Recognized as a pioneer in electronic trading, Donato Montanaro is the Chairman and CEO of TradeKing, a nationally licensed online broker dealer. Prior to TradeKing, Don was Founder and President of SureTrade, Inc., an NASD member brokerage firm and a subsidiary of Quick & Reilly. Under his leadership, SureTrade became profitable in 13 months and grew to be the 8th largest online brokerage firm worldwide. As special consultant to the American Stock Exchange (2002 – 2005), Don also conceived an innovative option product, the Fixed Return Option (FROs), which began trading on the Amex in May of 2008.

In 1997, when Donato Montanaro, Jr. started SureTrade, he turned the online brokerage business on its side by offering the lowest online trade of $7.95. The company grew to become the eighth largest online brokerage business. Eventually SureTrade merged with Quick & Riley, one of the first discount brokers. After Fleet Financial purchased Quick & Riley, Montanaro ran SureTrade as a subsidiary of the Fleet Financial Group. Following its acquisition of Fleet Financial Group, Bank of America folded both the SureTrade brand and the Quick & Riley brand into Bank of America Securities brand. He says, "The systems we built at SureToday today comprises the backbone pieces of the Bank of America Securities' system."

Now Montanaro has returned with a third-generation online brokerage business designed to give E-trade Financial, TD Ameritrade, and Charles Schwab a run for their money. TradeKing charges $4.95 per stock trade and 65 cents per option trade, offers cutting-edge tools for trading options, and allows its customers to engage in social media.

For the past three years, TradeKing has ranked in the top three in Smart Money's annual review of online brokers. In 2007, TradeKing also ranked first in the survey's customer service category. Barron's gave the online brokerage firm four stars for its cool tools. Montanaro says, "We've achieved our price point goal of getting people's attention with our offerings, our values, and then shocking them with great customer service."

The BTM Institute recently saw down with Montanaro to talk about how technology drives value-added offerings, such as customer collaboration, and automated tools for options trading. Here's what he had to say:

Q. How does the SureTrade business model differ from that of TradeKing?

Some things are similar and some things are different. TradeKing has the SureTrade founding team. We took many of the things we learned at SureTrade, such as our core values, and brought them to TradeKing. We strive to offer great value both in price leadership and all of the things that come along with that price. We offer robust tools for trading execution. We focus on customers to the point where they drive what decisions we make to add value. 

However, we have a different approach to the marketplace this time and offer things that are distinct from our competitors, such as social networking for our customers. For example, we focus on options trading for self-directed retail investors. To make options trading a responsible part of our customers' investment strategies, we provide them with free educational options trading programs, and arm them with the appropriate information, tools, and electronic access. 

Q. Can explain your social networking features?

The community area on our site enables customers to blog. I think I'm the only CEO of a financial services company with a blog. To this end, I make myself available to our customers and our community. Customers interact with each other, as well as us. They call it a MySpace for financial services. Customers can set up personal profiles with the intent of finding other people to discuss related various investment issues. They can also form groups and discussion forums. It provides an open social networking environment, which is different from our former company. It also differentiates us from our competitors. We were the first one to offer customers a social networking capability.

Q. What is your business model, and how does it align with your enterprise architecture?

We have a simple transaction business model. We make our money by transacting that business efficiently, and offering a great Web site and good customer service -- all for costs that are less than the revenue that comes in on a per trade basis.

To grow the business, we earmark a certain amount money for technology, for people who support the business, such as customer service, and for online marketing programs, such as search marketing.  The awareness we create from our marketing programs helps to drive traffic to our site with the intent of getting visitors to open an account and to start transacting business with us.

Our enterprise architecture combines proprietary things, such as tools and interfaces, and things we've built to support the social networking aspect of our site. We also rely on partnerships with vendors in various areas, such as research, transaction processing, and hosting. Together, we combine all of our vendor relationships into a cohesive user experience. We leverage all kinds of systems architectures.

Our Web site acts as our main storefront. We interact mostly with customers through our Web site and via email. We do hold live chat sessions with customers. Of course, we get 1,000 calls per day, which our customer service people handle. Our many dedicated resources enable us to provide a stable system, which we can then constantly innovate.

Q. What process do you go through to make technology investment decisions and how automated is the process?

It all depends on what aspect of technology we're looking at. For example, we have hosted redundant core systems, which support the Web site and process and route all trades. These systems have automated triggers that tell us way in advance of when they are about to reach a certain percentage of system capacity. As a result, we’re able to go ahead and order more bandwidth or add slices to our racks in the places where we host.

