Who says nobody has figured out how to make money on the Internet?
According to a new study by Piper Jaffray, online trading commissions will reach $2.2 billion in the year 2001, more than eight times the amount collected in 1996.
"The online trading area is one of the stand-out successes in the history of e-commerce," said study author Bill Burnham. "This is indicative that the industry is entering a very high-growth phase."
The explosion of online trading may spell trouble for traditional full-service brokerages, which have been eyeing the growth of the new industry as an increasing threat.
According to the study, online trading will account for 60 percent of discount commissions by the year 2001 and 10 percent of all retail stock brokerage commissions.
"The real threat to full service brokerages isn't that their current user base is going to flee, but that the next generation of potential customers will start out in the online world and will never migrate," said Burnham. The traditional houses are prevented from joining the online stampede by fear of "alienating their existing brokers," according to the report.
"It's a catch-22 situation," said Burnham. "Every step they take toward the Internet, they risk alienating traditional brokers. Buy if they don't make that move, they risk missing out on the next generation of investors."
One such full service brokerage is Piper Jaffrey itself. Burnham conceded there was "a lot of hand-wringing going on" at his firm.
"Like any other firm," he added.
The report ranked Schwab the No. 1 online trading company, with 35 percent of the market. Fidelity Investments was second, followed by E*Trade.
"Online investing via PC is growing like crazy," said Schwab spokesperson Tom Taggart. He said the discount broker has 908,000 active online accounts with $67 billion in online customer assets, up from 336,600 accounts and $23.3 billion in assets at year end of 1995.
The Piper Jaffray study also predicted the online trading market would more than double from $268 million in 1996 to $628 million in 1997. The report credits the growth of the Internet and online trading venues, and increasing consumer confidence in online security.
While commission revenues have skyrocketed, average commission rates have plunged almost as fast, down nearly 50 percent from $30 to $35 in 1996 to $15 to $20 this year, where the reports expects they will stabilize.
But online brokers disagree.
"I think commissions are going to continue to go down, and we expect that," said Taggart. "Prices are going to be very competitive."
Taggart said that even with falling commissions, online investors would be looking for more than just a bargain. "They're asking 'what tools are you giving me online to help me as an investor.' That's what reaches the mass market. That's what's next."