BACKGROUND

E*Trade Group, Inc., through its subsidiary E*Trade Securities, is leading the investment

services revolution of the digital age. E*Trade, one of the pioneers of electronic investment

services, is also one of the top online and Internet-based brokerage firms. Unlike traditional

"brick and mortar" houses, such as Merrill Lynch and Smith Barney Shearson, and discount

brokers such as Charles Schwab Corp., E*Trade operates only online, without the overhead of

the extended sales offices networks and large employee base of full-service brokerages.

E*Trade offers its customers 24-hours-per-day, seven-days-per-week stock and options trading

and access to real-time market information, company research, market analysis, and other

investment information services. E*Trade's services are available through online services such

as America Online, Compuserve, and the Microsoft Financial Network, through the World Wide

Web at the company's web site, through Internet-based "push" services such as the PointCast

Network, and through direct-modem access and the touchtone telephone Telemaster system.

E*Trade has broken the paradigm of traditional investing by giving its customers--typically

computer-savvy, individual investors&mdashcess to the information previously available only to

brokerage professionals. E*Trade does not act as an adviser, but rather gives its customers the

tools to make their own investment decisions. As such, E*Trade has slashed the cost of trading,

charging as low as $14.95 per 100-share transaction, compared to $150 or more at a full-

service broker, or even the $70 or more per transaction charged by discount brokerage houses.

The company, which operates a second "hot" facility in Sacramento, California, which duplicates

the company's Palo Alto facility's equipment and customer service staff as backup protection,

employs only around 350 people, compared to the many thousands at full-service brokers.

E*Trade customers subscribe to the service by establishing a minimum $1,000 account with the

company. To discourage hackers, cash accounts are maintained offline--leaving the customer

vulnerable only to the threat of unauthorized trading, which itself is discouraged by the

company's secure online site. Customers are issued a password with which they can access

their portfolio through the company's full web site. There they can choose among a variety of

information, research, and portfolio management features, including personalizing the site for

their own interests, and buy and sell stock and perform other investment transactions on the

AMEX, NYSE, and NASDAQ exchanges. Based in Palo Alto, California, E*Trade's services are

not limited to U.S. customers; indeed, the company's electronic services are accessed by

private investors from more than 60 countries. At the same time, E*Trade, through its E*Trade

Ventures subsidiary, has been establishing a presence on international exchanges, operating in

Canada under the E*Trade brand name through a joint venture with Versus Brokerage Services,

Inc. In June 1997, the company announced that it had reached a similar agreement to bring its

services to Australia, through an alliance with that country's Nova Pacific Capital Limited.

Founder William Porter, E*Trade's chairman, owns a 20 percent stake in the company and

serves on the board of directors. Leading the company's growth, however, is Christos Cotsakos,

also a director with a 5 percent stake in the company, as president and CEO. E*Trade's growth

has been dramatic: its nearly $52 million in revenues for 1996 is more than double its sales for

the previous year, and estimates for 1997 expect revenues to double again. Meanwhile, the

company adds 500 new customers and as much as $10 million in new assets daily. E*Trade's

more than 150,000 customers have also been steadily increasing the company's trading

volume. In April 1997, the company reported a daily transaction volume of more than 14,000.

When William Porter formed TradePlus with $15,000 in startup capital in 1982, the online

investment revolution was already underway. The first online service, called Tickerscreen, was

initiated in May 1982 by Max Ule, as a division of Rosenkrantz, Ehrenkrants, Lyon & Ross, Inc.

A bulletin-board system, Tickerscreen enabled customers to place orders after the markets

were closed, which would then be transacted by the brokerage house when the markets opened

again the next day. Porter, who had held management positions with General Electric and

Textron, after earning an M.A. in physics at Kansas State College and an M.B.A. in

management from the Massachusetts Institute of Technology, saw an opportunity to take online

investment services further--by automating the full transaction process.

