IT Matters: Ameritrade CIO Says Technology Matters for Delivering Trading Services

by nextslm.org staff

Technology, especially if it’s proprietary, is what matters for enabling the second largest online brokerage firm to keep its competitive edge. Founded in 1975 as a telephone-based trading company, Ameritrade handles about 116,000 trades a day, with client assets of $39.1 billion. In April 2002, Ameritrade merged with Datek, another large online brokerage firm.

Nicholas G. Carr, author of the Harvard Business Review article, "IT Doesn’t Matter" (May 2003), might want to take note on the role IT played in the successful merger of both Ameritrade and Datek two years after the dot.com bubble burst.

Brought in from Bain & Company to consult on the merger of the two company’s IT systems, Asiff Hirji, Ameritrade’s Chief Information Officer, says, “Since most mergers fail, we did something no company has done before. On a Friday after the market closed, we took the two trading systems, decoupled one from the backend, and hooked it up to the other. The Datek frontend got hooked up to the Ameritrade backend. The systems were ready for business on Monday morning.”

Integrating the two systems this way helped to save more money than Datek technology budget for a year, Hirji adds. “We were originally looking for $100 million savings; however the latest figure is about $230 million.”

The long and short of it, Hirji says, is that Ameritrade is a technology company in a financial services wrapper. Hirji recently took a few moments to talk about his role and the role of IT at Ameritrade, the merger of the two systems, the competitive edge that technology provides Ameritrade, and, of course, Carr’s article.

Q. Can you go into the specifics of your role as a member of the management team?

I divide my time between two roles – managing all of the technology functions, including telecommunications, and participating as a member of the management team, which shapes and then executes the company’s strategy.

The management team has two purposes – resource allocation and stewardship of the business. I participate in resource allocation. The team strives to figure out the best way to grow our business by using our resources prudently and delivering the results for our shareholders.

My goal is to make sure we make the right decisions around what’s consistent with our strategy.

Q. How have you structured personnel according to key IT tasks that need to be performed routinely?

I’ve three main groups. One group runs all the infrastructure operations. Another group runs all of application development. The third group handles product development, which includes taking the ideas people have and translating them into new product offerings. The other groups include security, architecture, and administrative support for everything from human resources to procurement.

Q. What do your platforms look like?

Our systems have three tiers. The frontend consists of the Web presentation layer and the logic around it. Our Web site provides customers with 17 different experiences, including, Datek, Ameritrade, Accutrade, or FreeTrade. The next tier down includes the order management, order routing layer. The bottom tier includes the back office system, which is the clearing system of books and records.

Having a clearing system makes us unique. Most online brokerage firms outsource this task to firms such as ADP. Our clearing system runs on a proprietary database. Our home grown business logic and application logic underpin the database. The frontend consists of a middleware component called Tuxedo. The frontend consists of proprietary components we built in house.

Q. What competitive edge does Ameritrade have?

We’re the largest online broker measured by trades. Historically, we’ve been the first to introduce innovative products. For example, we were the first to trade online; the first to trade over the Webphone, and the first to do real-time streaming data. We’ve been very good at creating a good toolset for very active traders. In fact, our customers will tell you that the quality of our toolset which we provide for trading and the power of the order router make us stand out from our competitors.

We don’t deviate from our main business focus – to be the best, low-cost online brokerage firm. Some of our competitions do unusual things, such as sell mortgages.

The quality of our IT people also differentiates us from our competitors. They can’t help but deliver the technology better, less expensive, and smarter than anyone else. They’ll leverage the technology in ways beyond what our competitors haven’t been able to do. Proprietary software provides a competitive advantage. On the other end, because it can be copied and replicated, proprietary software along won’t help you sustain your competitive edge.

Q. What’s your opinion about the Harvard Business Review article?

I also read the furor around the article. Nicholas Carr is half right. I agree with his point that infrastructure components are commodities. There isn’t one vendor I’d want to spend more money with next year than I’ve spent this year. That goes for last year, too. In fact, for each year ahead, I’m looking forward to spending less and less money with vendors.

For example, when it comes to storage, we have a little of everything. We aren’t buying any more of it. Instead, we are leveraging the storage we have in better ways. Since we are being vendor agnostic, my teams are aligned around business functions, not specific vendors or platforms.

Q. If that’s the case, where are you putting your IT dollars?

My budget hasn’t changed. We’re spending proportionally less and less on the infrastructure and more and more on proprietary software. The article missed that part.

Unlike a manufacturing firm, our technology provides the core of our product... Our technical capability enables us to find and to help you execute your trading strategies as efficiently as possible. A lot of commodity hardware goes into providing the infrastructure that enables this capability to happen. Likewise, we have a tremendous amount of proprietary knowledge that goes into this capability also -- whether it’s the way we present the data, or whether it’s the trade triggers – that differentiates us from our competitors.

Q. Did you describe the aftershocks, if any, Ameritrade experienced from the dot.com dilemma? If so, how did you recover from them?

