Online trading gathering steam, forcing brokerages to change ways

The Outlook

Much of the excitement could vanish if the bull gives way to a bear

June 20, 1999|By Rachel Sams

CHARLES SCHWAB Corp., a key barometer for gauging the performance of Internet trading firms, stunned investors when it said that stock trades in May slipped 28 percent from April. April had been a record trading month for Schwab.

The revelation shook Schwab, the country's largest discount and Internet broker, and the industry. Schwab's stock plunged 13 percent the day of the announcement, while other large Internet brokerage firms, including Ameritrade Holding Corp. and E*Trade Group Inc., fell 16 percent and 15.2 percent respectively.

Is such a downturn in business to be expected, or does it signal a significant slowing in the online trading business? How important has online trading become, and what is its potential?

Michael A. Flanagan

President, Financial Service Analytics, Philadelphia

One month does not make a trend; it does, however, raise a flag. High volume is necessary to justify high valuations. What we're seeing is a classic example that volume and the market do not continue to go up.

Online trading is perhaps the most significant factor influencing the industry today. It has caused the traditional full-service brokerage industry to change the way business is done. The industry is undergoing a momentous metamorphosis. It's a revolution, rather than an evolution, brought on by technology.

Online trading is going to continue gathering market share in the industry. Pure Internet trading firms will continue attracting new customers, and traditional full-service brokers are beginning to incorporate Internet trading into their full-service package. Even full-service customers are going to be doing more online trading in the future with their full-service firms.

Several firms are re-evaluating their strategy. None to my knowledge has come out and said explicitly that they are going to emulate Merrill Lynch's strategy of targeting both full-service and Internet trading customers, but I expect that to happen.

Sheldon Grodsky

Director of research, Grodsky Associates Inc., South Orange, N.J.

Internet stocks are in the middle stages of what could be an enormous bear market. I think most could fall a lot more. Investors are being massacred -- they're looking at themselves in the mirror and saying, "What am I doing?"

Online trading is here to stay -- the genie's out of the bottle. The trend towards online trading vs. talking to a broker will continue. I don't think we've seen the end of that. The number of online brokerage firms will probably decline. There won't be enough online brokerage business to support them. A lot of the trading is bull-market froth that will not be here in the next bear market.

People will continue the long-term trend of bringing transaction costs down for people who just want to buy and sell. Day trading will probably decline from recent levels, although it may still be above where it was last year for a while. The peculiar phenomenon of people thinking day trading is a way to make a living is going to come to an end. It's a very hard way to make money.

Mitchell Peremel

Vice president, Peremel & Co., online trading firm, Pikesville.

I think the downturn is to be expected. April was a huge month for Internet stocks. Those stocks have come down a lot in the last month and a half. Some people have probably curtailed buying and selling for the short term as the stocks settled into new trading ranges.

I think a lot of the Internet stocks have seen their peaks for a long time. When these stocks hit their highs, they really got out of hand. They went too far too fast. A lot of investors that paid top dollar are going to be sitting with these stocks for a long time before they reach their peaks again.

I think there is a long-term trend of investors realizing the Internet is a viable option to help them with their investing. That doesn't mean they don't need to call their broker -- some investors need to be able to bounce an idea off of a broker.

I think all brokerage firms will have to be online in the future. All clients are demanding it -- not necessarily online trading, but they want access to their accounts.

Meg Vandeweghe

Professor at R. H. Smith School of Business, University of Maryland, College Park; former managing director, J. P. Morgan, New York.

I think the downturn is to be expected after a record month. More and more people are realizing that it is very difficult for individual investors to trade individual stocks and beat the market. Many people are putting their money into index mutual funds instead.

Clearly, online trading has very much changed the business. I think those changes will continue. More and more people will use online trading. Major players like Merrill Lynch are offering the ability to trade online at discount rates. Instinet, which has always provided online services to institutional traders, is now going to offer online services to individual traders.

In my opinion, day trading, for most people, is very much like gambling in Vegas. It's easy to be successful at day trading in a market that's going up. It's something people will see the risks of as we begin to see a market that's not quite as strong as we've seen for the last few years.

I think there will always be a place for brokers who are able to provide advice to clients or asset management professionals able to provide services not only in terms of securities, but also in terms of deciding asset allocations for a portfolio.

Pub Date: 6/20/99

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