Online Brokerages Facing Slowdown

According to analysts at Chase H&Q and US Bancorp Piper Jaffray, general stock market jitters have resulted in a larger-than-expected drop in trading volume and could have a negative impact on second quarter results.

On Wednesday, Chase analyst Gregory Smith and US Bancorp’s Stephen Franco lowered their revenue estimates for E*Trade Group, Inc. (Nasdaq: EGRP) and Ameritrade Corp. (Nasdaq: AMTD) because of the slowdown.

“We expected a declining trading volume,” said Smith. “It’s just been a little worse than we were hoping for.”

Lowered Expectations

Smith cut his revenue estimate for E*Trade’s fiscal third quarter by $32 million to $325 million (US$), leaving his per-share earnings estimate at breakeven. Franco lowered his earnings estimate for the company to $326 million, or breakeven per share, from $364 million, or one cent.

“We basically had a bear market in the Nasdaq,” Smith told the E-Commerce Times. “It’s fallen more than 30 percent in a short time period. That put a lot of investors on the sidelines during the quarter.”

The slowdown follows a strong start to the year. Online brokerages saw record growth during the first quarter, as assets in accounts held by the firms topped $1 trillion, according to U.S. Bancorp Piper Jaffray. New accounts rose by more than 2.5 million during the quarter.

Slow but Steady

Despite the negative outlook, trading volumes tend to slow during the spring and summer. “It’s part of the cyclicality of the brokerage business,” Chase H&Q’s Smith said. “By the end of September, I expect things to pick up.” He maintains buy ratings on both E*Trade and Ameritrade.

“Despite the weakness over the past three months, we still expect E*Trade’s fiscal third quarter to be its second-best quarter ever, as measured by revenues and trades,” said Smith. “While the quarter has been tough, we believe all of the long-term drivers of E*Trade’s growth remain in place.”

The top 10 online brokers account for more than 90 percent of all business, and smaller firms could get gobbled up as they fight for accounts, said Smith. While Charles Schwab Co. is the biggest online broker in terms of size, E*Trade is the fastest growing. The firm added 562,000 new investment accounts during the first quarter, up 30 percent from the fourth quarter.

The company’s Web site is the most visited online investment site, according to Media Metrix.

Looking for Consolidation

Because of market conditions, many observers are asking whether the downturn will lead to consolidation among the bigger players. Smith does not believe consolidation is on the horizon, however.

“I don’t think there’s any pressing need for any of the companies to get together,” said Smith. “They haven’t reached dire times yet.” He added, however, “It is kind of your ideal market for consolidation, with a number of firms going spending lots of money on attracting customers and improving their technology.”