Securities Firm Seeks a Greater Presence : Trading: Otra wants to supplement its clearinghouse function by also becoming a retail brokerage.

Otra Securities Group Inc. in Glendale runs a tidy little clearinghouse for small stock brokerages. People buying and selling stock through those brokerages have their transactions “cleared” by Otra, which transfers the cash to the sellers and the stock to the buyers.

It’s not sexy but it can be profitable. Otra, founded in 1986, earned $1.6 million on revenue of $12.6 million last year--a respectable 13 cents of profit per $1 of business. And Otra’s performance is starting to appeal to more people. Its own stock, which fetched a mere 50 cents a share two years ago, is now approaching $6 on the over-the-counter market.

But Otra isn’t always in charge of its own fate.

“One of the things that’s always bothered me about being a wholesale clearing firm is you don’t have any control over your revenue base,” said William R. Stratton, Otra’s co-founder, chairman and largest stockholder. “When we come to work, we don’t know if we’re going to clear 3,000 trades that day or 1,000. We have to be prepared to do 3,000, but we also have to be profitable at 1,000.”

So Stratton, 43, believes that Otra must diversify to accelerate its growth. To wit, he’s building his own staff of stockbrokers so that Otra can itself become a retail brokerage, perhaps later this year.

In effect, the retail brokerage would enable Otra to create its own demand for its traditional clearing services. No longer would Otra’s business be totally dependent on how many trades its outside brokerage customers send its way.

Otra actually clears an average of 1,700 trades daily. Of course, the huge brokerage firms such as Merrill Lynch & Co., Prudential Securities Inc. and PaineWebber Inc. clear millions of shares traded each day. They also have long employed Stratton’s proposal of combining their far-flung brokerage system with their own clearing, or “back office,” operations.

Below these giants are dozens of mid-sized regional brokerage firms with hundreds of brokers that nonetheless use outside clearinghouses to save cash. But even they are potential customers that so far have been out of Otra’s league.

Otra serves small brokerages that aren’t household names, firms such as Tamaron Investments in Denver and Chelsea St. Securities in Dallas. (Otra has no customers in Southern California, however.) Some of these firms specialize in thinly traded “penny stocks” that normally trade for less than $5 a share, although Tamaron President David Lutz said his firm is one that avoids penny stocks.

Today Otra clears trades for 26 broker-dealers, which have about 80,000 customers who actively trade stocks, Stratton said. That’s down sharply from the 42 broker-dealers it had at year-end 1989, owing in part to the general shakeout in the securities business since the 1987 crash.

In particular, many penny-stock brokers have gone bust since the October, 1987, stock market crash, said Joe Ricketts, chairman of Ameritrade Inc., an Omaha clearinghouse. They failed not only because of the crash but also because of regulatory efforts since then to clamp down on the abuses that have been associated with certain penny-stock brokers, such as fraud and inflated commissions, Ricketts said.

Legitimate and successful small brokers that have remained “seem to have gravitated toward Otra,” in part because many clearinghouses--including Ameritrade--now avoid penny-stock and other small brokers, Ricketts said.

Stratton conceded that early on, Otra “made bad decisions on doing business with people we shouldn’t have done business with,” particularly in terms of granting those firms credit that was secured by stocks that the brokers left with Otra as collateral. Without naming names, Stratton said some of those stocks eventually became worthless. Now, he said, Otra deals with its brokers on a cash-only basis, so its credit problems no longer exist.

Regardless, why would any successful stockbroker want to be part of Stratton’s plan to build a new brokerage?

Stratton claims that what he can’t offer in prestige he’ll offer in higher earnings. That is, he said he’ll let his brokers keep 50% or 60% of the commission on each trade they generate, compared with the 28% to 33% many brokers now earn at the major securities firms.

Charles M. Spear, chairman of Spear Financial Services Inc., a Glendale company that operates a discount brokerage firm, said Stratton is right that many brokers’ commissions have been squeezed as their firms try to cut costs. For that reason, “there are brokers with considerable books of business that could be drawn away” if Otra can snag them, Spear said.

But Spear said that if Otra plans to pay higher commissions to its brokers, it’ll have to keep its overhead costs very low, “and the question is can they run themselves lean enough to make money?”

By all appearances, Stratton keeps a close eye on costs. Otra’s offices are nearly Spartan; Stratton’s own office is cramped and modestly furnished, featuring only pictures of some of 12 thoroughbred race horses in which he owns partial interests.

His desk is institutional. “This desk was in this office when we moved in five years ago,” he said. “We didn’t throw it away, we just used it.” His salary? About $100,000 a year.

Back in the firm’s early days, Stratton remembers handling a paltry 35 trades the first month Otra was open. But the business grew fast enough that Otra went public in 1987 at $2.50 a share, which gave the company about $2.2 million for expansion.

Otra has managed to keep its revenue growing partly by charging individual investors an “annual maintenance fee” of $25. The fee covers Otra’s costs of holding their stock certificates, sending them quarterly financial statements and other services. On average, Otra collects about $15 to $17 of every $100 in commissions that those investors pay their brokers, Stratton said.

Otra, in fact, collects the whole commission first as part of settling a stock trade, which occurs five business days after the trade is executed by the brokers. Otra subtracts its fee, then sends the rest of the commission to the seller’s broker. In turn, it dispatches the stock certificates to the buyer.

Otra also buys and sells stock for its own account and lends money to investors on margin accounts. It also acts as transfer agent for about 60 small companies; that is, it keeps track of who owns the companies’ shares. But all of those activities account for only 5% of Otra’s total revenue, while clearing dominates with the other 95%.

In forming Otra, Stratton put up most of the $700,000 that he and co-founder John M. Whitesides used to get started, and today Stratton still holds a 47% stake in the company, which now has a market value of about $8.5 million.

Whitesides, a friend of Stratton since they were in junior high school together in Salt Lake City, previously had worked in the clearing business. So they combined his contacts with Stratton’s money to get Otra off the ground.

An accountant by training, Stratton had spent the previous decade running his family’s fence-manufacturing business. The business was sold in the early 1980s, which gave Stratton the cash to start Otra. He and Whitesides settled on the name Otra in part because in Spanish it means “other”--as in other challenges--and also because it is an acronym for “on the road again.”

Otra Securities Group Inc. at a Glance

Otra Securities Group Inc. primarily provides securities clearing services for small broker-dealers nationwide. The Glendale-based company also provides stock-transfer services for corporations, makes markets in more than 80 stocks and evaluates business plans for companies.

For fiscal years ended Dec. 31; In millions