Porter's TradePlus "vision" combined two emerging trends. Already trading under his own

account, Porter also looked at cutting the cost of trading. By then, a new breed of discount

brokers, such as Charles Schwab, had arisen to challenge the full-service brokerage houses. By

the mid-1980s, discount brokers amounted to nine percent--up from two percent at the start of

the decade and rising--of all stock transaction commissions. Porter, however, believed that he

could cut the cost of trading even deeper than the discount brokers, who still charged as high as

$100 per transaction. The second trend was the appearance of the first personal computers in

the early 1980s. Porter immediately recognized the potential of this new electronic market,

foreseeing that personal computers&mdash≡uipped with their own modems--would soon

become commonplace office and home equipment.

In 1982, TradePlus contracted with C.D. Andersen & Co. to create a computerized order entry

system. That system went online in July 1983. TradePlus enabled its customers to access

market information, and conduct trades during market hours, while offering 24-hour-per-day

portfolio management capability. By paying a premium on the basic service charge, customers

could also receive real-time stock pricing and portfolio updates; otherwise, they received

information after a 20-minute delay. Customers paid a signup fee, ranging up to $195, and

monthly subscription fees of $15, which gave them one-hour of connect time per month. Use of

the service beyond that cost $24 per hour during market hours, and $6 per hour when the

markets closed. For the premium, real-time service, nonprofessional customers paid $75 per

month and professional investors paid $135 per month, fees established by the National

Association of Securities Dealers.

By 1984, C.D. Anderson counted some 500 TradePlus customers, who contributed as much as

12 percent of the firm's commissions. In that year, the Anderson's exclusive agreement with

TradePlus ended, and Porter began marketing the company to other discount brokers, signing

on Fidelity Brokerage Services, of Boston, and Texas Securities, Inc., of Fort Worth, by the

middle of the year. By then, TradePlus was not alone: several other discount brokers had begun

to offer their own online services. But TradePlus continued to build, in 1985 signing Quick &

Reilly, then the nation's third-largest discount broker, to offer TradePlus through the

Compuserve Information Network. The following year, TradePlus services were also added to

another large database service of the time, Dialog Information Retrieval Service. The concept of

online investment transactions was catching on, although individual investors were still

burdened by monthly subscription charges. Toward the late 1980s, that changed when

Donaldson, Lufkin & Jenrette introduced its PC Financial Network, which was incorporated into

the standard services of such online businesses as America Online and Prodigy. TradePlus's

primary customers, meanwhile, included a growing number of discount brokerage houses,

conducting their activities via the TradePlus system.

Online trading continued to build momentum. By the summer of 1987, TradePlus reported that

its servers were in use nearly every minute, often by several people at once, 24-hours per day,

including a large number of international customers as well as domestic customers. By then, in

addition to Quick & Reilly and C.D. Anderson, two banks began offering TradePlus as a

brokerage gateway. Bank of America's Home Banking service gave customers access to

Charles Schwab & Co. using TradePlus's computers, while Chemical Bank's Pronto customers

could place orders through TradePlus to Quick & Reilly. Electronic trading seemed on its way to

becoming a competitive force in the investment community. But then, in October 1987, the

market crashed. Trade volume contracted, and the online trading services, TradePlus included,

withered.

Trading picked up only slowly as the 1990s began, crippled by a national recession, and then by

the U.S. entry into the Gulf War. But in 1991, Porter, still active with TradePlus, again showed

his visionary side. With several hundred thousand dollars of startup capital from TradePlus,

Porter established a new company, E*Trade Securities, Inc., providing deep-discount brokerage

services. Instead of the monthly fees charged by TradePlus, E*Trade offered flat-rate trading

and free information services via the online services, including America Online and

Compuserve. By the following year, Wall Street had recovered from its slump, entering the bull

market of the 1990s. At the same time, interest in the online services began to build, while

advances in modem technology and falling prices among computer equipment in general, were

providing faster access to a widening range of people.

E*Trade quickly dominated this new investors market. As trade volumes continued to build,

interest in investing--particularly among the Baby Boom generation--was also rising. By the mid-

1990s, more than 20 percent of the nation's population was investing in stock, compared with

less than 5 percent the decade before. By 1992, combined revenues at TradePlus and E*Trade

neared $850,000. The following year, revenues--based on E*Trade's $40 per transaction

charge&mdashøpped $2 million. The company also turned profitable, posting $100,000 in net

earnings.

