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Online trading surviving
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October 15, 2001: 11:08 a.m. ET
Online investing is down, but surviving the bear market and tough times.
By Stan Luxenberg
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NEW YORK (CNNmoney) - Online brokers are showing signs of life amid a volatile market and a weak economy, but trading volume still is 40 percent below its bull market highs.
The Sept. 11 tragedy didn't trigger any outages, though online firms suffered because trading was suspended that week, analysts say. Many online brokers, including Schwab, have said that the loss of trading could hurt earnings. Analysts have been lowering estimates across the board.
Schwab will report its third-quarter earnings Oct. 17, according to Briefing.com. When First Call surveyed analysts three months ago, the consensus earnings forecast for the broker was 8 cents per share, but since then the estimate has been dropped to 5 cents per share.
With technology stocks soaring in the first quarter of 2000, daily volume at Datek Online Holdings regularly hit more than 120,000 trades, but this year the figure has dropped from an average of 117,000 trades in January to a trough of 57,000 in August.
At Schwab, there was a surge in activity when markets reopened Sept. 17, spokeswoman Sondra Harris says. The broker, which processed 135,000 trades a day in the week before the attack, saw its volume increase to 331,000 Sept. 17. But following the spike, trading remains weak, she says.
The same is true at Datek. "We are having some ups and downs, but it's not near the big days we had at the peak of the market," spokesman Mike Dunn says.
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Despite the hard economic times, brokers have not been raising basic commission schedules.
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Dan Burke, Gomez Advisors |
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Still, a recent survey showed that even though online trading is down substantially, investors are likely to return once the market turns around. All of the brokers are adding new accounts, the survey found.
Brokers say that many of their clients are small traders who invest heavily in Nasdaq shares, so activity tends to rise and fall along with that market.
The good news for investors is that despite the hard economic times, brokers have not been raising basic commission schedules, says Dan Burke, director of brokerage services for Boston-based Gomez Advisors, which tracks the industry.
But some firms have been imposing fees on the accounts of clients who rarely trade, Burke says. Most recently, Datek started charging an annual fee to clients who have less than $5,000 in their accounts.
Datek's Dunn argues that the fees are necessary because customers demand more services, and regulations have raised the cost of trading.
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Dunn also says the firm has higher costs because of a new rule approved by the Securities and Exchange Commission requiring brokers to identify and monitor "pattern day traders" who make more than four trades in five days. The rule, designed to protect the brokers from sustaining too much risk, requires brokers to make sure the day traders have at least $25,000 in their accounts.
"We have to monitor this and put extra programmers on just to comply with the rule," Dunn says.
Another part of the new rule requires day traders to keep money in their accounts if they have an outstanding loan and own stocks on margin.
Despite weak revenue, brokers contend that customers continue to show interest in doing business online. Schwab's Harris notes that although trading volume has dropped, the traffic to the Schwab Web site has not slowed.
She notes that the site has been getting about 6,000 visits a day from people using the portfolio planner and other tools that require time and patience to operate. "People felt confident when things were easy, but now they are hungry for information and to do research," she says.
-- Stan Luxenberg is a freelance writer for CNN Money. 
* Disclaimer
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