On-Line Brokerages Suffer Continued Downturn

Philip Morton, Investors Offshore

12 March 2001

Two of the US's leading on-line brokerages told on Friday of declining volumes in February. Ameritrade said that it added 39,000 new accounts during the month, but that average daily trade volume in February fell 13 per cent to 114,000 from the previous month; T D Waterhouse said that new accounts had increased 3 per cent in the month but that total trades per day fell 10 per cent on average, to 135,800.

Both companies said they expected to report losses for the current quarter. "We will continue to manage expenses carefully," said Waterhouse chief executive Steve McDonald. "Given current market conditions, we will defer discretionary spending, reduce our full-time employee count through the normal attrition that is part of our business, and prioritise projects with shorter payback periods." Ameritrade had already announced some layoffs in January, but is thought to be avoiding too much retrenchment for the time being.

On-line trading has also been declining sharply in the UK, with the number of online trades falling by nearly 30 per cent to 693,000 in the last three months of 2000, according to ComPeer, the financial services research group. Volumes in Continental Europe have held up better, although the rate of increase in on-line accounts fell from 200% in the first six months of last year to only 30% in the second half of the year.

The general collapse of trading volumes has not yet been matched by any fall in the number of brokerages; in the UK for instance the number of online stockbrokers vying for investors' business has tripled to more than 30 in the last 18 months, and new sites open almost weekly. Of course this is just the result of planning that took place last year, and it is only a matter of time before a wave of consolidation sets in, probably later in 2001.

Some stand-alone on-line brokerages will go bust; many of those owned by large, secure financial institutions will simply fold their tents and steal away; but some will merge. Buying the shares of on-line stockbrokers would therefore be an interesting speculation - not for the faint-hearted, but if one could work out which brokerages will be bought and which will buy, there could be money to be made. That's if all their shares have now stopped falling, which certainly wasn't the case on Friday: Ameritrade shares continued near a two-year low; Charles Schwab fell more than 6 per cent to $18.24 and E*Trade tumbled more than 11 per cent to $8.17.

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