Downbeat Prediction Sets Off E-Brokerage Stock Slide
Online brokerage stocks plunged Tuesday on worries that small investors’ fascination with point-and-click trading is waning.
The slide was triggered by a report from Bill Burnham, an analyst at Credit Suisse First Boston, who told clients that online trading volume in the current quarter is likely to slip below the level of the second quarter--the first time such a drop would have occurred.
Total online trading volume in July appears to have barely topped that of June and was “clearly lower” than activity in April, the report said.
After surging 47% in the first quarter and 15% in the second quarter, Burnham projects that third-quarter online trading volume will drop about 5%.
The downturn stems in part from the steep declines in many Internet-related stocks that have been favorites of many individual investors since online trading began to mushroom last year, analysts say.
Of course, no one expects online trading to simply dry up, with millions of Americans using the Web to research and make investments.
“I’m not worried about the long-term health and vitality of [online brokers]. That’s still very much intact,” Burnham said. “Unfortunately, the reality is that . . . online-trading volume is going to have a very big impact on these stocks.”
Online brokerages typically derive 70% or more of their revenue from trading commissions, Burnham said.
Shares of industry leader Charles Schwab slumped $4.69 to $37.75 on Tuesday, E-Trade Group tumbled $4.31 to $24.69, and Ameritrade Holding Corp. sank $2.75 to $21.25. Ameritrade was forced to cancel a secondary stock offering last week when it couldn’t find enough buyers.
After peaking in April along with many other Net stocks, online brokerage stocks have been sliding for months on concerns that trading growth was slowing from its previously blistering pace.
The ongoing decline in many Net stocks has, not surprisingly, dampened many investors’ enthusiasm for playing those stocks.
Trading volume in a sample group of Net and other tech stocks was 54% lower in July than in April, Burnham wrote.
“When there’s a run-up in stocks, there’s lots of volume as people ride the wave,” said Mary Burnes, manager of Nasdaq trading at brokerage Edward Jones in St. Louis. But “when the music stops, everybody rushes out until the party starts again. You see these swings in volume based on these run-ups and declines.”
Also, stock trading in general historically ebbs during the summer, said John Payne, a consultant at Cerulli Associates in Boston.
Despite the cyclical trends, investors will increasingly trade online, said Gideon Sasson, the president of Schwab’s electronic brokerage unit. “The Internet is the backbone of investing. That will not change,” he said.
Still, Burnham recommends that investors steer clear of the brokerage stocks until at least September, when the picture on third-quarter volume will be clearer.
On a positive note, the industry continues to add new investor accounts at a strong clip. Overall, accounts grew 9.4% in the second quarter, according to Deutsche Banc Alex. Brown.
The number of accounts surged at some large firms, jumping 42.9% at E-Trade, 24% at Datek Online Holdings and 18% at Ameritrade.
Online brokers have sought to diversify their product lines to reduce reliance on commissions, said Dan Burke, analyst at Gomez Advisors, a Concord, Mass.-based research firm. E-Trade, for example, is buying Net bank Telebanc.
“Just look at the [Web] sites and what they’re offering now,” Burke said. “It’s all about planning and mutual-fund screening and educational content. It’s not just about cheap rates and fast execution.”
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Harder Times for Net Stocks
New issues of Internet-related stocks have gotten a much chillier reception from investors in recent weeks. Many new issues, though surging initially, have found little support from investors in the days following their public offerings. A look at four Net-related new issues that have come to market since mid-July (prices are daily closes except as noted):
Tibco Software
(Business: computer networking solutions)
July 16, intraday peak: $41.38
July 13 IPO price: $15.00
Tuesday: $23.88, down $1.88
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MP3.com
(Business: music distribution)
July 20 IPO price: $28.00
July 21 intraday peak: $105.00
Tuesday: $33.25, down $6.38
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Packeteer
(Business: network management solutions)
July 27 IPO price: $15.00
July 29 intraday peak: $32.75
Tuesday: $23.25, down $3.63
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Quokka Sports
(Business: sports programming)
July 27 IPO price: $12.00
July 28 intraday peak: $15.88
Tuesday: $8.06, down $1.19
Sources: Times research, Bloomberg News
Slamming the Brokerages
Shares of major online brokerages and investment banks dove Tuesday, continuing a steep decline from their 1999 peaks. Most reached their highs in early spring.
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52-week Tuesday Tuesday Decline Stock (ticker symbol) high close change from high Wit Capital (WITC) $38.00 $20.19 -$3.69 -47% Charles Schwab (SCH) 77.50 37.75 -4.69 -51 Knight/Trimark (NITE) 81.63 37.03 -4.22 -55 DLJ Direct (DIR) 45.63 18.63 -2.50 -59 Natl. Discount Brok. (NDB) 93.00 32.13 -4.94 -65 Ameritrade (AMTD) 62.75 21.25 -2.75 -66 E-Trade (EGRP) 72.25 24.69 -4.31 -66 J.B. Oxford (JBOH) 25.75 8.81 -1.06 -66 Siebert Financial (SIEB) 70.63 19.75 -1.75 -72
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Source: Reuters
