Pinnacle

William Porter: Forefather of Online Trading

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

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WILLIAM PORTER, FOUNDER, E*TRADE: This is another gas analyzer. This one was for the military.

BEVERLY SCHUCH, HOST (voice-over): Bill Porter loves building better mouse traps. He also loves building better horizon censors, TV cameras and most importantly for millions of investors, better stock markets.

(on camera): Does it ever even boggle you how fast everything is moving?

WILLIAM PORTER: Yes, it does.

SCHUCH (voice-over): Among other things, Bill Porter is the inventor of online trading, the founder of E*Trade and the world is indeed beating a path to his door or portal.

WILLIAM PORTER: The very first online trade was made through our system in 1983.

SCHUCH (on camera): Ever?

WILLIAM PORTER: On July the 11th a dentist up in Michigan. And, you know, there was kind of the exciting -- wow, a trade went, you know, a whole new concept.

SCHUCH (voice-over): That would be enough brilliance for any one lifetime, but not for Bill Porter. Been there, done that, what's the next big thing? Porter's latest brainchild is an all electronic options market. He's calling it the International Securities Exchange and it goes online in March.

WILLIAM PORTER: Like most things, you want to be the first kid on the block and we're going to achieve that in this country in my book.

UNIDENTIFIED BROKER: Actually, you're the first adult on the block, right?

WILLIAM PORTER: Well...

SCHUCH (on camera): At the age of 70 you decided well, gee, what this world needs is another stock exchange. Why?

WILLIAM PORTER: Well, because the U.S. is not competitive in the world. The world is consolidating. There's going to be, you know, seven days a week, 24 hours a day, 365 or 66 days a year trading that will take place around the world. In fact, I wrote that in my very first business plan for E*Trade back in 1982 that this would happen and so it is happening.

SCHUCH (voice-over): Porter's background doesn't give any clues to his amazing ability for invention. In his childhood, he spent summers as a cowboy on a Colorado ranch. During W.W.II, he quit high school to join the navy. The navy kicked him out when it learned he was just 16 years old.

WILLIAM PORTER: When I got back from the navy I decided my dad was right and I really needed to go to school. And so I got a book called "High School Subjects Self-Taught" and took some tests and got my GED and I went back to college and did very well.

SCHUCH (on camera): Put yourself through college, didn't you?

WILLIAM PORTER: Yes. Worked on the railroad all, at night as a crew dispatcher on the Denver Rail Grand Railroad.

SCHUCH (voice-over): You would have gotten a better look at Bill Porter's character if you'd been there when as a young boy his parents gave him a microscope. Bill cut his eyelashes off so he could see through the eyepiece. Now, eyelashes grown back, Porter holds patents on 14 different inventions, including top secret devices.

WILLIAM PORTER: And here I am with one of my night vision cameras. This was the first commercial version made for electron microscopes. That's the system that we set up to test locomotives. I started a project called The Search which is a device that you plug into the side of a locomotive and you can test it out. And I got a development program with the Southern Pacific Railroad and later with the B&O and actually they felt that it would improve the operating capacity of their railroads by about 10 percent. And at that point in time there were 33,000 locomotives in this country.

So I feel like I put 3,000 locomotives on the road and that's one of my biggest achievements frankly.

SCHUCH (on camera): Yeah, that's got to -- is it really?

WILLIAM PORTER: Yeah. Never made any money out of it but I feel really good about that one.

You going to the hot tub first, huh? OK.

SCHUCH (voice-over): While most 71-year-old grandfathers are slowing down, Porter is streaking into the new economy like an electron beam. This discipline of invention, the founder of E*Trade, Bill Porter is next on PINNACLE.

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WILLIAM PORTER: I was a cowboy.

SCHUCH (voice-over): Bill Porter learned some of life's most important lessons on the back of a horse.

WILLIAM PORTER: Hard, hard work. I used to get up at four o'clock in the morning and it was my job to go out and get the horses in and so forth and come in and eat and sit on a horse all day long. And when we weren't doing that, we were, you know, stacking hay or mowing the oats or, you know, whatever.

SCHUCH (on camera): Are there any vestiges from those days incorporated in your life now?

WILLIAM PORTER: Absolutely, in the sense that of go do it. When you're in the homesteading frame of mind you just do things because they're right and you have that self-confidence that just won't quit.

SCHUCH: So you grew up a very self-confidence man?

