| BUSINESSWEEK ONLINE : NOVEMBER 15, 1999 ISSUE | ||||||||
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| COVER STORY
Online Brokerage Stocks: Is Their Time Coming Again? After the third-quarter bummer, they're bouncing back. But all is not clear yet It seemed like a classic case of bad timing when full-service brokers Merrill Lynch (MER) and Morgan Stanley Dean Witter (MWD) finally launched ambitious online trading initiatives just as the online discount brokerage business was slumping. Due in large part to a cooling of the euphoria over Internet stocks last summer, online brokerages suffered nearly an 8% decline in average daily trading volume in the quarter ended on Sept. 30 -- the first quarterly volume decline ever in their short history, according to a Nov. 3 research report from U.S. Bancorp Piper Jaffray. Stocks of discount brokers -- including Charles Schwab (SCH), E*Trade Group (EGRP), and Ameritrade (AMTD) -- plummeted to less than half their May highs and remained stalled through most of October. In just the past week, however, the online trading business has shown signs of picking up. Total market volume increased by 11% last month, making October the second-best month ever, says Tim Butler, an analyst with Pacific Crest Securities. And November is starting out abnormally strong, with the first three trading days all scoring volumes of more than 2 billion shares. A recent crop of benign economic reports is calming investor fears about rising interest rates and could lead to sustained rallies in some of the high p-e tech and Internet stocks that online traders love -- and lead to better revenues for online brokers in the fourth quarter, Butler believes. EVERYBODY'S DOING IT. While plenty of questions remain about how the full-service firms such as Merrill will fare in the hypercompetitive online world, the recent surge in trading volumes means that some battered Net brokers are poised for a rebound, analysts say. The imminent repeal of the Glass-Steagall Act, which is expected to lead to more merger and acquisition activity in financial services, also could mean that some brokerages will be seen as takeover targets and move higher, says Butler. Meantime, the popularity of online trading continues to grow. In a Nov. 4 speech at the annual meeting and trade show of the Securities Industry Assn., SIA President Marc E. Lackritz noted that online trading accounted for 37% of all retail trades in the first half of 1999, up from 30% in the second half of 1998. The number of online trades per day has increased five times since 1997, and by the end of the year there'll be 5.4 million online accounts with $374 billion in assets, he noted. Perhaps in part due to such optimism -- which was bolstered by the higher trading volumes -- Nov. 4 may have marked the start of a turnaround for online brokers. E*Trade Group, the leading E-brokerage pure play, rose 5 3/16 points, or 20%, to close at 31 3/8, its best day in months. A report from U.S. Bancorp Piper Jaffray that day commended the firm for acquiring the most accounts of any online brokerage and gaining a greater share of total trading volume during the third quarter. E*Trade is Butler's favorite stock in the group because it has an aggressive management team that is continuing to broaden its lineup of services. E-FINANCE KING. Other pure plays also scored double-digit percentage gains on Nov. 4. Ameritrade added 2 5/16 points, to close at 19 1/16, and National Discount Brokers (NDB) gained 3 13/32 to close at 28 1/32. Charles Schwab, meanwhile, rose 2 3/8 points, or 6%, to close at 40 7/8. It is still regarded as the king of e-finance group because of its leading share of online accounts, total customer assets, and trading volume. But Piper Jaffray's report that Schwab's share of trading volume slipped from 27.8% six months ago to 23.3% in the current quarter probably tempered Nov. 4's gain. Still, Schwab is a formidable competitor to traditional brokerages, analysts say. "If there is a blue chip in the e-finance space, Schwab is it," says Butler. Despite the latest rally, investors can find plenty of reasons to remain wary of the online brokerage group going forward. "The big things that caused negative pressure on the stocks are still out there," says Lehman Brothers analyst Rich Repetto. First and foremost, competition is getting more intense. Online brokerage firms are slashing commissions for active traders and high-net-worth accounts in order to hold onto their most profitable customers. E*Trade announced in August that active traders would pay as little as $4.95 for some trades (instead of the firm's usual rate of $14.95), and American Express said in October that it would offer free Web trading to customers with accounts over $100,000. Merrill and Morgan Stanley's entries into online trading will also ratchet up the competition, especially over high-end clients, says Repetto. "LUKEWARM." Another threat to the industry's long-term health is the advertising war that's now under way. Repetto estimates that the top eight online brokers will spend $1.2 billion on marketing in 2000, up from $750 million in 1999. "I don't think it's a mistake, but I think the ante has been raised," he says. Firms that can't afford to spend on advertising will probably cut commissions as a way to attract new accounts, fueling the price war. He's currently "lukewarm" on both the firms he covers, E*Trade and Ameritrade. "I don't think everyone can be winners," he says. Finally, just one negative economic report is all it'll take for interest rate fears to resurface, driving the market down and putting renewed pressure on trading volumes. Online brokerages were probably punished too severely by investors when volumes slumped in the third quarter and deserve to bounce from here. But that hardly means all the concerns about their long-term performance have been lifted. By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS Merrill's E-Battle COVER IMAGE: Inside Merrill TABLE: Merrill's Online Strategy...Has Many Pitfalls TABLE: Leaping into Cyberspace TABLE: Merrill's Web Presence TABLE: Merrill Towers over Schwab... CHART: ...But Schwab's Market Cap Tops Merrill's...And Schwab's Asset Growth Blows Merrill Away TABLE: A Slew of Partners The Architect of Merrill's Digital Future VIDEO: Q&A with John McKinley ``The Winds of Change Are upon Us'' (extended) ONLINE ORIGINAL: Online Brokerage Stocks: Is Their Time Coming Again? INTERACT E-Mail to Business Week Online | |||
