Online trading volume continued to grow in the third quarter, but the rate
of growth slowed compared to previous quarters, according to a new report
to be fully released next week by Credit
Suisse First Boston
The report said that online trading grew 14 percent in the third quarter,
but was less than the 16 percent increase in the second quarter and the 25
percent increase in the first quarter. The drop in the growth rate is
attributed to the growing volatility of the market during the past quarter.
The report points out that online firms, such as E*Trade, Ameritrade, and Datek, saw their market shares decline or
remain flat. But more established discounters, such as Waterhouse Securities, Charles Schwab, and Fidelity, saw their market shares increase.
"What happened was that as markets became more volatile, the new,
online-only firms found it tougher to grow than the existing firms," said
Bill Burnham, vice president and senior research analyst for electronic
commerce at Credit Suisse First Boston Technology Group. "The existing
firms benefited from the fact that they have a huge reservoir of customers
that they have yet to convert to online trading.
"What we saw this past quarter was the acceleration in the conversion of
existing customers to online trading at Schwab, Fidelity, and Waterhouse,"
The report named Waterhouse as the big winner this quarter because it
increased its market share to 10.5 percent. With this growth, Waterhouse
leapfrogged Fidelity into the No. 3 spot, and was within just a few tenths
of a percentage point of upsetting long-time No. 2 E*Trade, according
to the study.
Looking forward, the most significant development in the industry will
be intensifying competition, which may force smaller firms to become part of
larger financial institutes, Burnham said.
"Unless you have a blank check for a $100 million for advertising, online
trading is pretty much a closed industry to you," said Burnham. "We saw
that the door to new entrants in the industry was essentially shut tight,
essentially by E*Trades' $100 advertising campaign, and also because of the
huge technology expenditure now required to stay in the leading edge."
The companies not in the top ten are likely targets for takeovers by large
financial institutes, Burnham speculated.
"I think in the short-term we could see some mergers in the second-tier
firms," said Burnham. He said the only way the smaller firms will survive
is by merging amongst themselves as well as "selling a piece to a very
large financial institute that could provide them with some capital."
Burnham said there has been some discussion about mergers and acquisition,
but declined to comment or name any specific companies.
Second-tier online trading firms include National Discount Brokers, Web Street Securities, and Brown & Company.
Burnham, however, noted that companies in the top ten, like E*Trade,
Ameritrade, and DLJ Direct, may
manage to stay independent.
"You hear rumbling now and then about merger discussions," said Burnham.
"But each of those could survive on their own and they are not under any
pressure to merge with anybody, although it's always an opportunity."
As online trading has boomed along with the Internet economy, it has been
accompanied by a rise in consumer complaints about unreliable access during
critical moments, when individual investors have the most money on the
line. With online trading surging, Web brokerages have tried to keep adding
capacity to their systems.
Still, as recently as September 10, equipment failures at Ameritrade and
Waterhouse stymied online traders for a short time on a day that the market
dropped more than 3 percent.
The report also highlights that the average commission charged by the top
ten online trading firms remained flat in the quarter as the companies
continued to focus on differentiating themselves through their enhanced
products and services rather than their prices. The average commission
remained flat at $15.75 per trade. The study said it did not anticipate any
major price movement in the coming quarter.