9/16/99 N.Y. Times News Serv. (Page Number Unavailable Online)
1999 WL-NYT 9925901801
New York Times News Service
c. 1999 New York Times Company
Thursday, September 16, 1999
Market Place: Signs Of Dropoff In Online Stock Trading
By JOSEPH KAHN
Although some stock market pundits are still worried about irrational
exuberance, Bill Hatcher, a retiree who trades stocks and options online,
worries more about misplaced melancholia.
"The sensation mongers out there have scared everyone to death," said
Hatcher, referring to the zeitgeist of the online chat rooms he constantly
monitors. "Whether it's Y2K, or inflation, you just don't see as many happy
people out there trading now."
It may just be the laws of gravity. But the outlook of individual investors
has been taking a dive. And that is bad news for online brokerage houses, which
have seen trading volumes ebb recently. If the trend holds, investors are on
course to trade fewer shares online this quarter than they did in the previous
three-month period, making it the first such sustained decline in Internet
trading volume for the nascent online brokerage industry.
Summer is rarely a record-breaking time for stock trading. But trading
volume - on which online brokers depend mightily for revenues - slumped more
than just about anyone expected in July and August. September, at least so far,
has not offered much relief.
A few of the indicators: Charles Schwab, the largest online brokerage firm,
reported Wednesday that average daily revenue from trades by its customers
dropped 14 percent from July to August, a figure that some analysts viewed as a
leading indicator for the industry. Credit Suisse First Boston noted that
trading in a sample basket of high-flying Internet stocks was off 2 percent for
the second quarter. And two brokerage analysts on Wednesday downgraded earnings
estimates for Knight/Trimark Group, the biggest market maker for shares traded
on the NASDAQ, including many big Internet stocks.
Scott Appleby, online brokerage industry analyst for BancBoston Robertson Stephens,
reduced his estimates for Knight's earnings per share for the July-
September quarter to 31 cents from 36 cents, or 14 percent. That is the second
time in a month he has lowered his profit targets for the market maker, whose
revenues have skyrocketed in tandem with heavy trading in Internet stocks and
individual investors' migration to online brokerage houses. In early August, he
revised estimates for Knight downward from 40 cents. Knight's shares closed
Wednesday at $30.625, down $1, or 3 percent.
"It's an industry-wide issue," Appleby said. "We expected a seasonal trough
in the summer. But the volume has been unexpectedly poor."
Few believe that America's love-affair with online trading has faded. On the
contrary, most analysts say that Internet brokerages have just begun to tap a
huge pool of savings still stored in banks and in accounts with full-service
brokers. Americans have 70 million brokerage accounts, but only 10 percent of
them permit online trading. And as more people move their assets online, taking
a more active role in their investment decisions, trading volume tends to rise
substantially.
Moreover, the decline in trading in the third quarter comes after a nine-
month growth frenzy that saw Internet broker transactions double in size. By
the end of June, they accounted for one in six stock trades made in America.
That pace was not viewed as sustainable.
Still, even a temporary trading slump could be hazardous to the online
brokerage industry's health. Schwab, for example, derives almost half its total
earnings from trading commissions, and most of its trades are now conducted
online. For smaller brokers - there are three score of them competing for
Internet investors now - the dependence on trading commissions is far greater.
All have seen sharp drops in their share prices. Schwab shares have fallen by
half since April and closed Wednesday at $36.4375, up 6.25 cents. Etrade has
tumbled 63 percent in the same period, closing Wednesday at $23.5625, down
46.875 cents.
What's more, many of the leading Internet brokers are geared for growth, not
for a grinding battle for market share. ETrade and Ameritrade, two of the best-
known online brokers, are spending hundreds of millions of dollars to promote
themselves, sacrificing earnings today for rapid growth tomorrow. Ameritrade
said Wednesday that it planned to spent $200 million over the next year on
advertising, about as much as Mazda spent advertising cars and trucks last
year.
"ETrade and Ameritrade depend on commission much more than Schwab," said L.
Russell Keene, a brokerage analyst at Putnam, Lovell, de Guardiola & Thornton.
He has a relatively bearish "hold" recommendation on both stocks.
Most of the Internet brokerages will report third quarter earnings in early
October.
Keene said he now saw the first and second quarters of this year as
exceptional. Internet investors, Internet stock and Internet brokerages found
themselves then in a virtuous circle. Investors opened new brokerage accounts
and seized on high-flying Internet stocks, including the brokerage firms
themselves, sending share prices skyward.
"That really fueled an anomaly in trade volumes," Keene said. "If you ignore
the first and second quarter and look at the trend, what we see this year is
less worrying." He said stock trading volumes were still up over year-earlier
periods, even though the increase was less robust than it was in the recent
past: Third quarter commissions grew 40 percent in 1997 over 1996, 30 percent
in 1998 over 1997, and seem likely to grow 20 percent in 1999 over 1998, he
said.
Other measures of online investment activity are also slowing, but not as
much as trading commissions. Customers at Schwab, which reports certain
operating statistics more regularly than most of its rivals, added $8 billion
to the company's assets under supervision in August, allowing the firm to keep
pace with expectations. Schwab also reported that it had 6.3 million customer
accounts in August, up from 6.2 million in July and not far off analysts'
predictions.
Etrade and Ameritrade seemed to have slowed more, Keene said. He expects that
Ameritrade will add about 50,000 new accounts for the quarter, down 50 percent
from account growth in the second quarter. ETrade, Keene estimates, will add
about 200,000 accounts, well off its stellar performance in the second quarter,
when 332,000 customers opened new accounts at that firm.
"There are other indicators of a slow down in the quarter," he said. "But it
is by no means a terminal slowdown. The long-term trend is still healthy." But
the summer swoon may give a clue as to how fickle retail investors are. They
have fired the rise of Internet brokerages and then given them the shivers.
"Just like we were seeing people act like cheerleaders for companies before,
now you often see people just fan the fires of negativity," said Joe Andras, an
electrical engineer in Laguna Beach, Calif., who manages his own stock
portfolio and trades online. "It can be frustrating, but it shows you that you
have to look long-term."
23:16 EDT SEPTEMBER 15, 1999
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NEWS SUBJECT: Business Stories; Newspapers' Section Fronts; Internet; New
York Times News Service; Stock Market News; Securities
Exchanges (BZZ FRT NET NYTM STK XCH)
PRODUCT: Internet (DIT)
Word Count: 1121
9/16/99 NYT (No Page)
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