While upstarts such as E*Trade, Ameritrade and others chip away at Schwab's market share, the company is aggressively fighting back with marketing, price cuts and acquisitions.
Just today, the San Francisco-based company said it will acquire CyberCorp, an electronic trading technology and brokerage firm, for about $488 million in stock. It also said it is cutting commissions for active individual traders from $29.95 to as low as $14.95.
And just last month, Schwab acquired U.S. Trust in a deal worth about $2.9 billion, hoping to attract individuals with a high net worth while keeping those who may jump to asset-management firms as their assets grow.
Schwab's activity is understandable: Its customers accounted for 27.5 percent of online trading volume at the end 1998, but that share slipped to 22 percent at the end of 1999, according to research by U.S. Bancorp Piper Jaffray.
During the same period, E*Trade's share grew from 11.8 percent to 15.3 percent.
E*Trade and Ameritrade have relied on cutthroat commissions to attract lower-end clientele. And the button-down financial powerhouses such as Merrill Lynch, Morgan Stanley Dean Witter and PaineWebber, which have come online recently, are poaching those clients who want more personal attention as their treasure chests fill.
Nowhere was the battle between the two firms more apparent than during the Super Bowl this past weekend, as Schwab sponsored some of the pregame show while E*Trade plastered its brand all over the halftime show. Rival Ameritrade decided against advertising during the Super Bowl.
Besides offering low-priced trades and marketing heavily, E*Trade is mimicking Schwab to some extent by adding banking, insurance and others services for investors.
"E*Trade may have begun as a cheap online brokerage, but they have set their sights well beyond that," said Jason Lind, a research analyst at U.S. Bancorp Piper Jaffray. "(E*Trade) wants to be a dominant player in the space, and they are aggressively expanding their services."
Still, E*Trade also has to be wary as Schwab fixes its sights on nabbing the bread-and-butter of many online brokerages: the active traders.
"Schwab has done a great job in the middle segment," said Amar Mehta, an analyst at CIBC World Markets. "But the landscape is getting much more competitive now, and Schwab will have to go after the other two segments."
While shares of online brokers in general are well off of their highs of last year. Schwab stock is hovering around $35, well below its 52-week high of $77.50. E*Trade has dropped more than half its value and is trading around $20--no where near its 52-week high of $72.25. Schwab has a market capitalization of about $29 billion compared with E*Trade's $5.05 billion.
Just last week, E*Trade said it planned to offer bonds to raise about $500 million, with a large chunk of it, about $350 million, going toward general corporate purposes, including financing future growth.
While stocks in this industry may be lagging in part because of investors' growing attraction toward business-to-business stocks, analysts noted that traders are also nervous about the high reliance on revenues based on trading fees. This revenue may plummet if the market turns sour.
"When there is a raging bull market, you can't help but make money--trading volumes are up," Lind said. "When there is a bear market, these revenues will dry up, and those who are depending on them without another source of revenues aren't going to survive."
A key to survival, analysts agreed, is diversifying to a range of financial services, from Net banking to insurance and mortgage products. With greater assets per account, these firms would have a better chance of surviving while waiting for the bears to return to hibernation.
On this front, both Schwab and E*Trade have much work ahead. Lind said that the average assets per account for Schwab is about $105,000 and about $24,000 for E*Trade.
"(Schwab) has seen that once their customer assets reach the $5 million point, those people start to leave," Lind said. "That is the reason they acquired U.S. Trust."