WILLIAM PORTER: Absolutely.

SCHUCH (voice-over): Even as a teenager, Porter had some hard bark on him. With the country at war, he knew what he had to do, join the navy, even if he was a bit under age.

WILLIAM PORTER: I really didn't like high school very well. Actually, it's kind of silly, I would cut class and I'd go down the library and read about what I wanted to read about and I ultimately at 16 ran off and joined the navy, snuck into the navy, so.

SCHUCH (on camera): I saw that picture of you. You look about 12. How could they have been fooled?

WILLIAM PORTER: Well, I wasn't honest but, you know, I knew everything when I was 16, like most of us do, and so I got into the navy.

SCHUCH (voice-over): And promptly got kicked out. But Porter is no quitter. So once old enough, he reenlisted legally and served his tour of duty.

(on camera): W.W.II was winding down.

WILLIAM PORTER: Yes.

SCHUCH: Did you want to see action?

WILLIAM PORTER: Yes, and I did but I...

SCHUCH: Bad action? You came back from the navy and went to college? WILLIAM PORTER: That's, I don't talk about it.

SCHUCH: You've never talked about it?

(voice-over): After the navy, Porter earned degrees in mathematics and physics from Colorado's Adams State College and Kansas State University.

WILLIAM PORTER: Here's a whole series of things that I was involved with. The adaptive shoulder, I have a patent on that.

SCHUCH: Porter's navy experience and his knack for math and science took him to several companies where he worked on top secret military projects. Porter holds many patents for his electronic inventions but it's the companies which get the royalties. Meanwhile, the military still uses his inventions and some are still top secret.

WILLIAM PORTER: This is one that I put into an airplane to demonstrate to the military and so forth what could be done with low level TVs.

SCHUCH (on camera): What are some of the patents that you hold?

WILLIAM PORTER: Low light level TV, infrared horizon sensors, some convolution integral stuff that has to do with signal detection.

SCHUCH: One person said the infrared horizon sensor, you developed this before Sputnik?

WILLIAM PORTER: Yeah, actually it was before Sputnik.

SCHUCH: So clearly you were always ahead of the game with these?

WILLIAM PORTER: G.E. was making satellites and so forth and they wanted to be able to stabilize a satellite in space and what is there to hang onto up there to know which way is up and down? And so they came to us, I was in the electronics side of the house, and said how can we do this? And I said well, look at the infrared from the horizon. And so they gave us a contract and I built the very first infrared horizon sensor.

SCHUCH (voice-over): In 1965, Porter made another discovery, business. His curiosity roused, he went to MIT as a Sloan fellow and earned an MBA. He used this new found science to begin his own company, Commercial Electronics.

WILLIAM PORTER: Oh, I got a little tired of the military activity and I just felt that a lot of the technology that I had learned had application for the commercial side of the world and so moved off in that direction and moved with the low light level TV that I had. In fact, I coined those words, low light level TV, way back in the late '50s or so and started producing cameras for the TV industry.

SCHUCH: He learned a lot in business school, but they can't teach you everything. They didn't have a class in what to do when your life falls apart. (on camera): The '70s sound like it must have been a tumultuous time. You left your company, you got divorced from your wife.

WILLIAM PORTER: Yes, part of that was the '74 recession, at which time I had like 280 people in a company and I had a major contract with a TV organization at that time to produce a series of cameras. And there was a big recession and so they canceled the order and there I sit with like 280 people with no money to pay them.

SCHUCH: And that's...

WILLIAM PORTER: That's not fun. And so I ended up selling the company to Warner because the technology was all solid.

SCHUCH: Did I hear this right, that you got custody of the children?

WILLIAM PORTER: Well, they came with me, yes. The oldest was, he was in college. But the youngest was like 10 or so.

SCHUCH: So you find yourself a single parent.

WILLIAM PORTER: Yeah. And that's fine.

SCHUCH: That was fine?

WILLIAM PORTER: That's no problem.

SCHUCH: Well, what was the biggest challenge?

WILLIAM PORTER: There was no real challenge.

SCHUCH: Really?

WILLIAM PORTER: Yeah. No, parenting is not difficult, really, I don't think. Treat 'em good and...

SCHUCH: I think it's the most difficult job in the world, being a good parent. Do you just, it's natural for you, do you think?

