Net gains to be had when going for broke online

It seems almost weekly that a new online stock trading system is rolled out in the Australian market, offering more and more service for a seemingly shrinking price tag. While the benchmark $21 trade is even looking shaky, still new play-ers enter the market.

The more cynical of industry pundits suggest these groups are merely buying mar-ket share so they can list themselves on the stock exchange and then make a killing on the back of the Internet bubble where anything with a ".com" after it is

It seems almost weekly that a new online stock trading system is rolled out in the Australian market, offering more and more service for a seemingly shrinking price tag. While the benchmark $21 trade is even looking shaky, still new play-ers enter the market.

The more cynical of industry pundits suggest these groups are merely buying mar-ket share so they can list themselves on the stock exchange and then make a killing on the back of the Internet bubble where anything with a ".com" after it is automatically excluded from any of the rules surrounding sensible investment. Others point to the US where the sheer size of the market means a reasonable profit could potentially be extracted from the market on a high volume basis. Somer even says it is the future of financial services distribution.

Certainly demand for the service is booming, both in the US and Australia. In the US, online stock trading rose 49 per cent during the first quarter of this year as investors, attracted by the chance to buy and sell Internet stocks at reduced commissions, opened 1.2 million new accounts, according to US analysts Piper Jaffray.

Trades rose to an average of 496,074 transactions a day in the first quarter, and have more than doubled in nine months, Piper Jaffray says. Nearly 8.5 mil-lion investors have opened their own accounts, playing the market with US$523 billion in total, a rise of 24 per cent for the quarter.

"The numbers are phenomenal," says Steve Franco, electronic commerce analyst with Piper Jaffray and the report's author. "They show that online brokerage is not just a segment of the discount brokerage industry: it's going to be the way retail investors expect delivery of financial services."

The surge in online trades has been driven by increased investor interest in trading shares of companies that do business on the Internet as well as commis-sions that average less than US$16 a trade, about one-tenth the cost of a full-commission trade through a US broker.

E*Trade, which saw customer trades rise 65 per cent to 65,800 daily, best among the top 10 US online traders, regained the number two industry ranking it lost last quarter to Toronto-Dominion Bank's Waterhouse Investor Services, according to the Piper Jaffray figures. Charles Schwab remained number one with a 27.9 per cent share of trades.

Increased volume has strained brokers' ability to handle transactions. Schwab's Web site recently crashed for the seventh time this year and the second time in a week.

Separately, E*Trade says it has passed 1 million accounts, up from 909,000 at March 31, compared with Schwab's 2.5 million online accounts and Fidelity In-vestments' 2.3 million online accounts - though the world's biggest fund company ranks five in trading volume. The three firms had two-thirds of industry ac-counts at the end of the first quarter.

E*Trade executives said the company has about 1 million members signed up for its free Destination E*Trade web-site, which offers research, mortgage and in-surance information. E*Trade hopes those members will later become revenue-producing trading customers.

"Destination E*Trade has gained a lot of traction," Franco says. "They've also been winning back some hyperactive traders they had been losing to the Dateks of the world."

Datek Online Holdings, the number four online broker, saw trades rise 49 percent during the quarter.

It also appears the big are getting bigger and the small are getting the pic-ture. In the top 10 rankings, the gap has widened between the six biggest bro-kers and the next four, Franco says. Six months ago, Ameritrade's market share was 6.9 per cent compared with 4.3 per cent for DLJ. That gap is now 8.3 per cent to 3.8 per cent in market share.

The average online account holder made 3.76 trades per quarter, up 22 per cent. The average new account cost $187 in advertising and marketing, down from $205 in the third quarter of 1998.

Online brokers like E*Trade and Ameritrade are adding mutual funds and interna-tional stock trading as a way to guard against any decline in US stock trading, Franco says.

"Asset-gathering is key," he says. Schwab accounts average $60,000 to $70,000, triple the E*Trade average.

Putnam Lovell de Guardiola & Thornton analyst Greg Smith estimated that online trades accounted for 8 per cent of US share volume and one in eight US stock trades in the fourth quarter of 1998. That's lower than an earlier estimate of one in seven trades, by Credit Suisse First Boston.

According to the research firm Gomez Advisors, there are now more than 7.5 mil-lion online investor accounts, and that number is expected to grow to 18 million by 2001.

Top 10 Online Brokers in the 1st Qtr

Broker Average Daily Trades Market Share (%)

Charles Schwab 138,250 27.9

E*Trade 65,800 13.3%

Waterhouse 57,800 11.7%

Datek 50,345 10.1%

Fidelity 49,981 10.1%

Ameritrade 41,252 8.3%

DLJ Direct 19,062 3.8%

Discover 13,838 2.8%

Suretrade 11,000 2.2%

NDB 6,580 1.3%

Source: Piper Jaffray

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