The new availability of investment information, accessible by the online services' customers 24

hours per day, added to the popularity of investing, and particularly self-directed investing by the

growing numbers of computer-literate customers. Both America Online and Compuserve were

undergoing their own growth boom during this period. By 1994, the two companies counted

some two million customers between them. In less than three years, America Online alone

would count more than eight million customers.

Nineteen ninety-four proved significant for E*Trade as well: revenues exploded, nearing $11

million, making TradePlus and its E*Trade subsidiary the fastest-growing private company in the

country. E*Trade quickly outpaced its parent, and the company would eventually be reorganized

as the E*Trade Group, with E*Trade Securities remaining its principal subsidiary. The company,

which counted 44 employees in 1994, scrambled to keep up with its own growth, adding more

than 200 employees in one year, and expanding its office space from 4,800 square feet to more

than 20,000 square feet in 1994. By the end of 1995, however, E*Trade was forced to move

again, to new quarters with some 48,000 square feet.

By 1995, the new American information revolution was firmly underway. The appearance of so-

called multimedia PCs, which bundled sound, video, and--particularly important for E*Trade--

modems into relatively inexpensive and easy to install packages, brought a whole new wave of

people to computers and online services. E*Trade soon found itself joined by competing online

investment services, forcing it to drop its transaction rate to $19.95. But the company had

already taken the lead among the growing home investors community--which was also served

by such popular online services as America Online's Motley Fool investment information area.

E*Trade found its system overloaded with customer calls, and in the summer of 1995 was

forced to quadruple its systems. By the end of that year the company's revenues had doubled

again, reaching $22.3 million and generating a net income of $2.6 million.

The online services proved merely a taste of things to come. By the end of 1995, the Internet--

and more specifically its graphical World Wide Web interface--had become the buzzword of the

country. A new range of service providers sprang up, countering the hourly charges of the

online services with unlimited access at flat-rate monthly fees. E*Trade quickly set up shop on

the World Wide Web as well. Within weeks after the company's entry on the Web, the Internet

accounted for more than 13 percent of the company's sales.

In early 1996, E*Trade began preparing its own initial public offering. Porter stepped aside,

bringing in Christos Costakos to lead the company. Costakos, a son of Greek immigrants from

Paterson, New Jersey, had been a decorated Vietnam veteran--a volunteer awarded the

Congressional Medal of Honor for his actions during the Tet Offensive--before joining the early

1970s startup Federal Express. Beginning at an hourly wage of $3.50, Costakos worked his way

up the Federal Express ranks over nearly 19 years, before becoming president and CEO of

Nielsen. With Porter as chairman, Costakos was named president and CEO in April 1996 and

led E*Trade into its IPO that summer.

E*Trade was adding some 500 customers and as much as $10 million in assets per day; by

May 1996, the huge increase in trading volume--in the first half of that year alone volume had

tripled, from 50 million shares traded to more than 170 million&mdash′oved too much for the

company's system, crashing the company's computers and leaving its customers stranded for

some two hours. For that two-hour period, the company paid out $1.7 million to cover its

customers' losses. A second, more limited glitch occurred in July. But the company had already

begun to prepare for such an event, having leased a 53,000-square-foot space in Sacramento,

California, to install a redundant hardware and customer service facility. The growth of its

competitors, including the arrival of Schwabs' e.schwab service, forced E*Trade to cut its

transaction rate again, to as low as $14.95.

E*Trade's growth pace continued, seeing revenues more than doubling again to near $52

million for 1996. The company also began expanding its services, offering investors the

opportunity to buy shares in IPOs and purchase equity in private offerings. Trade volume

continued to grow, reaching 8,000 transactions per day--with the Internet accounting for more

than a quarter of all transactions. The company also formed a subsidiary, E*Trade Online

Ventures, to search for other directions in which the company could expand. One such

expansion was the company's agreement with Versus Brokerage to extend the E*Trade brand

name to Canada's financial market. A similar agreement would bring the company to Australia

in May 1997. In June 1997, E*Trade and leading World Wide Web search engine Yahoo!, which

recorded some 10 million "hits" per day, announced an agreement which added a direct link to

E*Trade's web site from the Yahoo! site.

