NEW YORK (CNNfn) - Merrill Lynch & Co. is jumping into the online trading fray.
The investment bank signed a definitive agreement Friday to buy the online brokerage technology unit of securities firm D.E. Shaw & Co. The purchase will enable Merrill to offer online trading and other types of Web-based financial services, such as banking and commercial transactions.
The acquisition didn't include D.E. Shaw's Juno Online Services unit, which supplies Internet access and free e-mail to more than 6.5 million members.
Terms of the deal weren't disclosed, but the agreement was expected to close by the end of the first quarter after certain regulatory hurdles are cleared. Approximately 30 computer engineers from D.E. Shaw will come to work for Merrill under the agreement.
Merrill will also acquire a valuable database and a set of online software programs, which it will merge with its current Internet capability.
Online trading growing
The purchase comes as more and more people move to trade online. Industry experts say 10 million brokerage accounts will be able to trade on the Internet by year-end, nearly double the number now, and at least one analyst said Friday's deal is a logical extension of "what Merrill has done since its creation."
"Charles Merrill's vision was to bring Wall Street to Main Street," Mike LeConey, industry analyst for Security Capital Trading, said. "Now it turns out the concept of Main Street has to be refocused (to include the Internet)."
LeConey contended that online trading attracts people who are unlikely to seek out traditional brokers, including those self-employed, retired or living in smaller towns or rural areas.
Merrill (MER) has been a longtime critic of online trading, its vice chairman John Steffens once calling it "a serious threat to Americans' financial lives."
But increasing competition from online brokers, such as E*Trade Group (EGRP) and Ameritrade Holding Corp. (AMTD), has forced the company to reassess its Internet offerings. In October, Merrill launched a four-month Internet trial, offering its stock research free over the Web, an experiment one company official called a "home run" and that is expected to be extended.
The company also plans to make online trading available to 55,000 of its 4.9 million account holders by the end of March.
However, the company insisted it has not changed its strategy.
"We don't view (this deal) as an about-face at all," said Howie Sorgen, Merrill Lynch's technology officer. "Our business is not the discount brokerage business, but clearly we intend to take advantage of Internet technology and the whole online trading space."
No discount brokerage planned
Merrill has previously said it doesn't plan to compete directly with its less costly discount brokerage counterparts, which often offer services for as low as $5 a trade.
Sorgen instead described Merrill's Web offerings as an "electronic interchange," an opportunity for its brokerage clients to benefit from the skills of its financial consultants on a 24-hour basis.
"And those that have the necessity for online trading, as we gauge the suitability for our clients, we will make that available," Sorgen added.
Shares of Merrill Lynch gained 3-1/8 to 73 Friday afternoon.
Shaw returns to its roots
For Shaw, the deal marks another step toward returning to its core trading operations.
The New York-based firm specializes in using esoteric computer programs to spot potentially lucrative investments, build portfolios and manage risk.
Its founder and chairman, David E. Shaw, is a former Columbia University computer scientist who earned a fortune from those programs and whose love of technology is near-legend on Wall Street. After leaving Columbia to join Morgan Stanley in 1986, he founded D.E. Shaw two years later. In 1994 he was named to President Clinton's science and technology advisory committee.
Shaw entered into an alliance with Bank of America in early 1997, before the bank agreed to merge in a blockbuster $60 billion deal with Nationsbank.
In October, BankAmerica stunned investors by disclosing it suffered $372 million in trading losses as a result of the bank's relationship with Shaw. After BankAmerica cut most of its ties to Shaw, the firm slashed a quarter of its work force, closed a California office and sold a securities trading unit. Its FarSight Financial Services unit, a small online brokerage, remains up for sale.
A spokesman for the $1.7 billion hedge fund emphasized the move to seek a buyer for the unit was unrelated to the losses and strictly a result of the bank merger.
"The merger of BankAmerica and Nationsbank meant it simply made no sense to be in these businesses," Nick Gianakouros said.
-- by staff writers Nicole Jacoby & Steve Radwell