Shares Online: e-Brokering eVolution

Friday 20th April 2001

By Francis Till

Almost seven years ago, in 1994, American company K Aufhauser & Co became the first brokerage firm to offer public internet trading, it says, even though the "internet" was still not yet a commercial entity.

The service was known as WealthWEB and it was acquired - along with its parent - a year later in 1995 by Ameritrade Holding Corporation (AHC). AHC re-launched the service as eBroker, the first internet-only broking service. 1995 was also the year America Online, Compuserve and Prodigy began offering internet service.

By 1996, there were already dozens of online brokers, all struggling for early adaptor footholds, but none was doing good job of replacing the telephone with the internet. According to a November 1996 ranking study of 55 American online brokerages that year, users of the services said they logged in for stock news, research and quotes - not to make trades. The Nasdaq was up the day the report was released, incidentally ... to 1287.

E-Trade, perhaps the best known of online brokerages, actually began by offering electronic quote and trading services to established brokers Fidelity, Charles Schwab, and Quick & Reilley. The company says it carried the first individual electronic trade (made by a Michigan doctor in 1983), but that can be said to be stretching the margins of the internet for effect by about a decade farther than even Ameritrade.

Indisputably, however, both E-Trade and Ameritrade grew rapidly during the early internet years at the end of the century to emerge as the two largest online brokerages in the world, and both owe much of it to alliances forged in 1996 with America Online, the world's largest internet service provider - which got that way, in part, by being sufficiently content rich to make its subscribers happy within the (advertising and subscription revenue rich) AOL "walled garden."

In November, 1999, Securities Industry Association president Marc E Lackritz said online trading had accounted for 37% of all retail trades in the first half of the year, up from 30% in the second half of 1998. The number of online trades had increased at that point by five times since 1997, and Mr Lackritz predicted by the end of 1999 there would be 5.9 million online accounts in the US, with $US374 billion in assets.

It hasn't turned out quite that way, but competition was heating up as the stakes rose in 1999, and even the most conservative houses began to take online trading seriously. Full-service brokers such as Merrill Lynch and Morgan Stanley Dean Witter, for example, finally launched ambitious online trading initiatives that year - directly into the face of a trading slump. Margins were shrinking, too, as services began slashing commissions - even, as in the case of American Express - offering free trades under special conditions. And the advertising spends were moving into the realm of astronomy - the top eight online services alone spent over $US750 million in 1999, $US1.2 billion in 2000.

Things have not gone well since. The implosion of the internet "bubble" saw some fast and furious trading - but the market valuations of the large internet brokers took huge hits as well.

Ameritrade, for example, had cruised along at under $US5 for most of its life, only to be catapulted to nearly $US60 in the months leading up to April 2000. Now, it is trying to hold on to a $US5 in a 52-week period that has seen it dip well below $US4. E-Trade has suffered similarly. Having shot from $US5 to over $US60, it now trades in the $US5-8 range. And those stories are typical of the online brokers, many of whom have cut back operations dramatically, been swallowed for pennies on the dollar, or simply folded up in the last year.

The customer base is still there for the larger companies, at least. Ameritrade lists 1.4 million brokerage clients; Datek, renowned as the fastest and most efficient of online traders with over 100,000 trades a day, boasts 770,000, often high volume, traders; and E-Trade, after tying up with Ernst & Young last year to add gravitas and nous, is hedging against a shrinking US base by moving into global markets with outlets in Australia, Canada, Denmark, Japan, Norway, South Africa, Sweden, the UK, Korea and - as of April 2 - Hong Kong, bringing its combined broker and banking accounts for the quarter ending in March total to 3.7 million, up 41% from 2.6 million accounts in the same quarter last year.

But that's the top. There are almost 150 listed online traders in the US alone, and trade volume is dropping like a stone in a well. In 1999, the group executed nearly 1.2 million trades a day. Since the decline began last April, daily online trades have fallen 30%, to 834,000, investment bank Roberson Stephens says.

Among the hardest hit, perhaps, are services that offer barebones online brokering as a sideline or as part of a portal content aggregation concept - and there are many of them, even in New Zealand.

Quicken, for example, the highly regarded maker of financial software, opened a New Zealand website in July last year, promptly added a trading system (Quick Broker), and then took it all back in December, choosing to pass its trading clients to DFMainland and centralising other operations in Sydney.

URLs

Datek: www.datek.com

E-Trade: www.etrade.com, www.etradeaustralia.com.au

Quicken: www.quicken.co.nz

DFMainland: www.dfmtrade.com

Ameritrade: www.ameritrade.com, www.ebroker.com, www.aufhauser.com

Merrill Lynch: www.ml.com

Morgan Stanley Dean Witter: www.msdw.com

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