COMMISSION REVENUES FOR TOP-TIER ONLINE FIRMS DROP 30% IN PAST HALF-YEAR.
—April Kapahar (Financial NetNews)
Commissions generated by the top 12 online trading firms during the third quarter dropped 30% from its peak two quarters ago, according to a report by Boston, Mass.-based consulting group Celent Communications. Commission revenues were generally on the upswing since early 1998, until they peaked in early 2000. At their peak, aggregate commission revenues for the top online firms reached nearly $3.5 billion in the second quarter of 2000; the current figure hovers under $2.5 billion, according to Celent’s study.
“The reduction is due in part to sharply lower trading volumes, but also because of ever increasing competitive price pressure,” wrote Fritz McCormick, author of the report. He said market share for online firms is diminishing as full-service firms enter the scene at a rapid clip. That, combined with low trading volumes, has led to this fallout, he said.
Celent analyzed the commission revenues taken in by 12 major online firms, including Ameritrade, Charles Schwab & Co., Datek Online, DLJdirect, E*Trade Securities, Fidelity Investments, National Discount Brokers, Suretrade and TD Waterhouse. Although Celent predicts that the value of online assets will grow quickly, reaching $3 trillion in 2003, versus $2 trillion today, McCormick said the market for self-directed investors is saturated. To weather the storm, online brokers will need to make greater inroads in the marketplace beyond the first generation of tech-savvy self-directed investors, according to McCormick.
Self-directed investors typically have low account balances, around $35,000, and are not willing to pay for research, analytical tools or the services of financial advisors, according to the study. The Web broker’s best hope lies with mainstream investors, who typically have account balances that hover around $100,000 and are migrating to the Internet.
Online brokers will have to attract investors who will want services that have typically fallen under the full-service umbrella—and who will be courted by full-service firms as well, he said. To capture them, online brokers will have to adapt, which may mean anything from opening branches to offering advice, McCormick said. The study found that only 35% of online assets are held by online-only firms—the remaining 65% are held by bricks-and-clicks players.
These findings generated lukewarm reactions from many of the firms. A spokesman from Suretrade said it has all its bases covered. It doesn’t need to attract the high-net-worth crowd because that is the territory of sister firm Quick & Reilly, he said. Suretrade will continue to cater to the active trader crowd and believes the segment will remain profitable.
Ann Nelson, v.p. of marketing at Ameritrade, disagreed with the idea that the majority of the firm’s clients could be summed up under the label “self-directed,” she said. The firm’s investors cannot be made to fit one category. She added that the firm is attracting more long-term investors through 401(k) plans, in which it provides the self-directed brokerage option.
Finally, a Datek spokesman disagreed with the report’s conclusion that the market is saturated, emphasizing the firm’s recent performance. It recently overtook Ameritrade in U.S. Bancorp Piper Jaffray rankings, he pointed out. McCormick agreed that Datek posted solid growth in accounts during the third quarter, attributing it to the firm’s aggressive marketing campaign and its strong back-office technology. However, McCormick’s approbation was measured: He said many firms, including Datek and Ameritrade, are posting respectable growth in terms of the number of accounts opened, but are suffering in terms of asset growth in assets and share price.
The 30% decline that the study found corresponds to the 12 firms in aggregate—individual firms may have fared better or worse. |