With an estimated 40 million Americans online by mid-1997, and a total online community of

some 60 million worldwide, E*Trade's future appeared electric. Analysts expected the online

investment market to grow from 1.5 million in 1997 to 10 million or more by the turn of the

century. E*Trade looked forward to becoming the top brand name of this new investment era.

BOARD OF DIRECTORS

Frank J. Petrilli

Chairman and Interim CEO

E*TRADE Financial Corporation

Interim CEO Frank J. Petrilli has been the Chairman of E*TRADE's Board

of Directors since January 2012. He became Interim CEO in August 2012,

and will remain in place while the Board conducts its search for a

permanent CEO. As Interim CEO, Mr. Petrilli is charged with overseeing

E*TRADE's executive management team and executing on the Company's

business strategy.

FINANCIAL ANALYSIS

Organization – E*TRADE Clearing LLC, is a wholly owned direct subsidiary of E*TRADE Bank,

which is an indirect wholly owned subsidiary of E*TRADE Financial Corporation (the “Parent”).

The Company, a single member limited liability company, is a broker-dealer registered with the

Securities and Exchange Commission, and a member of the Financial Industry Regulatory

Authority.

Nature of Operations – The Company clears and settles securities transactions for customers of

other broker-dealers, including E*TRADE Securities LLC, and E*TRADE Securities Ltd, both

affiliated broker-dealers. Accordingly, the Company carries security accounts for customers and

is subject to the requirements of Rule 15c3-3 under the Securities Exchange Act of 1934.

Use of Estimates – The statement of financial condition was prepared in accordance with

accounting principles generally accepted in the United States of America (“GAAP”), which

require management to make estimates and assumptions that affect the amounts reported in

the statement of financial condition and related notes. Actual results could differ from

management’s estimates. Certain significant accounting policies are noteworthy because they

are based on estimates and assumptions that require complex and subjective judgments by

management. Changes in these estimates or assumptions could materially impact our financial

condition. Material estimates in which management believes near-term changes could

reasonably occur include: allowance for doubtful accounts; estimates of effective tax rates,

deferred taxes and valuation allowances; and fair value measurements.

Cash and Equivalents – The Company considers all highly liquid investments with original or

remaining maturities of three months or less at the time of purchase, that are not required to be

segregated under federal or other regulations to be cash equivalents. Cash Required to be

Segregated under Federal or Other Regulations – Cash required to be segregated under federal

or other regulations consists of interest-bearing and non-interest-bearing cash accounts, and

money market deposit accounts. At June 30, 2012, the Company had interest-bearing cash

deposits of $250.0 million, non-interesting bearing cash deposits of $369.0 million, and money

market deposit accounts of $52.0 million maintained in special reserve bank accounts for the

exclusive benefit of customers pursuant to Rule 15c3-3 under the Securities Exchange Act of

1934.

At June 30, 2012, the Company also had interest-bearing cash deposits of $12.0 million

maintained in a special reserve bank account for the exclusive benefit of proprietary accounts of

introducing broker-dealers (“PAIB”) customers pursuant to Rule 15c3-3 under the Securities

Exchange Act of 1934.

Receivables from and Payables to Customers –Receivables from and payables to customers

include amounts due on cash and margin transactions. Securities owned by customers,

including those that collateralize margin or other similar transactions, are not reflected in the

statement of financial condition. Receivables from customers include unsecured loans of $7.0

million, for which the

Company recorded a $6.9 million reserve as of June 30, 2012. See Note 4 – Receivables from

and Payables to Customers and Non-customers. Customer securities transactions are recorded

on a settlement date basis.

Receivables from and Payables to Brokers, Dealers and Clearing Organizations – Receivables

from brokers, dealers and clearing organizations include amounts receivable for securities not

delivered by the Company to a purchaser by the settlement date (“fail to deliver”), margin

deposits and net receivables arising from unsettled trades. Payables to brokers, dealers and

clearing organizations include amounts payable for securities not received by the Company

from a seller by the settlement date (“fail to receive”) and net payables arising from unsettled

trades.

Deposits paid for securities borrowed and deposits received for securities loaned are recorded

at the amount of cash collateral advanced or received. Deposits paid for securities borrowed

transactions require the Company to deposit cash with the lender. With respect to deposits

received for securities loaned, the Company receives collateral in the form of cash in an amount

generally in excess of the market value of the securities loaned. Interest income and interest

expense are recorded on an accrual basis. The Company monitors the market value of the

securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded,

as necessary. See Note 3 – Receivables from and Payables to Brokers, Dealers and Clearing

Organizations.

