Online Trading Business Brings ‘Windfalls and Headaches’

In a new report released this week, Hambrecht & Quist (NYSE: HQ) Electronic Brokerage Research Analyst Gregory Smith warns online trading companies that the industry’s rapid growth, along with the surge of online retailing as a whole, presents “both windfalls and headaches.”

In “The Electronic Brokerage Industry — Fasten Your Seatbelts,” Smith argues that trading companies will have to work harder to attract new customers. That fact has already become apparent through the spurt of new services being added to existing online brokerages.

In addition, many long-established, brand name brokerages are getting into the online business to capitalize upon their reputations. According to Smith, big names now getting online are driving “mass mainstream acceptance of direct, online investing.” Smith believes that the trend will help the Internet become a required distribution channel, with the “online” distinction ultimately going away.

Succeeding in the online trading business is no longer a matter of attracting visitors to a new type of electronic commerce, Smith also adds, arguing that it is now a “battle of balance sheets.” Online brokerages raised more than $1.7 billion (US$) in investment capital this year, he said, with most of that money funding advertising and marketing efforts.

It Only Gets Bigger From Here

Smith believes that the Internet will help drive overall trading into record territory this year, and predicts that more than 80 million people will own stock by January 2000.

Several current trends will speed that growth next year, he added, such as shorter settlement schedules, extended trading hours, wider global access to U.S. markets, the growth of broadband Internet access and lower transaction fees. Technological advances have helped day trading contribute to 11 percent of the Nasdaq’s first quarter 1999 growth, Smith says.

As the online trading business gets more competitive, Smith is looking for individual companies to consolidate the way other online merchants have combined forces and customers. “Banks, brokerages, portals and even software firms are battling over the front-end control of the customer. Soon, investors should be able to easily consolidate financial products from multiple vendors, all under one virtual roof,” he says.

Differentiating the winners from the losers in coming months will be financial strength, management depth, market share and strong executive leadership and vision, Smith says.

About Hambrecht & Quist

Hambrecht & Quist, which provides venture capital and financial expertise for entrepreneurial companies, raised more than $12 billion in public and private financing in the last four quarters. The company, based in San Francisco, was established in 1968 and has additional California offices in San Diego and Newport Beach.

More offices are located in New York, Boston, Atlanta, and London, as well as an affiliate relationship in Tel Aviv. Hambrecht & Quist is in the process of being sold to Chase Manhattan Bank for an estimated $1.35 billion.