Brothers William and Rafael Cruz came to the United States together. They trained to become award-winning classical violinists together. And in 1982, they abandoned promising music careers together to launch Omega Research, a Miami-based producer of the stock-trading software known as TradeStation.
Now, together, the Cuban-born pair are orchestrating the company’s transition from software maker to full-service online brokerage.
For years, Omega Research prospered by selling programs that allow users to design, test, automate, and execute their own trading strategies. By the late 1990s, however, it became clear that such software was giving way to direct-access trading on the Web. So last year Omega Research merged with Onlinetrading.com, a leading Web-based brokerage for active traders, in an all-stock deal valued at $300 million. The company acquired WindowOnWallStreet.com, another online trading site, for $16 million in assumed debt and newly issued stock. Omega Research also launched TradeStation.com, a subscription online trading service.
In December, the company changed its name to TradeStation Group Inc. William Cruz Jr. remains president of the company, and he and Rafael are co-chairmen and co-CEOs. Each owns 20.6 percent of the company (Nasdaq: TRAD). The Cruz brothers control approximately $124 million in equity, based on an average trading price of about $2.57 per share.
With each passing day, the company’s fortunes depend less on selling software and more on online subscriptions and commissions. “We had to shift our strategy,” admits Rafael. “That’s really what we have been doing the last two years – redefining our company. We were selling specialized trading software in a time when software meant high-tech. Now software is ancient. It’s an Internet world.”
TradeStation Group calls its new service the “next-generation trading platform for the active trader.”
WindowOnWallStreet.com provides complex market quotes, securities charting, portfolio management, discussion forums, and analysis. So far, the site has more than 12,000 subscribers who pay $79.95 per month. Customers spend an average of six hours per day using the service.
OnlineTrading.com is a direct-access online brokerage serving upper-income individual and institutional investors. The site, which had not launched at press time, will incorporate the latest version of TradeStation Group’s analytical trading software, TradeStation Pro.
Many competitors market analytical trading programs on the Internet. TradeStation’s edge, however, is its reputation and longevity in the marketplace. For eight consecutive years, its software has won the Readers’ Choice award given by Technical Analysis of Stocks and Commodities magazine. TradeStation Pro is written in its own programming language and has an exhaustive list of prepackaged trading strategies. Many people who buy the software sell or exchange trading strategies they create.
Here’s how TradeStation works. Suppose you want to purchase only stocks of semiconductor component manufacturers with more than 30 percent annual earnings growth that trade under their 50-day moving averages. The software can produce a list of currently traded companies that meet such criteria and predict their performance. You can choose stocks that match the criteria over a five-year period, for example, and chart their performance. The software also allows you to “paper trade” to test your selections. Investors can apply a similar approach with futures, options, and currencies.
TradeStation Group isn’t jumping into the online trading business at the best of times. A report by analysts at Robertson Stephens Inc. expects transaction growth for online brokerages to increase 20 percent to 25 percent in 2001, down from an original projection of 40 percent growth.
However, the Cruz brothers don’t plan to pitch their service to mainstream users of such sites as E*Trade, Charles Schwab, and Ameritrade. “Those are systems for investors,” says William Cruz. “Our system is for very active traders.”
Those active, semi-professional traders make up fewer than 10 percent of trading accounts but generate more than half of all trading volume. “A relatively small cadre of truly active or semi-professional traders has emerged as a powerful force in the online investing world,” says Bear Stearns analyst Amy Butte. “While the number of these semi-pros has remained unchanged over the past year, their trading activity has surged by 55 percent.”
The Cruz brothers’ primary target is traders who have purchased TradeStation software. Since 1991, the company has sold more than $100 million worth of programs to more than 45,000 customers, whose average annual income is about a half million dollars, according to William Cruz. “We will go to them with direct mail, offering discounts and showing how they can now have top analysis and execution capabilities in one package,” he says. The company also plans to launch an advertising campaign in specialized publications aimed at online traders.
The Cruz Brothers Arrive in the U.S.
Reshaping Omega Research into TradeStation Inc. isn’t the toughest transition the Cruz brothers have confronted. They came to the United States from Cuba in 1966, along with their father, an attorney, and mother, a beautician. Two aunts came with them. The family settled in Emporia, Kansas, where Rafael Cruz Sr. studied to become a librarian at the University of Kansas. The family moved after he landed a job at the University of Illinois in Champaign.
William Jr. began taking violin lessons in elementary school in Illinois. Rafael soon followed. They practiced four hours a day with their aunt, who had been a concert pianist in Cuba. In high school, the brothers won numerous state and national awards, and it appeared they were destined for musical careers. “We wanted to be concert violinists. We had no intention of doing anything else,” remembers Rafael Cruz.
After the family moved to Miami in 1974, William became fascinated with the futures market and read everything he could about trading. At age 18, he opened a trading account with $2,500. He soon lost all the money, but he was hooked. He continued trading after enrolling at the University of Miami on a music scholarship. A year later, he left UM to enroll in the prestigious Juilliard School, finally returning to UM in 1981. By then, Rafael was studying music at Indiana University. Both brothers received instruction from some of the nation’s leading violinists.
Meanwhile, William sought ways to improve his trading decisions. He teamed up with a music teacher who was also a computer programmer, and they developed software to test trading strategies. “Friends wanted copies of our software, and it didn’t take us long to realize that we should be selling this stuff instead of giving it away,” says Rafael.
After some soul searching, the brothers abandoned their music careers. “The decision devastated our aunt, but we promised her we would be the best businessmen we could be,” says William.
They dropped out of college and founded Omega Research in 1982, running the company out of a room in their family’s home. They decided that William would handle product development and Rafael would oversee marketing. In 1989, the company introduced its first trading strategy software, called System Writer.
The TradeStation Program Launches
The TradeStation program debuted in 1991. Other programs followed, including SuperCharts and OptionStation. In 1996, Omega struck a deal with Telerate Inc. to offer TradeStation to Telerate’s institutional customers worldwide. In 1997, Omega went public.
Building a sibling-based company presents its own set of challenges. “Countless times, they have had very spirited debates regarding each one’s responsibilities,” says Charles Wright, a former consultant to Omega Research who has known the brothers for 13 years. “They disagreed about whether software should have certain features, and the consequences of the features from marketing and operational standpoints,” says Mr. Wright, now at Fall River Capital, a Milwaukee-based commodities trading consultant.
But it’s tough to argue with success. The brothers’ company turned a profit in every year from its founding through 1999. Retrenchment into a new product line means incurring significant costs, however. For the first nine months of 2000, the company reported a net loss of $9.5 million.
In filings with the Securities and Exchange Commission, the company stated that it is unclear when, if ever, revenues from the Internet will offset losses, but it expected to operate at a loss at least through early 2001.
Meanwhile, the Cruz brothers have turned down a handful of buyout offers.
Analysts predict that consolidation in the online trading industry will pick up steam over the next year or so. But the co-CEOs of TradeStation have their own plans to create a billion-dollar corporation. “There are two types of companies – overnight successes and those that grow steadily over the long run,” says William Cruz. “We are the second type.”
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