CONSOLIDATION IMMINENT FOR ONLINE BROKERS
by Peter Topolewski
Slumping markets and stiff competition from full-service brokerages have
sped up the clock on what many analysts say is an overdue consolidation
among online brokers. Companies like E*Trade (ET, $12), Ameritrade (AMTD,
$9), and Datek have been hit particularly hard by the Nasdaq doldrums.
With the tech sector suffering, self-guided investors who capitalized on
low online trading fees are today not only trading less, they're also
looking for more advice from full-service brokers.
While online trading accounts for nearly 70% or more of all trades by
individual investors, since the first quarter of 2000 the number of trades
per account has fallen 48%. To make matters worse, 2000 saw the average
assets per account among the top online brokers fall 29%. The situation
has not improved any in 2001. The top six online brokers now average
$43,000 per account, which pales in comparison to the average $300,000 per
full-service brokerage account.
The overall effect has been a dramatic drop in online brokers' own share
prices. While more diversified online brokers like TD Waterhouse (TWE,
$13) and Charles Schwab (SCH, $23) have fallen by about 40 and 50%
respectively since 1999, E*Trade is off about 75%%, Ameritrade is down
85%, and CSFBDirect (DIR, $4) is down roughly 90%.
The longer the Nasdaq slump persists and the longer traders stay away from
the market, the more precarious becomes the position of many standalone
online brokers.
Like every sector of the Internet industry, the online brokerage sector is
extremely saturated. It was only by virtue of a roaring Nasdaq -- and
thus huge trading volumes -- that this sector remained so heavily
populated for so long.
Now that the pie has been reduced in size, it simply will not feed 140
different online brokers much longer. While companies like E*Trade are
doing what they can to squeeze profits from a slowing market (by charging
customers fees for accounts left inactive for more than a quarter, for
instance), some analysts are predicting consolidation will leave as few as
a dozen online brokers in the market.
Among the top companies, Ameritrade and Datek are prime acquisition
targets. Charles Schwab and TD Waterhouse remain the cream of the crop.
Even these, however, will find stiff competition with full-service
brokerages. For example, companies like Morgan Stanley Dean Witter (MWD,
$75) and Merrill Lynch (MER, $67) have done an excellent job integrating
low-cost Internet trading into their offerings.
by Peter Topolewski
Slumping markets and stiff competition from full-service brokerages have
sped up the clock on what many analysts say is an overdue consolidation
among online brokers. Companies like E*Trade (ET, $12), Ameritrade (AMTD,
$9), and Datek have been hit particularly hard by the Nasdaq doldrums.
With the tech sector suffering, self-guided investors who capitalized on
low online trading fees are today not only trading less, they're also
looking for more advice from full-service brokers.
While online trading accounts for nearly 70% or more of all trades by
individual investors, since the first quarter of 2000 the number of trades
per account has fallen 48%. To make matters worse, 2000 saw the average
assets per account among the top online brokers fall 29%. The situation
has not improved any in 2001. The top six online brokers now average
$43,000 per account, which pales in comparison to the average $300,000 per
full-service brokerage account.
The overall effect has been a dramatic drop in online brokers' own share
prices. While more diversified online brokers like TD Waterhouse (TWE,
$13) and Charles Schwab (SCH, $23) have fallen by about 40 and 50%
respectively since 1999, E*Trade is off about 75%%, Ameritrade is down
85%, and CSFBDirect (DIR, $4) is down roughly 90%.
The longer the Nasdaq slump persists and the longer traders stay away from
the market, the more precarious becomes the position of many standalone
online brokers.
Like every sector of the Internet industry, the online brokerage sector is
extremely saturated. It was only by virtue of a roaring Nasdaq -- and
thus huge trading volumes -- that this sector remained so heavily
populated for so long.
Now that the pie has been reduced in size, it simply will not feed 140
different online brokers much longer. While companies like E*Trade are
doing what they can to squeeze profits from a slowing market (by charging
customers fees for accounts left inactive for more than a quarter, for
instance), some analysts are predicting consolidation will leave as few as
a dozen online brokers in the market.
Among the top companies, Ameritrade and Datek are prime acquisition
targets. Charles Schwab and TD Waterhouse remain the cream of the crop.
Even these, however, will find stiff competition with full-service
brokerages. For example, companies like Morgan Stanley Dean Witter (MWD,
$75) and Merrill Lynch (MER, $67) have done an excellent job integrating
low-cost Internet trading into their offerings.
