Individuals’ Thirst for Internet Stocks Boosts Online Brokers
Individual investors, spurred by hunger for Internet-related stocks, have increased online trading at least 30% just since September, industry executives say.
And on Monday, the focus on that trading surge--and what it might mean for Internet brokerages’ profits--helped boost shares of several of the firms.
“The world finally got wired,” said Kenneth Pasternak, chief executive of Knight/Trimark Group Inc., a “wholesale” trader that says it executes 40% of all online trades and counts Web brokers such as E-Trade Group and Waterhouse Investor Services as clients.
“It’s novices trading the Internet stocks and feeling the power of the Internet,” he said.
Individuals are trading stocks over the Internet almost 350,000 times a day, up from 250,000 in the third quarter, according to estimates by industry analysts and some firms. That’s about 25% of the 1.4 million trades the New York Stock Exchange and Nasdaq Stock Market say they execute each day, combined.
But small investors trade about 100 shares, on average, in each of these transactions, compared with the exchanges’ average of more than 1,000 shares per trade. So online brokers account for only a small part of the $55 billion of stocks that trade daily on U.S. markets.
Still, the business is growing dramatically. With seven trading days remaining in 1998, Charles Schwab Corp. and E-Trade, the two largest online brokerages, are showing online trading increases of more than 30% from the third quarter, according to people familiar with the companies.
Other firms report even greater percentage increases. “Our volume is up 50% in the last six weeks,” said Knight/Trimark’s Pasternak.
“The increase in volume is all in Internet stocks,” said E.E. Geduld, president of Herzog Heine Geduld Inc., the third-largest Nasdaq market maker, which executes trades for companies such as E-Trade.
Individuals are flocking to Web-based trading, analysts said, drawn by trades that cost an average of $15.75--far cheaper than telephone trades with discount brokers--and by Web sites that offer push-button execution, free stock quotes, news and broker research.
Online trading as an industry has “moved well past the early adopters,” said Lisa Nash, vice president of customer management at E-Trade. “People have tried it and now they believe in it.”
E-Trade, No. 6 online broker Ameritrade Holding Corp. and others are also spending more than $5 million a month on advertising to attract new users.
Industry growth of 30% is “a very realistic prospect,” said Bill Burnham, an electronic-commerce analyst with Credit Suisse First Boston.
Schwab, Ameritrade and E-Trade declined comment on specific figures, saying quarterly statistics will be released in January.
On Monday, optimism about the jump in trading helped drive Schwab shares up $7.31 to a record $51.69. E-Trade leaped $4.19 to $32.13 and Knight/Trimark jumped $1.75 to $16.63.
Still, E-Trade isn’t expected to be profitable this year or in 1999, owing in part to heavy capital expenditures. Fears about the long-term competitive picture in the business have kept shares of smaller firms such as Ameritrade and National Discount Brokers down this year.
Steve Franco, electronic-commerce analyst with Piper Jaffray Cos., said the pace of online trading growth won’t be sustainable if it’s coming from existing accounts only. Online brokers must continue to add customers.
Otherwise, “I don’t think they can carry these kinds of numbers going forward,” he said.
“If you look at the last 90 days, most of the positive movers have been Internet stocks, and that’s what these guys live and breathe on,” said Franco.
Pasternak has a broad perspective on the industry. E-Trade, Ameritrade, Waterhouse and Morgan Stanley Dean Witter & Co.’s Discover Brokerage Direct own about 28% of Knight/Trimark Group.
Knight/Trimark has executed about 229,000 Nasdaq and NYSE trades a day in December, and about 65% of them--or about 150,000--are delivered to Knight/Trimark by online brokerages or individuals. If Knight/Trimark accounts for 40% of all online trades, that would put the recent daily industrywide average at almost 375,000.
Alex Goor, president of Datek Online Holdings’ online brokerage, doesn’t see the explosive growth of online trading coming to an end soon.
“I don’t think this is an aberration. I think it’s a tremendous trend toward increased volume,” he said. “Online trading is an education. Doing it makes you do it more.”
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The Traders’ Stocks
Some of the leading publicly traded online brokerages and analysts’ estimates for their fiscal 1999 earnings per share (EPS):
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Ticker 52-wk 52-wk Monday ’99 est. Stock symbol High Low* Close Change EPS Ameritrade AMTD $26.81 $11.13 $21.00 +0.81 $0.02 DLJ DLJ 63.75 20.38 39.88 +2.63 2.84 E-Trade EGRP 35.25 10.00 32.13 +4.19 --0.39 Knight/Trimark NITE 20.25 4.50 16.63 +1.75 1.16 Natl. Discount NDB 13.38 8.50 9.50 --0.13 0.70 Charles Schwab SCH 44.44 18.50 51.69 +7.31 1.42
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* Not including Monday’s trading
Source: Times research, Zacks Investment Research