WILLIAM PORTER: I don't know. You just do whatever needs to be done. I don't know how to answer the question exactly. If there's a problem you solve it and if there's not things are fine.

SCHUCH (voice-over): Things are going swimmingly in Porter's family life now. We'll focus on his mission to reinvent the marketplace when PINNACLE continues.

WILLIAM PORTER: There it goes.

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WILLIAM PORTER: I'm going to buy NBLS. Oops. See, right away I did it wrong, number of shares I can't read.

SCHUCH (voice-over): Bill Porter's making money the new fashioned way, on the Internet.

WILLIAM PORTER: This is E*Trade and this is my account. I just made a commission of $19. Placed here, done.

SCHUCH: On E*Trade, investors can manage their portfolios online without the advice or expense of a broker. It's estimated E*Trade and the other online brokers have attracted as many as 10 million customers who are now responsible for one in every four stock trades. Today, E*Trade executes nearly 130,000 trades a day in nearly two million accounts.

WILLIAM PORTER: The rate of signup during the previous quarter was about 5,500 customers a day.

SCHUCH: E*Trade evolved because Bill Porter couldn't find real time stock quotes for himself. He had made a little money from selling his company commercial electronics and he wanted to put the profits into the market. In 1982 when he learned how to find stock quotes with his computer, he realized there was a business opportunity providing the quotes to investors like himself.

(on camera): Let's go back to the precursor of E*Trade, which was Trade Plus, which you started really before anybody.

WILLIAM PORTER: What happened was that I was involved in the stock market a bit and discovered the Apple II and built the first software to tie into a mainframe and found that I could get stock quotes.

SCHUCH: So there wasn't the software then or the systems to even provide this information.

WILLIAM PORTER: That's right. We had to build everything ourselves from the ground up. So we ended up getting Schwab and Fidelity and Quick and Reilly (ph) and other brokers to use our service and so we were kind of the middle man between their customers and themselves. But over the years they started taking it in-house and that left us with the alternative of doing it ourselves and that -- so we introduced E*Trade.

UNIDENTIFIED BROKER: The master control center right for all the trading that we do around the world.

SCHUCH (voice-over): His invention is simple, super powerful computers do what brokers used to do, send your order to the market. No broker translates into cheaper fees. Orders on E*Trade can cost as little as $5. It's biggest rival, discount broker Charles Schwab, charges nearly $30 for an online trade and talking to a broker means paying at least $55.

E*Trade has led the revolution from just a handful of online brokerages in 1995, today there are more than 100. (on camera): You've got American Express, Suretrade.com and Merrill Lynch, which built its company on brokers, is now an online service, as well. So are those days of easy profits over?

WILLIAM PORTER: The growth of this industry is going to, you know, provide opportunities for many broker/dealers and the ones that will win in the long run are the ones that are the leaders and who have good market presence. And we have that. And that's what we're achieving with our very strong advertising program.

SCHUCH (voice-over): In 1999, E*Trade spent more than four times as much on advertising as it did on technology, more than $300 million. Its ad campaign cuts deep at the soul of traditional investing.

UNIDENTIFIED BROKER: Hello?

UNIDENTIFIED CONSUMER: Hello, Ms. Gruber (ph), can I interest you in some wonderful opportunities in the stock market? Ms. Gruber?

SCHUCH (on camera): You were behind this advertising campaign, weren't you?

WILLIAM PORTER: Well, the initial phases, yes.

SCHUCH: And you really have done a guerrilla marketing effort.

WILLIAM PORTER: Oh, there's no question about it and the reason is that in any industry it's the top three or four players that make money. We're building our customer base and it's very much intentional.

SCHUCH: You went after the brokers from the word go with, you know, 50 Ways To Get Rid of Your Broker. Is your goal to eliminate brokers?

WILLIAM PORTER: No. Brokers actually provide a service for many customers, particularly older folks who really need help in terms of retirement and so forth and we don't provide that kind of service. We give no advice. We're a traditional discount broker. And if the people really don't have the level of awareness as to what they want or knowledge as to what they want to invest in they really shouldn't use an online broker.

SCHUCH (voice-over): Not to surprisingly, success breeds its own problems. The huge influx of orders has created capacity problems for E*Trade and other online brokerages.

(on camera): There are some snafus, though, that E*Trade's had, a system failure last February.

WILLIAM PORTER: Right.

