MERRILL LYNCH ONLINE? As recently as six months ago, that phrase seemed to be an oxymoron to most in the financial services industry. Sure, the full-service broker/dealer had a Web site with sparse market data and offered free access to its warehouse of global research reports, but there was still a distinct line between what Merrill could do for its clients and what those other online firms could do.
The old-line brokerage, always a technologically savvy companya leader by most standardscast a face of disgust at the online model. John ("Launny") Steffens, head of the firms brokerage division, went as far as denouncing the online model last summer, saying, "the do-it-yourself model of investing, centered on Internet trading, should be regarded as a serious threat to American financial lives." Merrill was determined to fight the tide of online tradingthe Webwhich was threatening its longstanding jetty of personalized service and value. How quickly walls crumble.
In February, Merrill raised many eyebrows when it acquired the assets of D.E. Shaw Financial Technology (DESofT), a subsidiary of D.E. Shaw that develops Internet technology for financial institutions. In March, it dipped its foot into the pool with a pilot fee-based online trading programan unlimited number of trades and access to a Merrill financial consultant for a minimum annual fee of $1,500which has since been made available to any investor. In April, the firm created Direct Markets, a subsidiary of the Corporate and Institutional Client Group (CICG), to offer a complete array of front- to back-office services over the Internet to its institutional clients. And, in June, the firm announcedto the gasps of an industry that is not easily surprisedthat it would begin offering this December discounted online trading for $29.95 per transaction.
Make no mistake. Merrills online blitzkrieg is far more than a defensive engagementshots in the darkto shore up assets that have been flowing out to brokerages like Charles Schwab & Co. and E*Trade. Merrill is making a planned push to redefine itself, and in the process will redefine the full service brokerage industry. Come the end of this year, the brokerage will offer a tightly grouped array of online services for its individual and institutional investors, a suite of products that will far surpass the ability to trade electronically. What everyone is wondering is why a firm that balked at online trading for so long is jumping into the pool headfirst. More importantly, how can Merrill, a firm that had not focused on the Internet as a primary investment channel, build an entirely new infrastructure to support a volume-laden Web site?
Maybe it doesnt have to.
THE INTERNET: FRIEND OR FOE?
As of January, Merrills Web project, by most estimates, was a fairly weak one. Sure, Merrill Lynch Online offered its client access to their accounts, to Merrills research and some spartan financial planning tools, but nothing up to the level of what is offered by the online brokerages.
Like all full-service firms that scoffed at the Internet, Merrill chose not to pursue the Internet out of respect for its 14,500 brokers. Or, was it out of a fear of them? The matter of embarking out onto the tangled paths of the World Wide Web required a bit of navigation through the hallowed halls of a very large bureaucracy.
"There is no doubt in my mind that Merrill Lynch was having trouble bringing those two worlds together: the Internet and the broker," says one industry executive. "The broker and the Internet were heretofore considered direct competitors, and Merrill did not want to alienate their legions of brokers."
It was not a question of whether Merrill could do it. "Sure, Merrill had the technological resources, the intellectual capital, to mount a full-scale Web project. Some of the higher-ups were just protecting their own (the brokers)," the industry executive contends.
Merrills executives assert that they were not dragging their feet before the announcements made earlier this year. In fact, if you ask them, they already have, and have had, most of the technological infrastructure in place to provide a robust Web offering.
"One of the technological misperceptions, when it came to the retail franchise within Merrill Lynch, is that we did not have the capability or were not moving fast enough in providing this technology," says Howard Sorgen, chief technology officer of Merrills private client group.
Sorgen admits that his group was not rolling out technology required for an online trading Web site because that was not the direction in which the firm was moving 18 months ago. "The technology that you provide for the business that youre serving is clearly dependent on the business strategy," he explains. "And, if the business strategy was to be FC-centric in everything that is done, that is the technological approach that you take to that."
Merrill was ready for the Web, whether you agree or not, Sorgen says, pointing to the current incarnation of Merrill Lynch Online (MLOL). "If you look at Merrill Lynch, as far as back as 18 months ago, we had built and have today the capability to do online trading for the entire client base," he adds.
Philip Gilligan, who runs Merrills distributed applications technology group, explains that the firm has been dedicated to upgrading the functionality, the scalability and the security of its current Web site since it was introduced 1996.
According to Gilligan, 18 months ago, Merrill had the basic building blocks of the applications, the functionality was in place running on an infrastructure that was designed and built for a very large Web site. Gilligan says, "Fundamentally, the big change that took place back in late March was the announcement of client order entry. That was the first major new functionality."
Despite Sorgens assertions, many industry analysts are hardpressed to believe that Merrills technological infrastructure was prepared last year to handle a scalable online trading site, pointing to its acquisition of D.E. Shaws technology group, which specializes in building and implementing the front-end component of client order entry systems for the Internet.
"Its possible that they were ready over a year ago, but they just recently purchased D.E. Shaws technology unit which makes me feel they werent ready for it," says Dan Burke, senior brokerage analyst at Gomez Advisors. "DESofT is very integral to their rollout. Its the whole trading system, its the front-end and some back-end componentry to communicate with their mainframes."
Merrill probably could have released a trading site by the end of the year, but DESofT definitely made its life, and that of Sorgens, a bit easier. DESofT with years of experience under its belt, will allow Merrill to overstep what could have been the shortcomings of its new site, missteps that a firm like Merrill could not afford.
"If they hadnt acquired DESofT, they could have pulled something out by the end of the year, but you would have seen a much less streamlined system," explains Ed Koontz, an analyst in TowerGroups securities and investment practice. "It would probably have taken them another five to six months to fix it which, now, they hopefully wont have to deal with. They hired bright people who have worked with these technologiesInternet trading is something entirely differentand this added an element of experience that Merrill just didnt have."
Sorgen contends that the acquisition was more about people than about code. He admits that the group, which has since been rolled into the MLOL technology team, is playing a big part in developing functionality, but he contends that the most difficult part of the Web roll-out is not the front-end, but the back-end integration which is being handled solely by employees that have been with the Merrill Lynch organization.
"The whole major technology event is not the front-office stuff. Its integrating the massive array of legacy systems," Sorgen says. "I love my DESofT gang, but thats not where they play best in, thats not what theyre doing. They are best in understanding the business rules, the compliance rules and the functionality."
Koontz agrees with Sorgens take on DESoft lauding their expertise in trading technologies for the Web. "They have hired bright people who have worked with these technologies," he says, "It adds an element of experience that Merrill Lynch just didnt have. They were developing Internet expertise, but Internet trading is something entirely different."