Based on our past experience, we also have a general sense of what types of investments we need to make to handle anticipated capacity demands fueled by an increase in customers. 

For technology investments, we rely on the technology priority committee, which meets weekly. It uses project planning and tracking software to maintain a list of what we're working on, how things are progressing, and what decisions we made about changing our priorities. The changes we made come from what's going on in our marketplace, and our belief in what new things we should work on. We combine all of this information with the most important driver of our decisions -- what our customers tell us both in our Web site community dialog, and in our quarterly surveys about the areas we need to improve. All of these elements enable us to agree on how we set priorities. We then track those priorities using project management tools.

Q. Can you describe some of your interesting online trading tools?

We've brought some innovative trading tools to market, such as a simple tool called the probability calculator. To use it, you plug in any equity symbol you want to follow, and set a couple of target prices and a timeframe. This tool goes out and looks at all pricing in real time and all the implied volatilities in the underlying areas. It then comes back and tells you, according to the pricing of all options and trading on the market, the likelihood of reaching your target price or exceeding it by a certain percent. A tool like this gives customers a good sense of where to target their strategies. Customers find it to be a good validation tool for telling them how their prediction deviates from what the general market believes.

Q. Can you describe the fixed return option you came up with?

I was the first person to bring binary options, or a product called fixed return options, to the listed exchanges in the U.S. We just launched the trading of them on the American Stock Exchange. This is an example of how TradeKing makes responsible options trading more approachable and more understandable to all of our customers. 

It comes in two forms: one is a ‘finish high’ and one is a ‘finish low’. You pick your strike price and your date.  You buy the contract for whatever the going price is. It's always less than $100. You can trade in and out of them, and they trade freely in the market. You can also hold them to the expiration date to see if you were right or wrong about your price prediction direction.

Q. Since your revenues come from transactions, how do plan to scale your business to increase revenues?

We track metrics to see the effectiveness of our marketing campaigns. We look at how well we've done in attracting the customers we set out after. We also look at who our most profitable customers are.  We become more efficient as we learn from the results of our metrics. We managed to get higher and higher quality customers at a lower and lower price point. Our marketing efficiencies equate to our cost for acquiring new customers. These costs decrease as we become smarter about our market space.

As our number of our trades continues to increase, we can go out to the marketplace and get lower costs for the backend processing and for the clearing of trades. As are revenue increases, our cost per trade decreases. That's how we scale our business.

Q. What benefits have you seen from customer collaboration?

Our customer community has also helped us to increase our margins. We're seeing more and more customers in our forums self-servicing each other.  We have customers who will pose questions and then interact with other customers, or with us, to obtain the answers they were looking for. For example, they might ask about the margin rules we have. Five other customers who might know the answer will chime in and give these folks a link to the FAQ. This's almost like the kind of customer service we might provide via email. As this self-servicing gets better and better, we have less customer contacts per month over time. We can grow our business without adding customer service agents.

Q. Is all of your marketing online?

We do some advertising in print publications such as Barron's and Investor's Business Daily. Most of our marketing is online search marketing. We have both paid and natural search work both with Google and with Yahoo. We spend a lot of money in both of those channels every month. We use banner advertising in online places where we know our targeted customers reside. We partner with industry organizations, such as the Options Industry Council, by giving educational seminars around the country. All of these outreach programs drive our growth.

Q. Do you monitor blogs and sites that carry reviews of your service?

Yes! Our RSS feed technology combs the Internet for anything written about us. We read all of those comments.  Some times, we'll participate in a dialog that a third-party might be having about us. We usually just combine the information in the marketplace with what we already know, what we hear from our customers, and what we get from our surveys. We look at the significant annual industry comparisons of online brokers done by publications such as Barron's.

Q. Are you one of the few online brokers doing options trading?

Yes. Not all online brokerage firms do options trading.  Some firms will make it available if a customer asks for it. We're one of the few online firms specializing in options trading and options education. You don't make money if you buy stocks, wait for them to go up, and then sell them. You need to have strategies for volatile markets such as the one we've had for the past year. Options are the safest trades you can make. The only risk in the trade is to sell your stock at a higher price. 

Q. What are some of the tools you have for different trading strategies?

We have different types of screens for each of the different options trading strategies, such as covered calls, straddles, and butterflies. We offer an automated capability based on our 16 strategic newsletters on our Web site. If you subscribe to one, you specify that you want to trade options according to the recommendation in that newsletter. You set your dollar limits and your risk level. You can automatically trade according to those recommendations.

Skies the limit. 

© BTM Institute. Interview conducted by Elizabeth M. Ferrarini.