SCHUCH: Certainly it's been a cost to E*Trade, but also to the investors. You've had some class actions as a result of this. What's your answer to them? WILLIAM PORTER: Well, the class action, we believe, really have no merit and in fact the courts seem to be leaning in that direction with us. Certainly if you have a major broker/dealer on a heavy day with brokers, if they get saturated, there's no class action and likewise with us on a heavy day.

We did have some system problems and we're still learning.

SCHUCH: So these are growing pains that will occur, you're saying, from time to time?

WILLIAM PORTER: Those things will occur and, you know...

SCHUCH: Investors should know.

WILLIAM PORTER: That's right. That can occur.

SCHUCH (voice-over): When PINNACLE continues, Bill Porter, the inventor genius who prefers doing to speaking.

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WILLIAM PORTER: You know, we've been doing this for 15 years, Joan? Isn't that something?

JOAN PORTER: Time flies.

WILLIAM PORTER: Time flies when you're having fun.

SCHUCH (voice-over): Bill Porter and his second wife Joan have been traveling the same path together for 16 years. The two first met when Bill hired her to work at his company, Commercial Electronics. But it wasn't love at first sight. Bill was already married. Joan quit her job after a few years, married someone else and waited 15 years before their paths would cross again as divorced single parents.

JOAN PORTER: Some place in my consciousness I always saw Bill and Aiola (ph) together and I didn't pay a lot of attention and I kind of put it out of mind because I was married. And so about 15 years later one day I was thinking of him and I called him and we got together and went out on his sailboat and that was it. It was like we were to be together.

SCHUCH: It was fate, an unexplainable fact of life for Bill, the analytical scientist. For his mystical, meditative wife, no explanation needed.

JOAN PORTER: Grandpa doesn't like to have stuff put on him either.

SCHUCH: Bill, with three children from his first marriage, and Joan with one, now share 10 grandchildren. The kids love to visit grandpa and his pool in the hills of northern California near Palo Alto.

Today, Porter is chairman emeritus of E*Trade. He handed over the chief's reigns to Christos Cotsakos, a whiz kid he hired from FedEx.

WILLIAM PORTER: His plans for the future are just outstanding I guess is the best way to say it and I felt very good about being able to leave the company in his hands.

CHRISTOS COTSAKOS, CHAIRMAN & CEO, E*TRADE: And he allowed all of us the creativity to take his dream, bolt on some of our stuff to it and just drive it through to the marketplace. I wouldn't have missed it for the world.

SCHUCH: With Cotsakos running E*Trade, Porter is free to climb new mountains. His latest creation, the International Stock Exchange.

WILLIAM PORTER: This is the big event. This is why everyone's here.

SCHUCH: The ISE will be the first completely electronic options exchange in the country and the first to open in the U.S. in the past 26 years when it goes online this March.

(on camera): So who are you really taking on with this new exchange then?

WILLIAM PORTER: Well, AMEX, certainly.

SCHUCH: AMEX.

WILLIAM PORTER: And CBOE, the Chicago Board. And Pacific Coast and Philadelphia as well.

SCHUCH: And what's their reaction been?

WILLIAM PORTER: Well, actually it's been positive for the individual because historically they've charged fairly high fees to broker/dealers to send their orders in to their exchanges. We will not charge such fees and so they've already started dropping their fees. Now that's a benefit to the individual investor.

We've had over 100 of the existing market makers on the existing exchanges wanting to join us and so we will have no trouble at all producing market makers.

SCHUCH (voice-over): And Bill Porter delivered with Wall Street powerhouses like Goldman Sachs and Morgan Stanley Dean Witter signing on.

(on camera): Is this, then, going to be your final project, do you think?

WILLIAM PORTER: I don't plan to do any more, that is correct. In fact, I would like to phase out of this over the next year or two after it's really well launched and so forth. SCHUCH: And then what?

WILLIAM PORTER: Well, there's so much to do. You know, we do love to travel and, you know, enjoy ourselves with the family and so forth.

SCHUCH (voice-over): And so it goes for Bill Porter, who speaks so simply about such tremendous accomplishments. To him, building one better mouse trap after another is as natural a breathing.

(on camera): At what point in your life did you understand that you had superior intelligence?

WILLIAM PORTER: I don't think I have. You know, I think I'm fairly normal. Probably the difference is in my approach to things and just, you know, if there's something to be done, you do it.

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