[This reminds me of the fun bit in the _Business Class_ issue where
they dissected the cost of an airline ticket, seat by seat on a 737.
This is from Ameritrade; it's extremely telling that the costs of
making good on shoddily executed (late) trades is 150% greater than
their profits. Or, put another way, if there *really* weren't human
brokers in the loop, their profits could more than double. Of course,
they could also double profits if postage could be eliminated with
But the bottom line is that the triple-digit commissions of old at
Merrill covered over a lot of sins indeed...]
Herewith, an estimated breakdown of an $8 transaction fee.
$2.06 EMPLOYEE COMPENSATION AND BENEFITS
On-line brokerage houses keep costs down by employing brokers who are
officially licensed to take orders over the phone but can't give
investment advice. This means, among other things, that they don't
have to be paid as much as regular brokers. Even with computerized
trading, the company needs lots of back-office staff. At the end of
1998, Ameritrade had roughly 1,100 employees, almost double the total
from the year before.
Advertising is a huge expenditure for on-line brokers. With its mass
promotion efforts and quirky television ads, Ameritrade has been a
trendsetter. It's easing up on advertising for the time being,
focusing on getting its growing trade volume under control.
$.29 EXCHANGE COMMISSIONS AND CLEARANCE
Fees paid to the exchanges, like Nasdaq and the New York Stock
Exchange, and others to process the trades.
Communicating with customers on line is relatively cheap, but the
cost of mailing stuff to them and answering their phone calls adds
up. There's just more manpower and paperwork involved. The
communications budget also covers the cost of stock quotes and
financial news from the likes of First Call and Dow Jones News, which
are available on Ameritrade's Web site.
$.63 OCCUPANCY AND EQUIPMENT
Crashing in the midst of a market frenzy is the surest way to lose
loyal customers, and Ameritrade has had its share of problems over
the last year. Occasionally, on-line trading has been halted
altogether; other times, it's been painfully slow. So the company is
investing heavily in servers, software and computers. Rent isn't a
big expense, however, since Ameritrade is based in Nebraska rather
than in Manhattan.
This is a perilously thin profit margin. Ameritrade's after-tax
income was a paltry 7 percent of net revenue. The company makes money
other ways, like payments from market makers it favors, and it hopes
to add services for which customers will want to pay premiums, like
high-quality stock research.
$.33 INCOME TAX
Ameritrade shells out roughly 36 percent of its pretax income to the
$.48 PRICE ADJUSTMENTS
Making up for flawed trade executions (usually the result of
technology glitches) is a considerable expense. When the company
can't process a trade quickly enough to get the stock price a
customer wanted, people get quite upset. Last fall, a class-action
suit was filed against Ameritrade for its alleged failure to handle
its volume of subscribers.
$1.62 PROFESSIONAL SERVICES AND OTHER CHARGES
Mostly the cost of processing trade confirmations, as well as
lawyers, technology consultants and executives' travel expenses.
"He teaches me grammar; I teach him mavenry. Mavenry is a new word,
coined five seconds ago because I couldn't come up with a way to
express aficionadohood, connoiseurship or state of specialized
enthusiasm. Never enough [words in the language]."
Safire also had a bit on 'deprefixers' [Another neologism?]:
Stimulated by a recent piece about couth, kempt and gruntled, a new
division of the Lexicographic Irregulars has formed itself: The
My former Times colleague David Burnham, now with Syracuse
University's Transactional Records Access Clearinghouse, is one. He
notes the poet John Milton's use, in "Paradise Lost," of "Not nocent
yet, but on the grassy Herb," with nocent ("harmful") the
near-opposite of innocent.
Norman Hyman of Milwaukee sends a 1994 New Yorker article by Jack
Winter: "I was furling my wieldy umbrella when I saw ... a descript
person, a woman in a state of total array. Her hair was kempt, her
clothing shevelled, and she moved in a gainly way." His reaction: "I
was plussed. It was concerting to see that she was communicado, and
it nerved me that she was interested in a pareil like me. ... I
acted with mitigated gall and made my way through the ruly crowd
with strong givings."
Dorothy Berg of Madison, Wis., and Barbara Scholl of New York
directed me to the leading muse of the Deprefixers, the poet Felicia
Lamport. In both her "Scrap Irony" and "Light Metres," she deprefixed
Ms. Lamport, now 83, graciously gave me permission through her
husband to run her pioneering play:
"Life would be such a nice broglio
Running so smoothly and mok,
If I had a nice portfolio
Full of negotiable stock.
And if it were tax-exempt,
I would be gruntled and kempt."
But that was only getting started. Then came such an outpouring of
deprefixed delight not since matched:
"Nothing gives rise to such wild surmise/As the peachable widow with
consolate eyes." And: "The iquitous girl often loses her
balance/When wooed by a man with unusual chalance." And: "Men often
pursue in suitable style/The imical girl with the scrutable smile."
Jim Whitehead should definitely go look up the package on independent
radio; the Ira Glass profile is energizing; and WFMU is just plain
FoRKy in its aggressive eclectitude:
Clearly, then, the concept behind WFMU remains elusive -- perhaps as
elusive as the dinky 1,250-watt signal emanating from the station's
transmitter on the Watchung ridge in West Orange. In much of New York
City, those who want to listen in usually need first to attach an FM
antenna to their receivers and then perform microsurgical feng shui
adjustments just to achieve half-decent mono reception at 91.1. By
the station's best estimates, it draws about 300,000 listeners in a
given month. That's a figure that's grown a bit in recent years, but
a tiny blip on the radar compared with the 1.2 million who listen to
Howard Stern in a given week on K-Rock.
A tongue-in-cheek program-guide description for Doug Schulkind's
Friday-morning show boasts, "The finest in Micronesian doo-wop,
Appalachian mambo, Turkish mariachi, pygmy yodeling of Baltimore,
Portuguese juju, Cajun gamelan, tuba choirs from Mozambique, Inuit
marching bands, Filipino free jazz, Egyptian Kabuki theater and
throat singers of the Lower East Side."
Ken Freedman puts a seven-inch record called "Spin the Bottle" on the
turntable. It sounds equally weird at 33 and 45 r.p.m. "We don't know
what the right speed is," he says quizzically. Kafka is not
impressed. "I have lots of records like this," he says.