Reviewed by THERESA W. CAREY
Edited by Randall W. Forsyth
Maybe the marketing group at E*Trade is right, and someday we will all invest this way. If the numbers showing first-quarter growth as reported by Bill Burnham of Credit Suisse First Boston earlier this month are any indication, marketing hype may be morphing into reality.
Burnham estimates that the growth in trades placed online far outpaced the overall growth of the market -- 30%-35% versus 5% -- which means individual investors are leaping onto the online bandwagon, perhaps abandoning their traditional brokers and mutual funds. The numbers of trades executed online daily is estimated at around 450,000, up from the 340,000 a day at the end of 1998. Burnham increased his first-quarter growth estimate from 25%, based on the surge in trading volumes in the electronic-commerce segment of the market that he follows, as well as indicators such as Schwab's revenue increase of 46%.
The market, meanwhile, seems unconcerned by the paradox of online brokers' soaring stock prices and the technical difficulties they have been suffering as a result of their rapid growth. When eSchwab and E*Trade deal with their outages during the busy trading day, it's like changing a tire on a car that's screaming down the highway well above the speed limit. Something's got to give; so far what's happened is that the car has to pull off the road for a short while. New brokerage customers continue to sign up in spite of the occasional problems. And when they begin trading online, the online brokers' own stocks are among their favorites.
We continue to receive occasional complaints about problems with online brokers, and it's obvious the SEC has been getting "cc:'d" on those letters. Disgruntled customers complain about difficulties withdrawing funds or moving securities, conversions to Roth IRAs, and execution prices for market trades.
The industry recently formed the Online Discount Brokerage Committee, which is a subset of the Securities Industry Association, in an effort to promote self-regulation and education of customers-and to avoid having to deal with additional governmental regulation (see "Hands Off the 'Net").
The existence of online brokers creates opportunities for day traders to open accounts easily and, as the ad says, "Make that trade!" which is certainly a factor in the huge increase in online trading volume. The industry is starting to tighten up on margin requirements for the riskiest issues, and some brokers are pulling the most volatile issues off the Web, forcing traders in those stocks to call a human. Many brokers increasingly are requiring that a limit order (rather than a market order) be placed for initial public offerings when they're freed to trade in the secondary market. Limit orders would prevent an investor from paying, say 75, for a stock that opened at 20. "The survival of online trading as a new business model depends on our proactive attitude towards self-regulation," says committee member Carlos Otalvaro, president of Wall Street Electronica. He would like to see day trading treated as a separate market segment so that expensive regulations aren't applied to the majority of online trading customers.
Barron'sOnline will feature more online broker reviews. Following our annual online-broker survey ("Growing Pains," March 15), readers asked quite a few questions about what they felt we left out and what they felt we could do better next time. Space considerations limit the number of brokers we can cover in print, but every third week in the Barron's Online feature, "Web Site of the Week," I will review brokers not covered yet this year, or those previously reviewed that have undergone major overhauls.American Express Brokerage Direct was the first to be reviewed in Web Site of the Week, receiving ** and 14.5 points for a site that's declined from last year's offering while hanging onto higher-than-average commissions ($25 a trade and up). For those of you asking why we "left out" JB Oxford, Dreyfus and Scottrade: We tried to include them in the survey, but were unable to set up the trading account necessary for testing without their cooperation. Maybe next year.
It looks as though commissions have gone about as low as they can go as some brokers inch their fees up slightly for limit orders (Suretrade, for instance). When one online broker was told that our commission rankings would be based on limit orders rather than market orders, he quipped that he then might just raise the market-order commission. It wouldn't surprise us to see that happen.
Barron's readers outside the U.S. asked a question dear to my heart (since I am one of them): Which online brokers will let nonresidents sign up for online trading? In the past month, I've filled out applications at DLJ Direct, Discover, NDB, E*Trade and Waterhouse, and have been rejected for not having a physical address in the U.S. (a post-office box apparently does not impress them). In the fine print, it's apparent that nonresidents of the U.S., whether or not they are U.S. citizens, will have a difficult time opening an account at any U.S.-based online brokerage.
Many of the brokers are going international, however. Look for E*Trade and Schwab in Japan, and Wall Street Access hopes to make inroads in Germany and France. Some brokers are rolling out multi-currency accounts; we'll report on those as the plans evolve into reality. Several participants at our March 15 online conference asked about international trading opportunities; we'll keep an eye out for those.
Another development we'll continue to monitor this year is the introduction of non-Web-based trading environments, such as Watley's Ultimate Trader and CyberBroker. Real-time quotes incur additional fees, but the dedicated day trader with high trading volume can get discounts on commissions and other services. We'll have more on this technology as it develops; much of it is on the verge of solidifying from vaporware to reality.
Reader Duke Miller of Florida asked us about the "Select Client" minimums at DLJ Direct, which we reported as account balances of $100,000 or greater. Miller was told by a DLJ official that Barron's was in error and the actual minimum is $1 million. However, we received account application materials and marketing information during the course of the review that indicates many benefits kick in at the $100,000 level, among them IPOs and additional research. There are even more benefits for the gold-plated customers with more than $1 million in assets on account at DLJ Direct, but we stand by what was reported in the story and apologize for any confusion.
The possibility of fraud worries many investors, and the National Association of Securities Dealers is working on allowing online access to members' disciplinary records. Legal problems emerge, of course, especially when criminal convictions are disclosed. The National Futures Association is providing a Web-based clearinghouse of disciplinary information, covering more than 50,000 futures firms and salespeople, at www.nfa.futures.org. Its "Background Affiliation Status Information Center" (BASIC) allows investors to search for companies or individuals, and obtain detailed information on their disciplinary records.
Another interesting place to search for SEC-related information is the still-under-construction SEC Info Website (www.secinfo.com), being developed by Fran Finnegan of San Francisco, a former investment banker turned whiz programmer. Here you can search through all SEC filings related to a company, including those in which it must disclose disciplinary action. There's some interesting reading if you dig deep enough.