Datek Online Brokerage Services LLC

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DATEK ONLINE BROKERAGE SERVICES LLC

Datek Online was launched in June 1996 as an online trading firm. Founded by Jeffrey Citron and Peter Stern, the firm quickly grew to become one of the online trading industry's largest, with more than 640,000 customer accounts and nearly 100,000 trades per day. Among its products and services are online equity trading, option trading, mutual funds, IRAs, real-time quotes, level II quotes, extended-hours trading, margin trading, payment for order flow, Datek Direct, and decimalized trading. The company operates as a division of Datek Online Holdings Corp., which also acts as a parent company for iClearing LLC, BigThink, and Watcher Technologies LLC.

Jeffrey Citron's career in the trading industry began after he graduated from high school in 1988 and went to work for what was then called Datek Securities Corp. That same year, the NASDAQ introduced the Small Order Execution System (SOES), which forced market makers—firms that continually buy and sell particular stocks at listed prices—to execute electronically placed orders of up to 500 shares at whatever price was posted. Citron, originally hired as an office boy, manipulated the computer system at the New Jersey-based firm, enabling it to spot when a posted price was different from actual market value. Traders at Datek began to reap the financial rewards of catching market makers off guard by taking advantage of the posted listings that had not been updated. While many Datek traders eventually were fined and banned from the brokerage industry for unethical business practices, Citron's career in the electronic trading industry with Datek was just beginning.

In 1995, the technological entrepreneur teamed up with Peter Stern to take advantage of the burgeoning online trading industry. The twosome created Datek Online as a division of Datek Securities. Competing with the likes of E*Trade Group and Lombard Brokerage Inc., the company began enticing day traders with a low commission fee of $9.99 per trade. Soon after its inception, Citron and Stern teamed up with Levine to develop the Island Electronic Communications Network (ECN), a private financial trading technology platform that enabled Datek to offer fast order execution time. Island ECN operated as a separate entity from Datek, and its popularity grew throughout the industry. By 2001, the trading system served more than 500 subscribers and executed one out of every six trades on the NASDAQ.

Along with the creation of the Island ECN, Datek made key contributions to the development of online trading. Considered a pioneer in the industry, Datek was the first online brokerage to offer free real-time streaming quotes. It also was among the first to offer real-time account portfolio updates and account balance information to its customers. Additionally, the firm's execution speed was considered to be among the best, and the company backed it with a 60-second guarantee that ensured orders would be placed in a timely fashion. If the order took more than one minute, the commission fee was waived.

As the popularity of online trading continued to grow, Datek remained focused on introducing innovative concepts in an attempt to lure new customers. In July 1999, the firm became the first to offer extended-hours trading sessions. This enabled members to trade NASDAQ securities from 8 a.m. to 8 p.m. In July 2000, Datek also became the first online firm to offer decimal-based trading, a dramatic change from the traditional fractional system. This new cost-effective method of trading allowed customers to buy and sell stocks using one-cent increments. Datek Direct also launched in 2000 and was the first browser-based product that enabled investors to select the market maker or ECN of their choice, including the Island system. This new product gave investors more control over their orders.

Datek's innovative approach to online trading also led to top industry recognition. The company was ranked number one for frequent traders and new investors by Money Magazine in June 2000. That same year it was named one of the "Best of the Web" by Forbes, rated number one for the third year in a row in the Online Broker Survey 2000 by TheStreet.com, and named the top online broker by PC Computing. Stern and Levine also received industry recognition and were named two of the top 10 financial technology innovators of the decade by Wall Street and Technology.

While Datek Online quickly became one of the top players in the online trading industry, its parent company experienced some turbulence along the way. In 1995, Datek Securities cancelled an IPO due to a Securities and Exchange Commission (SEC) investigation into its trading operations. The company's questionable image, dating back to the SOES scandal and controversy over Citron's involvement, led to a corporate restructuring in 1998 when holding company Datek Online Holdings Corp. was formed. In 1999, Citron relinquished his CEO and chairman position and Edward J. Nicoll took over. Citron left the firm in hopes that his departure would brighten Datek's somewhat tarnished image.

In a move to strengthen its online trading arm, Datek Online Holdings Corp. announced a $700 million private equity investment by Bain Capital, TA Associates, and Silver Lake Partners in December 2000. As part of the deal, the holding firm gained control of all voting shares held by the original founders of Datek Online, and Island ECN was spun off as an independent firm. Steve Pagliuca of Bain Capital stated in a December 2000 company press release that, as a result of the deal, "Datek has the technology and the resources to build on its current position as a leader in the online investment field and to elevate the standards for serving retail investors."

The NASDAQ experienced the largest one-year drop in its history in 2000, and many Dow Jones Industrial Average stocks posted losses. While the market remained unstable into 2001, Datek pledged to continue developing innovative products and services that would keep its online trading customers informed of market conditions. As part of its plan, Datek announced a strategic partnership with Market-Watch.com, a leading Internet provider of financial news and information. The March 2001 deal enabled Datek customers to access CBS MarketWatch.com 's financial news and real-time headlines via Datek's News Center.