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Mysterious Midas Has a Big Head Start in a Unique Electronic Trading Niche With a Major Emphasis on Encouraging Koreans to Buy U.S. Stocks Electronically

What Can One Man Do? He Can Offer Investors a Cheaper Way to Trade and Start a Revolution

Midas Trade Could Be Golden

(This is a reprint from Equities Magazine, Summer, 2005. Printed by permission from New Equities Publishing, LLC)

As the world in general and South Korea in particular rush headlong to replace human beings with pixels dancing on a computer screen, a Southern California start-up is doing all it can to help -- and, not incidentally, create wealth for its shareholders.

MidasTrade.com Inc. (OTC: MIDS) has installed proprietary software at some of South Korea's largest broker-dealers, thereby allowing both institutions and individuals to buy and sell U.S. stocks and bonds, as well as options and futures, in real time electronically, at commissions and surcharges that are far less than those charged by taking traditional trading avenues.

According to founder and Chairman Brad Eckenweiler, South Korea may be the world's most wired nation. Nearly 75% of its households have broadband connections, and the country's 48.6 million residents are served by 25,000 Internet cafes, many of which are open round the clock. More than half of all security trades in the country are executed online. "The market in Korea is extremely large, and the Koreans' ability and desire to trade stocks electronically is pretty well documented," Eckenweiler says.

Here in the U.S., where barely 33% of households have broadband access, MidasTrade is now offering virtually the same technology, albeit three years after introducing it in Korea. Earlier this year, Midas Securities, LLC, the company's wholly owned operating subsidiary, rolled out four products. With names like TradePro and ProTrader, they offer various levels of data, news and real-time trading as well as search capabilities and direct access to NYSE, Nasdaq and AMEX plus OTC Bulletin Board and Pink Sheet securities. Commissions range from $9.95 to $13.95 a trade. By Thanksgiving, the company hopes to be promoting TradePro and its companions in a national advertising campaign.

Eckenweiler, a 52-year-old former venture capitalist, intends to expand to Canada (beta testing there was successfully concluded in February), Europe, Hong Kong and eventually the rest of China -- anyplace pixels can replace people. In short, he wants MidasTrade to offer its electronic securities trading system on a worldwide basis. It's an ambitious business plan, to be sure, but for the moment virtually all of the company's cash flow, and certainly its greatest promise for near-term profits, come from its South Korea operations.

Right now, MidasTrade is the only firm that offers direct electronic trading for Koreans who want to buy U.S. securities and, considering the cost and time involved in duplicating its capabilities, this first-to-market advantage is likely crucially important to Midas' long-range fortunes.

"Competitors would have to go through everything that we've gone through," Eckenweiler says. "They would have to understand all of the Korean firms' accounting systems and business practices. And they would have to convince KSD to change its software and move in another direction after three and one-half years of uninterrupted service from us."

Korea Securities Depository is a government agency, the exclusive provider of custodial and depository services in Korea for all securities transactions, domestic and foreign. Working with Midas Securities, KSD has launched the Home Trading System, to extend for Korean traders MidasTrade's online trading platform to foreign markets beyond the U.S.

The electronic genie that makes all this possible is called the Global Direct Access Network, or GDAN. After several years of developmental work, Midas Securities first tested GDAN in early 2002 in South Korea. That July, the system became operational at a small broker/dealer, Leading Investment and Securities, Ltd. A second brokerage firm, also small, signed on that October but soon dropped out because of internal problems. Plans to expand into China via Hong Kong stalled.

During the following year, MidasTrade burned through capital, wooing but not winning additional clients. In August 2003 it introduced a second generation GDAN, some five times faster than the original software. Meanwhile, two Korean newspapers reported that little Leading Investment, after adopting GDAN, had increased its online accounts to more than 600 from just 50, while its e-trading volume rose to $6 million from $400,000.

"The larger firms sat back and watched to see if there were any problems," Eckenweiler recalls. "But we never had a serious problem; we never missed a day of trading." The larger firms' caution is understandable: GDAN is a comprehensive program that MidasTrade technicians seamlessly integrate into a host firm's own operational software. Any glitch in GDAN could bring down a broker/dealer's entire system. Moreover, it is up to each firm's registered representative to persuade customers to use the technology -- and to explain the intricacies of the U.S. securities markets.

"Unfortunately, it's a long process," Eckenweiler says. "In Korea, the markets are totally transparent. There are no market-makers or anyone else involved. But once you get into the U.S., you have to deal with market-makers, short sellers, and other complications. So it's quite a different world."

Also, Koreans have reputation for not acting on a concept until they fully understand it. "Most of them read the owner's manual before they buy a car," Eckenweiler says. "So you can imagine the level of education that goes along with using our process."

He suspects that this may be one reason that Koreans have yet to use MidasTrade to buy or sell fixed-income securities. "I don't know that broker/dealers are comfortable yet," he says. At some point, he believes, the dam will break and Koreans will start buying U.S. bonds of all kinds. "But as of today's date, even though we've offered it, no one has expressed a desire to do that yet."

But even without making headway in fixed-income securities, MidasTrade has continued to sign on South Korean firms for its GDAN technology. In early 2004 it recruited its first major company, Good Morning Shinhan Securities (now, how many American firms have such a friendly name?). It began U.S. trading via GDAN that April.