We were affected in two ways. First, the bubble drove a tremendous amount of activity. When it burst, the trading activity went down along with our revenues. Second, we were indirectly hurt by some inaccurate perceptions people had about e-commerce companies. As for the latter, people need to distinguish between those companies that use the Internet as an excuse to raise money versus those companies that offer services which benefit from the Web.

A traditional bricks and mortar company which uses the Web to supplement in-store sales still needs to deal with the traditional delivery system and infrastructure. Now contrast that type of business with a company that can deliver a virtual product, such as eBay, expedia, or us. Companies like these have altered the traditional business model by moving a lot of cost out of the system. The true Internet-business model leverages technology to deliver on a totally new business model.

Now two years later, our stock is doing well, and our margins are in the high 40 percent.

Q. Have you become more disciplined as a result of the dot.com dilemma?

As a business, we’ve become more disciplined. I don’t know if it’s necessarily within the IT organization. Since we began as a discount, telephone-based brokerage firm, our culture has always been very financially prudent. We didn’t get caught up in the mania of raising lots of venture money and thinking we were free to spend it any way we wanted to. That doesn’t mine we didn’t get affected by that thinking. Prior to early 2000, our controls were less strict then when the firm started. Nothing has changed. We’re still rolling out new processes for how we prioritize new products and new processes for now we build them.

Q. Do you offer the human touch for folks who need some handholding?

Our call center consistently gets rated in the top for our industry for the level of service we deliver.

Q. What’s your cost model for IT?

We charge back to the business units those elements of the infrastructure they use directly. Every six months, we sit down with the business units and agree on the costs for development resources. We usually allocate a certain percentage of these resources to each business unit, and charge for those resources each month.

Q. How is IT measured besides the number of times a server is up?

Availability is clearly one of the measures. We also look at throughput expended for carrying out projects both in volume and in the number completed on time and within budget.

On the business side, we look at the IT cost per trade. We’ve goals and metrics for reducing that cost. We survey the business units as to see if we’re being collaborative, innovative, creative, and delivering the results. All of these things factor into our evaluation, and our figured into the way we calculate employees’ bonuses.

Q. Were there cultural changes that had to be made to bring the two organizations closer together?

Yes. Melding the distinct cultures of two successful companies occupies most of my time currently. The challenge is to take the best of each company’s culture and create a new company with a new culture. We’re trying to marry Datek’s product innovativeness and irreverence with Ameritrade’s commitment to operational excellence and customer service.

Q. Can you describe how the merger of IT infrastructures took place between the two companies?

We had two order router and order management frontends. The simplest way of merging these two systems would’ve been to pick one set or the other and drop all of the accounts onto it. We did that before when we acquired another company. For the migration, we decided we wanted to keep the experience and the functionality that the Datek customer got.

In March 2003, we shut down the Datek backoffice system and moved everything over to the Ameritrade clearing system. In one weekend we moved close to one million accounts, 10 of billions of dollars in assets, and hundreds of thousands of trades that were on the fly. I’m not aware of anyone else doing this before successfully.

We started in Friday when the market closed and Monday when the market opened we were up and running. After that, we retired parts of the Ameritrade order routing system and replaced it with the Datek order routing system. Today, we’ve one set of order managers and order routers that are a combination of some of the legacy Ameritrade and legacy Datek stuff.

Q. What’s left to be done with the merger of IT systems?

Because we still have independent frontends, the Datek customer gets an independent experience from the Ameritrade customers. That’s going to change. The last piece of the integration consists of replicating the Datek experience on the Ameritrade frontend. We will retire the Datek frontend.

Q. Why did you use the Datek frontend?

We looked at both frontends based on the cost, the reliability, scalability, and ease of deployment. Our analysis favored the Ameritrade frontend platform.

Q. As a result of the merger, did you layoff any IT employees go?

We reduced our IT headcount from 550 employees to 384 employees. We eliminated duplicate positions and selected the best of what we had.

Q. What is the working relationship between IT and the business units?

We’ve product managers who live within the technology group. However, they face off against the business leaders, who participate in evaluating these folks, along with their technology peers. Both sets of evaluations help us to determine if the product managers are meeting the needs of the business.

There is no monopoly of creativity in our company. If someone in a business unit has an idea for a new product, a group called client and product strategy champions the product idea for the business unit. The group works out how to integrate the idea in our system. Once that is done, our product development folks work with the application development and operational folks to determine the requirements for the product. Both groups see the product through to the time it hits the Web site.

Q. What do you look for in IT talent?

We look for people across the board. We’re committed to retaining, developing, and attracting the best individuals in the industry. My headcount is not moving. However, we’ve a healthy annual turnover rate, which allows us to bring in new talent. If you want to work at Ameritrade, you need to be a team player, be creative, have a lot of energy, and want to contribute to your full potential.

Q. What tools help your employees to do their job better?

Tough question! It’s not any class of tools, but the people. We’ve really smart IT professionals who also happen to understand brokerage. Most of them have a brokerage account and trade often. So, this experience helps them to create new products.

Our firm doesn’t rely on a system, such as PeopleSoft, which we’d be dead if something happened to it. Technology is really our product.

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