Merrill Lynch Will Offer Online Discount Trading
In a move that could spark price cutting across the brokerage industry, Merrill Lynch & Co. said that by December it will enable its 5.4 million U.S. customers to trade over the Internet at a sharp discount.
It is a bold and risky move for the flagship of Wall Street’s full-price, full-service brokerage fleet, and it is a powerful acknowledgment of the changes that online trading has brought to the financial services industry.
For investors, it will mean lower trading fees across the board, as the rest of the traditional brokerage industry is sure to follow suit, analysts said.
Indeed, Morgan Stanley, Dean Witter & Co., Citigroup Inc.’s Salomon Smith Barney unit, and PaineWebber Inc. reportedly are preparing online-trading offerings for later this year. With less fanfare, Prudential Securities last month unveiled its own, less-radical Internet and discount-trading strategy.
Another wave of consolidation may sweep the industry, as big firms scramble to acquire online trading firms as a way of gaining quick access to the business, experts said.
Internet trading volume has exploded to an average of 499,000 trades daily in the first quarter of 1999 from 190,000 trades a day a year earlier, according to Credit Suisse First Boston. Online trading now accounts for 14% of all stock transactions by individuals and institutions combined, the firm said.
Merrill’s customers today often pay commissions of $300 per trade, or 10 times the $29.95-per-trade price that it will begin offering on Dec. 1.
Another option Merrill will offer to customers with assets of $100,000 and up is unlimited, commission-free trading at a minimum annual fee of $1,500.
“They’ve undercut their entire business model of nice, fat commissions,” said William Doyle, an analyst with Forrester Research in Boston. “This is uncharted territory for these guys. They’re going to have to find some way to make it up.”
Merrill’s move is partly aimed at staunching the flow of customers to online brokerages, especially to Charles Schwab Corp., the San Francisco-based discounter that has become the biggest online brokerage.
It was no accident that Merrill chose the $29.95-a-trade figure: That’s the price--to the penny--that Schwab charges.
“When somebody as big as Merrill Lynch turns 180 degrees from its previous philosophy and attempts to adopt your business model, you don’t need to overreact,” Schwab spokeswoman Tracey Gordon said Tuesday.
In fact, Merrill’s move was seen as a bigger problem for its fellow full-service firms, most of which have yet to embrace online trading and have fought ferociously against discounting. Up to this point, Merrill has fought by their side.
Once it decided to act, Merrill was more aggressive than Wall Street thought it would be.
“Just when everybody thinks the quarterback is going to fall on the ball, he throws a long bomb,” said Bill Burnham, analyst for Credit Suisse First Boston.
Burnham said Prudential, for one, may have to rethink its pricing strategy of offering a $24.95-per-trade commission in addition to a annual management fee.
Merrill acknowledged that its price cutting may cost it brokerage revenue, but Chairman David H. Komansky said the firm expects to make it up over the long haul by extracting more advice-based fees--rather than commissions--from the assets it manages and by gathering more assets.
Investors calculated that Merrill’s brokerage profit margins will fall sharply, and they punished the firm’s stock accordingly. Tuesday was a bad day for brokerage shares in general, but Merrill stood out, dropping $8.75, or 10%, to $75.25 on the New York Stock Exchange.
Schwab fell $6 to $99.50 on the NYSE, and E-Trade Group Inc., the online trading firm, fell $5.19 to $39.31 on the Nasdaq stock market.
Some analysts called Merrill’s move revolutionary, but they noted the brokerage giant faces another potential revolution from within: Much of its corps of 15,000 U.S. brokers faces a serious loss of income from lower trading commissions.
One of the reasons Merrill was slow to make its move is that it had to spend time persuading its salespeople that the change was necessary and that their incomes would not suffer unduly in the long run.
For those brokers expected to be hurt most by the pricing changes, Merrill promised to make up their lost income directly for up to two years. Merrill declined to say how many brokers will be involved or how much such protection will cost the firm.
Still, experts say that other brokerages will try to take advantage of any disgruntlement among Merrill’s sales force by wooing brokers away.