Internally Developed Software, Net – The costs of internally developed software that qualify for

capitalization are included in the internally developed software, net line item. For qualifying

internal-use software costs, capitalization begins when the conceptual formulation, design and

testing of possible software project alternatives are complete and management authorizes and

commits to funding the project. The Company does not capitalize pilot projects and projects

where it believes that future economic benefits are less than probable. Technology development

costs incurred in the development and enhancement of software used in connection with

services provided by the Company that do not otherwise qualify for capitalization treatment are

expensed as incurred.

Share-Based Payments – The Company participates in the Parent’s share-based employee

compensation plans. The Parent and the Company record share-based payments expense in

accordance with the stock compensation accounting guidance. The Company records

compensation cost at the grant date fair value of a share-based payment award over the vesting

period less estimated forfeitures.

Fair Value – Fair value is defined as the price that would be received to sell an asset or paid to

transfer a liability in an orderly transaction between market participants at the measurement

date.

The Company determines the fair value for its financial instruments that are recognized or

disclosed at fair value in the financial statements on a recurring basis. See Note 2 – Fair Value

Disclosures.

Estimated Fair Value of Financial Instruments – The Company believes that the amounts

presented for financial instruments on the statement of financial condition consisting of cash and

equivalents, cash required to be segregated under federal or other regulations, receivables from

and payables to brokers, dealers, clearing organizations, customers, non-customers, and

affiliated companies and other liabilities approximate fair value.

Income Taxes – Deferred income taxes are recorded when revenues and expenses are

recognized in different periods for financial statement purposes than for tax return purposes.

Deferred tax asset or liability account balances are calculated at the balance sheet date using

current tax laws and rates in effect. Valuation allowances are established, when necessary, to

reduce deferred tax assets when it is more likely than not that a portion or all of a given deferred

tax asset will not be realized. Income tax expense includes (i) deferred tax expense, which

generally represents the net change in the deferred tax asset or liability balance during the six

months ended June 30, 2012 plus any change in valuation allowances and (ii) current tax

expense, which represents the amount of tax currently payable to or receivable from a taxing

authority. In 2012, the Internal Revenue Service sent an examination notification to the Parent

related to its 2009 and 2010 federal tax returns. While the

Parent cannot predict the outcome of the examination, it believes that adequate provision has

been made for any of the Company’s uncertain tax positions. Uncertain tax positions are only

recognized to the extent they satisfy the accounting for uncertain tax positions criteria included

in the income taxes accounting guidance, which states that in order to recognize an uncertain

tax position it must be more likely than not that it will be sustained upon examination. For

uncertain tax positions, tax benefit is recognized for cases in which it is more than fifty percent

likely of being sustained on ultimate settlement.

E*TRADE PRODUCTS & SERVICES

E*Trade uses technology to offer a wide range of innovative financial products and services.

The company’s products include trading, investing, cash management, lending, and managing

employee stock plans. Available through E*Trade Financial family of companies, these services

are offered mostly through electronic delivery channels and include the following:

Trading & Investing: Investment choices are:

Stocks

Options

Mutual Funds

Bonds

IPOs

Futures

Services

Move money with Quick Transfer

Transfer an Account

Wireless account access

Retirement & Planning - Accounts types:

Traditional IRA

Roth IRA

Rollover IRA

IRA for Minors

Small Business Retirement Plans

Education Savings

Beneficiary IRA

Services

Tax Tools & Tips

IRA Tips & Strategies

Rollover IRA Checklist

Automatic Investing in Mutual Funds

Banking & Credit Cards

Accounts

Checking

Money Market

Certificates of Deposit (CDs)

Credit Cards

Savings

Services

Online Bill Pay

Quick Transfer

View Internet Banking Demo

Wireless account access

Mortgages & Home Equity

Loans

Home Purchase

Refinance

Home Equity

Services

Loan Calculators

Loan Status

Quick Transfer

In addition, E*Trade provides services in person through E*TRADE FINANCIAL Centers. The

Company currently has 16 centers which are available to assist retail customers with product

selection.

