Online brokerage firms merger-and-acquisition and buyouts in 2012

The competition in the industry of online investing and trading has never been more intense than right now. There are over 30 very aggressive and visible brokerage houses on the market, with new firms being created constantly. The field is very crowded, and firms are trying to do everything possible to lure new clients or to steal customers from the competitors.

It's no wonder that in this cut-throat environment one of the best ways to grow is to buy a competitor. And the process is on the way: Optionsxpress was bought by Charles Schwab in 2011. TD Ameritrade acquired ThinkorSwim, and LightSpeed Trading got Noble Trading in 2010.

In all of these mergers and acquisitions we see one thing in common: the firm that's being bought has a more innovative, powerful and robust trading platform than a buying firm. The advantage for a buyer is clear: not only to save money and time on developing competitive trading platform, but also the gain of highly profitable customers - active traders - people that trade a lot and therefore generate a lot of revenue.

Of course the obvious question is: who will be the next buy-out target in 2012? If we apply what we learned from the acquisitions in previous years, then the most likely targets will be TradeMonster, TradeStation, Interactive Brokers, Choicetrade, MB Trading and SpeedTrader. All of these online brokers developed very powerful, sophisticated trading platforms. They also, maybe with exception of Interactive Brokers, are struggling to attract new customers and do not have enough money to effectively market themselves.

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So who would be the most likely candidates to buy them? In our opinion, the most likely buyers would be Fidelity Investments, Capital One Investing, Wellstrade, Merrill Edge and Vanguard. All of these firms are stagnating, lost their competitive edge and fell well behind their competitors in trading technology. They could definitely use fresh blood, fresh ideas, more innovation and upgrades to their antiquated trading systems. When you think about it, it's kind of surprising that neither of them made an attempt to acquire someone by now.

That being said, it is also worth mentioning that absorbing a new brokerage firm is not easy. The firms that did it in 2010-2011, still keep two separate websites and trading platforms. Customer service has been merged but there are complaints from clients if acquired firms that quality of service went down.

There was only one acqiusition is 2011 - Charles Schwab bought OptionsXpress. But considering that the market is surging and brokerages are making much more money, we believe that 2012 will see much more merger and acquisition activity in online trading industry.

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Updated on 10/10/2012.

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