What now for online brokers?

Online share traders still go bargain-hunting

US investors are turning away from stock trading in droves. But online brokerages are pulling out all the stops to persuade the cash to return to the market. BBC News Online's North America business reporter David Schepp reports.

As stocks around the world tumble, interest in online trading has also fallen.

Online brokerages are now fighting back, offering the nearly 20 million US investors who trade online better service and enticements.

But given the recent slide in stocks, even that may not be enough.

Online brokerages face a tough row to hoe given not just increased competition but increasingly disinterested investors, who cannot bear watching their fortunes dissipate in a falling market.

But in the face of a continually falling market, some online brokerages have had to reduce their workforce as a way to ensure a path to profitability.

For example, CSFBdirect, an online brokerage whose site has won critical acclaim, said on Wednesday that it would be laying off 150 employees, or 10% of its workforce, and closing down its customer-service call center in Parsippany, New Jersey.

Cost cutting

CSFBdirect hopes to trim $11m in expenses in making the cuts. It joins other internet brokers, such as Ameritrade and TD Waterhouse, who have both also announced cost-cutting measures that include job cuts.

"In light of the continued weakness, and the lack of retail trading volumes, we are not at all surprised by these moves," said Gregory Smith, an analyst at JPMorgan H&Q in San Francisco.

"We expect to see more headcount reduction within the online brokerage industry whether through layoffs or aggressive attrition," he added.

Retail-trading activity is in for a prolonged downturn due to reduced trading volumes, Mr Smith said. "The damage to retail investors will run deep."

Dot.com carnage

To be sure, the dot.com carnage of the past year has meant the end of the line for some of the internet-based brokerages.

Others have merged their operations in the hopes of milking the benefits of consolidation.

From just under a million transactions a day, online trading slipped to 850,000 per day in July, August and September last year and only recovered slightly to 900,000 transactions in the final 3 months of 2000, according to a recent report in the US weekly business newspaper Barron's.

It also noted that new online accounts grew last year at a 53% rate to 19.3 million.

Declining demand

While still healthy, the number is considerably less than the 73% increase seen in 1999, during the heyday of internet-stock investing.

But Barron's also noted that the average number of trades per account dropped to 2.9 in the last three months of 2000, down from an average of 5 trades for the same period in 1999.

In the face of declining demand, online brokerages are luring new customers with offers of free trades, frequent-flier airline miles and cash rebates.

But freebees can only do so much.

And if an online brokerage cannot provide good customer service, all the bait in the world will not keep investors coming back.

To address that problem, internet brokerages in the past year hired more customer-service agents, while also improving their Web sites to make them easier to use and employing revamped tools to make errors less likely.