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Low volume saps the shares of e-brokers

Shares of online stockbrokers fell today as analysts expressed concern that low trading volume will cut into revenues.

Shares of some online stockbrokers set 52-week lows today as analysts expressed concern that low trading volume will cut into revenues.

A report by Credit Suisse First Boston indicated that the that the lower volume in the Nasdaq over the past few weeks means that people are making fewer trades, and paying fewer commissions to brokers.

"These companies lose their economies of scale when their volume drops," said Jason Lind, a research analyst at U.S. Bancorp Piper Jaffray who covers the industry. When volume declines, the brokers find it more difficult to cover their fixed costs, he noted.

Scott Appleby, an analyst at Robertson Stephens, lowered his earnings estimates on E*Trade, Ameritrade and Knight Trading, but maintained his "buy" rating on all three stocks.

In late trading, shares of E*Trade fell $1.81, or about 12 percent, to $13.94. Earlier, they hit a new 52-week low of $13.13. The shares have fallen about 38 percent this month and 48 percent so far this year, after reaching $60.43 during the past 52 weeks.

Ameritrade dropped 58 cents to $11.19. Earlier in the day, it set a 52-week intra-day trading low of $10.50, about one-fourth its one-year high of $43.66. The shares are down about 34 percent this month and nearly 49 percent so far this year.

Shares of Knight, the only company of the three posting a profit, rose $1.56 to $27.63. However, the shares are down about 27 percent for the month and 40 percent so far this year, respectively. They have traded as high as $65.38 over the past year.

DLJ Direct fell 63 cents to $8.50 and hit a new 52-week low of $8.25 today, down from a high of $45.62.

In his report, Appleby said the average daily trading volume Nasdaq-listed stocks has fallen nearly 18 percent. Indeed, the ten lightest days of the exchange this year occurred this month.

"While we expected more moderate growth in the June quarter, the successive quarters of 50 percent-plus growth and the tepid market has created a more severe decline than we had initially anticipated this quarter," Appleby wrote. "We now believe e-brokerage June quarter sequential transactions will decline by 20 to 25 percent."

Appleby lowered his quarterly estimates for operating earnings for E*Trade to zero from 1 cent, and revenue to $335.8 million from $366.2 million.

For Ameritrade, the analyst lowered revenue estimates for the quarter to $147.5 million from $171.5 million, and reduced earnings to a loss of 1 cent per share from an income of 4 cents.

Appleby said he expects Knight to post a lower profit of 50 cents a share for the quarter, down from 68 cents, on revenue of $279.3, compared with the previous estimate of $381.8 million.

While times may be tough for the brokers over the short term, the ones who can ride out the low volume and get revenue from other sources may fair better. "Bear markets are a fact of life," Lind said. "You can guarantee that every few years, you're going to get one."

For example, E*Trade has expanded into other businesses such as banking in part to hopefully ride out market downturns and compete with other banks that are muscling into its turf.

Other analysts say that lower commissions will not necessarily sink the brokers. "(The brokers) could have been profitable at any point over the last two years," said Jim Marks, a director of e-commerce equity research at Credit Suisse First Boston.

Marks points out that profit margins for the brokers were in the 50 percent range if marketing costs are excluded. He described marketing initiatives as a lever that can be "pushed forward when times are good and pulled back when times are bad."

The number of trades per account have spiked during the quarter. Marks said that Charles Schwab customers averaged one trade per quarter during the past ten years. That number rose to 2.8 trades during the most recent quarter. Other brokers have seen a similar jump. Ameritrade and E*Trade averaged about 5 trades a quarter over the past two years, but jumped to around 11 and 8, respectively, last quarter.

The depressed stock prices could also lead companies to make acquisitions in order to gain new accounts.

"When the valuations were higher, the cost to acquire a new account through acquisitions was in the thousands, while a company could do it on their own (through marketing) for about $300," Lind said. Buying another company did not make sense, but that equation could change as the stocks set new 52-week lows.