COMPETITOR ANALYSIS

Competition within the securities brokerage industry has been fierce and fueled by an evolution

in social welfare policy from the private sector, a transforming regulatory front, and technological

adaptation. The idea of bringing securities trading online was a disruptive notion harnessed by

evolving technology initially aimed at making investment opportunities more accessible to

affluent investors and a growing middle class America. E*Trade was a pioneer in bringing the

brokerage service online. Along with others who subsequently entered the playing field

providing similar services, E*Trade contributed to the rapid changes in consumer stock trading

since the idea was conceived by Bill Porter in the early 1980s. Before the online trading

revolution, a private investor had two choices; obtain the services of either a full-service or

discount brokerage firm. The difference between the two were based on associated transaction

costs/fees, level of service, and resource availability to aid the investor in formulating an

appropriate strategy for his/her financial goals. A full service firm offered more at higher costs,

while discount firms offered services tailored to meet the needs of those who were a bit savvier.

E*Trade was initially modeled after a discount brokerage firm based online and later became a

financial portal offering much of the services of a traditional brick and mortar institution. This

transformation would eventually allow a larger target demographic within the industry and foster

a highly competitive business environment.

Several factors resulted in E*Trade becoming a viable competitor in the brokerage industry.

First and foremost, is that online trading was a disruptive technology, as described by Clayton

Christensen. The effect online trading had on the industry shortly after its inception has been

described as analogous to what discount trading firms had done to the full service firms in the

past. The significance of this trend would essentially dictate how competition shaped up over

the long run, but for E*Trade, being the pioneer of the concept, this alone made them

competitive. According to research done by Adam Elegant and Ramiro Monteagleare, “In 1992,

E*Trade was processing barely 100 trades per day. By the end of 1996, that number had grown

to almost 10,000 per day”. This rapid growth in transactions reiterates how influential this

business platform had been as well as the surge in consumer acceptance and demand that

would eventually provide business opportunities for existing and new startup firms.

Additionally from a business perspective, this innovation pioneered by E*trade meant that profit

margins had the potential to be competitive while simultaneous streamlined operational efforts

were exercised internally. In effect, the costs typically incurred by traditional brick and mortar

firms could be avoided in operating a business model such as that of E*Trade. Consequently,

these cost savings were then able to be passed on to the consumer by providing competitive

“Deep-Discount” rates, which helped E*Trade in customer acquisition. Incrementally influencing

the consumer mindset to online trading was the empowerment and convenience it facilitated

with investors; these were key factors for those who were self-directed in their financial

objectives.

Although Bill Porter conceived the thought and rolled out the first prototype, it would eventually

be a competing firm gaining the upper hand after the dot-com burst and in recent history. Based

on Clayton Christensen’s ideology of disruptive technology, E*Trade should have triumphed

given first mover’s advantage, but that was not the case. It was essentially leading discount

brokerage firm Schwab who eventually gaining a competitive edge in online trading. According

to an article by Peter Cohen, “inferior financial resources and weaker management” are some of

the reasons why E*Trade was unable to sustain the lead position. Cohen continues to state that

“Schwab had no intention of letting E-Trade do what it had done to Merrill [Lynch]. So Schwab

reinvented itself”. In essence, instead of creating a separate unit to address the new market,

Schwab integrated online trading into their core competency in order to adapt to the evolving

brokerage market. This decision has had, and still holds, significant relevance as it pertains to

E*Trade.

With hopes of overcoming the dot-com burst and regaining momentum, E*Trade set its sight on

becoming a full-fledged financial entity offering various financial solutions in addition to the

investment medium. It would have to in order to compete with well-established firms like

Schwab and TD Ameritrade, the two main publicly traded competitors for E*Trade at present.

Although there has been progress, E*Trade still struggles competitively amidst controversies

and operational deficiencies. The merger of TD Waterhouse with Ameritrade also re-shaped the

competitive landscape. E*Trade could have been in a very different position had they been the

other way around. The analysis below demonstrates where some of the weaknesses are

inherent to E*Trade. Since addressing these issues is proponent to strategic initiatives, possible

solutions will be addressed later in the operational strategy section.