In November a second Big Five firm signed on, LG Investment and Securities (since acquired by Woori Finance Holdings Co., whose stock is Big Boardlisted), and in December a third Big Five firm, Daishin Securities. Although progress seemed to continue early this year when MidasTrade recruited E*Trade Korea, a small and exclusively electronic securities dealer, problems arose, costing the company months of trading revenue.

For one thing, the third generation of GDAN -- featuring fully translated screen tabs, comprehensive charts, drop-down menus and directories, and other bells and whistles -- was nearing completion, and both LG and Daishin wanted to launch with this version. For another, Pershing, recently acquired by Bank of New York, assumed Bank of NY's duties as custody agent and clearing house. Pershing had modest international experience, and with the language barrier and other difficulties, it was some months before GDAN's rollout was back on track.

Midas' new software has more going for it than just that it is entirely in Korean. "It's also very light on their system, so it doesn't take up a lot of memory," says Eckenweiler. "And it's dynamic in that it runs our data feeds very easily so they get all the real-time data, which we also supply. So we get paid not only for the transaction, we also get paid for the data."

Meanwhile, Eckenweiler built up MidasTrade's lean staff -- currently the equivalent of no more than 25 full-time employees -- and recruited a veteran of the financial services industry to be president and chief executive officer of both MidasTrade and Midas Securities. Jay S. Lee joined the company in 2002 and became president and CEO the following year. Lee, whose background includes international banking and investment banking as well as securities, is fluent in both English and Korean. Since then, Eckenweiler has added two politically connected Koreans to his advisory board -- a retired chairman of the Korea Securities Depository and a former chairman of the Korea Securities Dealers Association.

That Eckenweiler waited several years before bringing in a full-time professional manager to run the company reflects his philosophy for this corporate start-up. "We've been really frugal," he says. "I still don't take a salary. We've pretty much done this on a shoestring." Indeed, by Eckenweiler's reckoning, only about $5 million has been invested in MidasTrade since it was founded.

The addition of LG Investment and Securities -- now Woori Investment and Securities -- and Daishin Securities (the largest broker/dealer in South Korea in terms of overall share transactions) may well be the tipping point. It could provide enough volume to push MidasTrade solidly into the black and compel South Korea's other broker/dealers, including the Big Five's remaining two, to sign on.

The economics for joining are compelling. Currently, each telephone order for foreign stocks is dinged with a $50 or $60 desk charge by the correspondent U.S. broker/dealer plus a $100 fee by the custodial agent, such as Pershing. Those fees are eliminated when trades are electronically placed through MidasTrade, which means money in the pockets of the traders, their broker/dealers, or both.

Eckenweiler can hardly wait until Woori and Daishin are aboard and trading. Since the last cash infusion in April, his company has hovered at or barely above the breakeven point. "The advent of Daishin will guarantee that we're profitable," he predicts.

For MidasTrade.com shareholders, that would be a long-awaited blessing. They have watched the stock top $7 in spring of 2004, as the Good Morning Shinhan Securities deal was announced, and then plunge to $1.12 a year later. Meanwhile, they have had to maintain their faith in the company despite the lack of a form 10-K or even a rudimentary balance sheet or cash flow statement.

Patience. Eckenweiler hopes to publish financial figures beginning with 2006's first quarter. "Right now, no one else is excited about going to Korea. But when they see our numbers, they will be. So there's a certain benefit in the fact that no one knows how well we're doing or not doing."

For all that, Eckenweiler says that it wasn't his intention to create an electronic superhighway between South Korean traders and American securities. As a venture capitalist , Eckenweiler was funding the development of software by Koreans for use in the U.S. by American traders. Problems arose, and his technical partners became discouraged and, one by one, left the company.

Eckenweiler, however, was undaunted. "While I was in Korea, I realized that there was a huge appetite for U.S. stocks. But back then, in 1999, there was no way to do it because capital flight rules were still in place." Those restrictions had been enacted to counter the 1998-1999 Asian financial crisis. South Korea paid back the money it borrowed from the International Monetary Fund and, in 2001, it relaxed its capital flight rules.

"I saw an opportunity that the people on the software side didn't," Eckenweiler says. "They really didn't understand what the possibilities were in the Korean market as far as the U.S. is concerned. None of them wanted to pursue a connection between Korea and the U.S."

But, unfettered by a technocrat's tunnel vision, Eckenweiler saw a future in which Koreans would buy and sell U.S. securities online and in real time, using his company's software. "Once the obstacles were overcome, especially with the onset of e-commerce and Internet trading, I just couldn't for the life of me figure out why Koreans wouldn't trade electronically if they had the opportunity. Everyone else left, but I stuck it out and eventually we ended up where we are today."

Just how successful MidasTrade will become remains to be seen, of course. Essentially, Eckenweiler wants to create the Microsoft Windows of electronic securities trading. If he's unlikely to achieve that degree of success, at least consider the potential of GDAN 3.0 in a world that's rapidly digitizing. Brad Eckenweiler may be just about where pioneer stock commission discounter Chuck Schwab was on May Day in 1975. That would be a sweet reward for his patient shareholders.

RISKS: MIDS is thinly traded and highly volatile. It takes a steel stomach to buy any Pink Sheet stock, and to buy a Pink Sheet stock with no financial figures requires an armor-plated stomach. Furthermore, to buy a stock that is almost entirely dependent on South Korea's stock-trading activity, which could virtually disappear should war break out with North Korea, requires either super-armor plate or excess investable capital.

Share Data
Recent Price: $2.69
52-Week Range: $4.50 - $1.12
Shares Outstanding: 14.5 million
Balance Sheet Data Not Available

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