At a news conference Tuesday announcing the plan, Merrill Lynch Vice Chairman John L. “Launny” Steffens said the firm plans to expand to 20,000 brokers by the year 2005 to keep up with what the firm hopes will be continuing growth in assets under management.
Ultimately, Merrill had no choice, analysts said. If it didn’t offer lower prices and Internet access, it faced erosion not only of its younger and less wealthy customers but of its millionaire heavy-hitters as well.
Donna DiIanni, a broker in Merrill’s Bridgewater, N.J., office, said many well-heeled customers there have moved some of their money to online brokerages to take advantage of the lower fees.
“We hope this [pricing plan] will encourage some of that money to come back,” she said.
There was some skepticism Tuesday about Merrill’s ability to pull off a difficult technological feat.
“You don’t just roll out of bed and decide to be a discount brokerage,” said Burnham, the Credit Suisse First Boston analyst. “It’s a completely different business.”
For one thing, Burnham said Merrill will have to gear up for far higher volumes of telephone calls than it handles today. It also must make sure it has enough capacity to keep its trading site from crashing in heavy volume, as has happened with numerous online firms.
Merrill President Herbert M. Allison said that another reason for delaying full implementation of the new plan until December is “to give us time to stress-test our [computer-trading] system.”
A glitch in an unrelated computer system may have provided Merrill with a foretaste of what happens when an Internet-based system encounters unusually high demand.
Part of the firm’s public Web site froze Tuesday as it was inundated by traffic from people seeking details of Merrill’s announcement.
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Online Trading
Internet brokerage accounts are expected to almost quadruple by 2003. Projected growth, in millions:
2003: 20.4 million accounts
Source: Forrester Research
What They Charge and What You Get
Online brokers usually charge about $8 to $30 per trade. Here is a sampling of brokerage commissions for the purchase or sale of 100 shares of Microsoft stock, as an example, and a list of some .Lof the features offered by each online broker, according to New York-based research firm Corporate Insight.
Suretrade/https://www.suretrade.com: $7.95
* Stock, option, mutual fund and bond trades
* Mutual fund and bond screening tools
Ameritrade/https://www.ameritrade.com: $8.00
* Stock, option, mutual fund and bond trades
* E-mail confirmations in lieu of paper confirmations
* Research and stock screening through MarketGuide
Datek/https://www.datek.com: $9.99
* Stock and mutual fund trades
* Mutual fund and stock screening provided by Thomson
* Streaming quote lists
Waterhouse/https://www.waterhouse.com: $12.00
* Stock, option and mutual fund trades
* Initiation of bond orders (trade placed with a representative)
* Mutual fund, stock and bond screening tools
NDB/https://www.ndb.com: $14.75
* Stock, option and mutual fund trades
* Mutual fund and stock screening tools
* Money-management tutorials
Discover/https://www.discoverbrokerage.com: $14.95
* Stock, option, mutual fund and bond trades
* Access to IPOs (accounts larger than $100,000)
* Access to Morgan Stanley Dean Witter research*
* Mutual fund and bond screening tools
Web Street/https://www.webstreet.com: $14.95
* Stock and option trades
* Unique “trading desk” layout
* Trade confirmations ‘pushed’ to users via a Java application
* Streaming Level II quotes* (detailed order flow data used by the most active traders)
E-Trade/https://www.etrade.com: $19.95
* Stock, option, mutual fund and bond trades
* Access to IPOs
* Access to BancBoston Robertson Stephens research*
* Active-trader accounts have access to Power E-Trade feature offering Level II and other detailed trading data
DLJdirect/https://www.dljdirect.com: $20.00
* Stock, option, mutual fund and bond trades
* Access to IPOs (accounts larger than $100,000)
* Access to DLJ research (accounts larger than $100,000)
* Mutual fund and stock screening tools
Fidelity/https://www.fidelity.com: $25.00
* Stock, option, mutual fund and bond trades
* Access to some Smith Barney research*
* Mutual fund and stock screening tools
Schwab/https://www.schwab.com: $29.95
* Stock, option, mutual fund and bond trades
* Mutual fund and stock screening tools
* Access to Credit Suisse First Boston and Hambrecht & Quist research (additional fee depending on account level)
* Additional fee required
