Datek Online

» see datek.com as it lived, on the wayback machine

~ the goodbye ~

In 1999 i was fifteen, in Ankara, on a modem, with no bank account and no reason to have one. Day trading was happening on the other side of the planet as a kind of televised national hobby, and the part of it that reached me was the part that reached everyone: footage of shouting men, the word nasdaq, a number going up. Datek was one of the names inside that story and i would not have been able to tell you it existed until i went looking twenty-seven years later.

The company under it is older than the internet business it is remembered for. Datek Securities Corp was founded in 1970 in Brooklyn by Aaron Elbogen and George Weinberger, and in 1987 it opened a trading operation in lower Manhattan run by Sheldon Maschler. That desk is where everything else comes from.

In 1989 two people working for Maschler, Joshua Levine and Jeffrey Citron, wrote a piece of software called Watcher. It read nasdaq quotes in real time and fired orders into the Small Order Execution System faster than the market makers on the other side could update their prices. SOES had been built after the 1987 crash to guarantee small investors a fill. Datek used it as a weapon, and by 1991 Citron personally had made a million dollars from it.

~ the chronicle ~

~ where the money came from ~

The SOES desk was fined repeatedly through the late eighties and early nineties, and in december 1996 Maschler was fined $675,000 and suspended from trading for a year. The retail brokerage was spun up in 1996 in the middle of that, priced at $9.99 a trade, and it worked immediately. By may 1998 it had 80,000 accounts holding $1.5 billion. A year later it had 253,000 accounts holding $6 billion and was the fourth largest online broker in the country.

The other thing Citron and Levine built in 1996 mattered more than the brokerage did. Island was an electronic communications network, a place where buy and sell orders met each other directly instead of going through a market maker who took the spread. By july 1998 it was handling around fifteen percent of all nasdaq trades. It became independent of Datek in december 2000, Instinet bought it in 2002 for $508 million in stock, and the pricing model it forced onto the american equity market never went back.

~ the postmortem ~

Citron stepped down as chairman in october 1999, partly because Datek was under Justice Department investigation and his name attached to it was a liability. In december 2000 a group led by Bain Capital and Silver Lake put $700 million in and Island was separated out. Ameritrade announced the acquisition on 8 april 2002 and closed it on 9 september 2002 for $1.29 billion. Customer accounts went from two million to three million, the combined firm traded under the Ameritrade name, and Datek customers logged into their old credentials on somebody else's site.

The reckoning arrived four months after the funeral. In january 2003 the SEC settled with Maschler, Citron and others over a scheme it dated from 1993 to june 2001, in which proprietary trades were dressed up as customer trades through falsified books and filings. The defendants paid over $70 million. Maschler paid around $29.2 million and Citron around $22.5 million, among the largest sums the SEC had ever collected from individuals. Citron went on to run Vonage. The $9.99 trade went on to become the zero dollar trade, which is the part of this that everybody kept.

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