As seen on the figure above, market share is a weakness for E*Trade and that has

subsequently affected its growth and optimal revenue generation within their niche. As part of

the core competency addressing target demographic, there are indicators as to what the short

and long-term potentials are for any organization in any particular industry. In the case of the

online trading sector, there are three types of self-directed consumers: Straddlers, Active

Investors, and Retail Investors. As it pertains to E*Trade, internet trading and investment

services they offered appealed most to Active Investors, who are described to be those

comfortable using the internet to conduct transactions after self-directed research. Retail

Investors, otherwise known as “day traders” and Straddlers, who are described as those

uncomfortable with internet transactions and prefer firms of established reputations, have

different needs; needs that E*Trade currently does not have. More specifically, Straddlers are

the type of consumers who prefer the human touch when it comes to money. Retail Investors

have the need for cost effective speedy transactions, since the volume of trades is much more

important for them than an Active Investor. According to a Forrester research finding, utilized by

Elegant and Monteagleare, the Active Investor places 47% more trades than Straddlers

(traditional investors) in any given year. Moreover, Retail Investors can place as many as 12

trades per day versus approximately 8 trades per year for an Active Investor. Addressing all 3

demographics while very possible, would require E*Trade to rethink their strategic focus.

Incrementally playing a part in possible future market share deterioration along with the threat to

customer loyalty, E*Trade’s further financial woes are the privately held firms in the industry

such as Fidelity, Scottrade, and Zecco. Fidelity has had a long history of success, consumer

trust, and overall good reputation. As such, withering away investors from Fidelity is going to be

a tough act given E*trade’s current capabilities. Likewise, capturing any defectors from other

organizations is likely to be a formidable challenge given the low cost pricing structure

associated with Scottrade and no-commission for certain transactions belonging to Zecco. The

current challenges domestically in the U.S. market from the privately held firms are real and

potentially catastrophic to E*Trade’s long term sustainability. Competitively speaking, E*Trade is

at the crossroads of innovative necessity and in need of a sound investment strategy.

OPERATIONAL STRATEGY PERSPECTIVES

Being competitive in today’s economy is such a broad notion that one really needs to dive

deeper into the strategic focus of the company in order to evaluate the said company’s

competitive intensity. Strategy occurs at various operational levels and the cohesiveness of the

various pieces contributing to grand (overall) strategy is critically dependent on corporate

governance. Although there is room for improvement, E*Trade is “conformed” in a sense that

top-tier directors of the board are primarily independent of the organization; at present about

2/3rd of the board. There is also a separation and distinction between the Chairman and Chief

Executive Officer. Furthermore, the nominating, compensation, and audit committees consist

solely of independent directors. The performance of the board is reviewed regularly, and outside

directors meet periodically without the CEO. The structural integrity of this foundation to drive

optimal courses of action is beneficial to all stakeholders of E*Trade’s community, both

internally and externally. Having said that, and considering some of the weaknesses identified in

the competitive analysis, E*Trade stands to benefit over the long run through acquisitions and

joint ventures so that they can grow market share and have the flexibility to be competitive with

other factors such as pricing. Although E*Trade missed out on the opportunity to merge with TD

Waterhouse, there have been acquisitions in recent history such as that of BrownCo in 2005

that have helped internal efforts. E*Trade needs to continue on this path so that they can

diversify themselves enough to target a bigger audience and sustain long term success.

Shooting for long term success requires a customer acquisition and retention plan that fills the

role of a sound marketing strategy. The brokerage and investment industry in general is well

known for aggressive advertising campaigns that are backed by substantial budgets. Ever since

the growth experienced in the mid-1990s, E*Trade has spent many millions on advertising in the

hopes of attracting and retaining individual investors. The multi-channel marketing plan at one

point aimed to target “the 10 to 15 million people who track investment information online but

still trade offline”. Some of the high-end traditional methods included Super Bowl ads and other

more innovative efforts included campaigns like “Celebrity Challenge” where two celebrities

competed head to head in a fantasy stock portfolio competition. More recently, E*Trade has

also been a competitive force in banking, lending, and credit granting and they are actively

marketing these products as well although maybe not as aggressively as they had in the past. In

today’s economy the competitive nature of marketing campaigns are intensifying and having an

aggressively solid multi-channel marketing strategy is essential to sustaining long term success.

