arm of Morgan Stanley Dean Witter, is providing most Morgan Stanley research to Discover clients for a fee--the only difference is that the research reports are labeled "Discover" instead of "Morgan Stanley." Clients of Fidelity's discount brokerage can buy Salomon Smith Barney research. DLJ Direct provides research reports from parent Donaldson, Lufkin & Jenrette to customers who maintain at least $100,000 in assets in their accounts. Charles Schwab plans to offer analysts' research, most likely from Credit Suisse First Boston and Hambrecht Quist, by year's end.

The changes wrought by the Internet have come with blinding speed and will almost certainly accelerate. For almost two centuries, full-priced brokers were the only way to buy and sell stocks. In 1975 the SEC changed the rules to allow discount brokers like Schwab to charge less than the fixed rate. But those commissions were still ten and 20 times higher than the fees being levied today on the Internet.

The obvious question: How in the world can a brokerage make money buying and selling stocks for $5 or even $10 a pop?

THE OMAHA CONNECTION

To see the future of stock trading in America, drive to the west side of Omaha, into an industrial park that's past the Kellogg's cereal factory and the Oriental Trading Co. You've reached the headquarters of Ameritrade.

It seems an odd setting for a financial-services firm, but Ameritrade is one of the nation's fastest-growing online brokerages. The parking lot is jammed. At tables set up in the lobby, job applicants take tests and get interviewed, while new hires are fingerprinted and photographed. Throughout the low-slung brick building, employees are being trained in makeshift classrooms. "We have a saying that if you've been here three months, you're training someone else," says Mike Anderson, Ameritrade's president. In fact, the company is growing so rapidly that it recently leased the floor space of the biggest store in an Omaha shopping mall for its third location. (Rapid growth is not unique to Ameritrade; many of the brokerage Web sites include advertisements for new employees.)

The overflowing offices at Ameritrade are astir with people answering customers' questions over the telephone, doing back-office work required at any brokerage and taking buy and sell orders (at a higher price) over the telephone. But they aren't the heart of Ameritrade.

That's in a locked room filled with blinking lights and roughly 100 computers. The temperature and humidity are kept constant--cool and dry. No one is allowed inside without authorization. Sixty-three people work here; they rotate shifts so that someone is on duty 24 hours a day, 365 days a year. There are multiple computers for each job. "If one goes down, the others work," says Tim Gilkerson, director of systems engineering. A backup power supply can keep the computers going for two or three hours if electricity fails, then a 600-gallon, diesel-driven generator can supply power so long as trucks can deliver more fuel.