Big Brokers Unplug Unprofitable Online Trading
Sat Jun 8, 9:09 AM ET
By Greg Cresci
NEW YORK (Reuters) - Cut your losses and move on. That's the mantra adopted by most Wall Street firms that have dabbled in the online stock trading business.
With individual investors showing no sign of regaining their once voracious appetite for online stock trading, financial giants like Merrill Lynch & Co. and Morgan Stanley have decided to shed online units to cut costs and focus on more traditional forms of investment service.
The retreat amounts to a vote of no confidence for the online banking and stock trading sector, which has fallen from favor since the bull market ended in 2000.
"While we were riding the curve of a rising market, it was easy for all participants to say 'We would like a piece of this business,"' said Karen Vernamonti, chief financial officer of J.P. Morgan Chase's online brokerage arm, Brown & Co.
The move reflects a shift in strategy by some of the major players on Wall Street as they try to focus harder on profitable business lines while walking away from others.
"You're seeing an industry in consolidation and an industry where scale is incredibly important, with certain firms making decisions that they are not going to be long term players in that scale game," said Vernamonti, who also was finance chief at the online brokerage unit of Credit Suisse First Boston before the investment bank sold it.
Last month, Merrill pulled the plug on a two-year-old, $1 billion online bank and brokerage joint venture with global banking giant HSBC Holdings Plc . Merrill had trumpeted the move as one that would "create the model for client service in the 21st century" and "reinvent the manner in which quality banking and investment services are delivered."
Morgan Stanley, for its part, sold its online trading accounts to Bank of Montreal for $106 million last month in an acknowledgment that it saw no future in online stock trading.
"A lot of these guys were late to the game to begin with and sort of felt forced to have an online offering to supplement their offline practice," said an industry analyst who wished to remain anonymous. "But the efforts have never really paid off for them to the extent they had hoped."
Merrill, the nation's biggest brokerage, still offers online trading at a discount through a special Web site but barely advertises its existence. And you would never know about Brown & Co. from J.P. Morgan's main Web site. The same relative obscurity goes for the Cititrade arm of Citigroup Inc. , the No. 1 U.S. financial services firm.
"At this point, scale has become so important that if the Wall Street firms didn't retrench, they would continue losing money in those ventures," said Justin Hughes, an analyst at Robertson Stephens.
Other heavy-hitters on Wall Street, such as Goldman Sachs Group and Lehman Brothers Holding , stayed focused on their institutional business and decided against high-profile online ventures.
That has left only a committed few, like Charles Schwab Corp. and E*Trade Group Inc. , as major online players. And their stock prices have been languishing for many months at levels far below their all-time highs.
"I think the biggest beneficiary from the consolidation would be Schwab, but it certainly doesn't hurt E*Trade and Ameritrade," said Hughes.
DOWNTRODDEN
The once high-flying online brokerage industry has fallen on hard times over the last two years, as markets have swooned and individual investors have moved to the sidelines.
"The one overriding theme so far is lack of profitability," said Steven Pierson, a managing director at Putnam Lovell Securities. "These businesses had rapid growth, threw off a lot of profits, and then people built platforms and technology and call centers to support perpetual growth. But growth stopped."
Revenue from trading commissions has fallen sharply industrywide, making the online brokerage business less appetizing for Wall Street titans focused on fee-based advisory services.
Stock trades funneled through the Internet accounted for 15 percent of overall volume in U.S. equity markets during the first quarter, down from a high of 30 percent in the first quarter of 2000, according to J.P. Morgan.
The average number of online stock trades fell to about 680,000 a day from more than 1.2 million in the first quarter of 2000, the bank estimates.
Most analysts agree that long-term prospects are bright for online brokerages and electronic financial services in general. They cite the benefits of low costs from operating over the Internet and point to continuing growth in the number of online accounts.
The number of online brokerage accounts has nearly tripled since late 1998, to more than 20 million today, and customer assets in Web accounts stood at $920 billion at the end of the first quarter, according to J.P. Morgan. Yet profits remain elusive.
"The big Wall Street firms are largely focused on profitability -- and this wasn't making money for them and their clients weren't demanding it," Hughes said. "Of the big brokers, nobody is really left." |