This is particularly more relevant to segments E*Trade is a key player in, as depicted by the

chart below from McKinsey Marketing Solutions.

While multi-channel efforts address the acquisition aspect of marketing, retaining customers is a

function of being competitive and customer-centric in every detail -- including the medium in

which business is conducted.

Although the competitive section isolated the three types of investors based on behavior, there

are other qualitative and quantitative factors that can be part of the target demographic

contributing to marketing campaigns. Qualitatively for instance, the Forrester research utilized

by Elegant and Monteagleare stated that more than 75% of on-line investors are male between

the ages of 25 and 44. This niche is very limited and suggests a world of opportunity for

marketing campaigns targeted to women as well as baby boomers and those above fifty years

of age. By introducing and converting this unique demographic to utilize E*Trade’s services will

result in a value-added marketplace. Quantitatively, E*Trade is currently focused on attracting

“Mass Affluent” investors. According to their 2006 Annual Report, this is a segment that

contributes 75% of the total revenues for the company and that there has been a 32% increase

in this segment. By combining various marketing methods aimed at customers with different

objectives, E*Trade can optimize their potential for long term growth.

Driving the marketing focus of an organization in any economy are the various products being

promoted to consumers. E*Trade’s product strategy has evolved significantly since the

company was founded in order to be competitive and sustainable. Essentially, the transition has

been from being focused on a single product activity to becoming a diverse product offering

organization. At present, E*Trade offers products targeted at both Retail and Institutional

segments. Within Retail, in addition to the online trading platform of which this company was

conceived, other financial products such as banking (checking and savings), lending (auto,

home, RV), and credit cards are offered in order to be a comprehensive financial solution to the

consumer. Institutionally, E*trade has catered to other organizations with financial services such

as employee benefit plans. While this diversity by concept is optimal, recent segment

performances and competition in general has weighed heavily on an imperfect balance sheet.

More specifically, the lending sector has struggled as a result of non-performing consumers.

Moreover, pricing of retail segment products while within reasonable ranges, are not competitive

with Schwab, TD Ameritrade and other deep discount online brokers.

In addition to material products and services that are offered by E*trade, the technological

platform in which most of its business is conducted can be considered a product as well. The

website, its contents, speed, and user-friendliness are all key factors to winning the consumer.

Historically, there have been instances where E*Trade has struggled with capacity issues in

handling rising customer trading transactions. Although upgrades have been implemented as a

result, it is important to note that it’s critically imperative for E*Trade to be “state of the art”.

Being that wireless technology has recently taken off, it would serve E*Trade well to be at the

forefront and cater to consumers by providing this convenience.

Having looked at the competitive nature of the online trading sector, operational perspectives

inherent to E*Trade and observation of recent trends, leaves much to ponder on as far as

E*Trade’s investment strategy is concerned. Clearly, there is a strong need for strategic

alliances such as partnerships with organizations within and out of the online brokerage

industry. Technology has significantly changed the competitive landscape in the brokerage

industry, and unfortunately for E*Trade, market share has always been skewed towards

organizations with established reputations. All efforts consequently should be focused on

gaining market share by any legal means necessary and mitigating risk such as bad debt

exposure, particularly in a low revenue generating environment. For one, international

expansion is a very attractive segment for E*trade to continue pursuing aggressively. Moreover,

consumer relationships through brand awareness and marketing effectiveness will yield better

conversion. Some of this effort should also have focus on targeting different demographics.

Further, investments directed at building and sustaining the technological product both online,

as with actionable items (advice, individual investment strategies, etc.) and offline, such as

ATMs, will be fruitful long term also. While the aforementioned address strategic initiatives

within particular operational units, the overall grand strategy would benefit by leaning more

towards a merger with a competing firm. The notion of this becoming a realistic necessity is very

significant and might have to happen sooner given the recent stock price performance;

deterioration of overall financial condition of the company; likelihood of individual deposits

pulling out of E*Trade’s banking solutions; and one particular analyst’s (Prashant Bhatia of Citi

Investment Research) assessment that there is a 15% chance E*Trade will have to declare

bankruptcy.