Web brokers face Darwinian fate

Now that the bigger online brokerage fish have gobbled up most of the guppies, they’re starting to feed on one another.

No. 3 Ameritrade Holdings Corp. last week announced that it is acquiring No. 4 Datek Online Holdings Corp. for $1.29 billion in stock, creating the largest online brokerage firm in terms of daily trades.

And the sharks could be circling.

“Over the last year, we have already seen a lot of consolidation, where the middle-tier players have already been pulled up into the bigger guys,” says Adam Townsend, an analyst with JPMorgan H&Q in San Francisco. “The next wave, I would guess, is going to occur between the larger diversified financial institutions, and they are going to come down and get some of the established online guys, like E*TRADE or Ameritrade.”

Nobody seems willing to guess who those potential buyers might be. The bidding for Datek, however, may provide a clue. Among those beaten out by Ameritrade were banking giants Wells Fargo & Co. of San Francisco and Bank of America Corp. of Charlotte, N.C.

Keith Stock, a senior consultant with Cap Gemini Ernst & Young in New York, says a potential bidder’s interest would depend on where the financial institution is in its own development of online brokerage. The trend, he says, has been for online brokerage to be part of a broader set of offerings.

The shakeout in the online brokerage business has come as transaction volumes and price margins have declined, analysts say.

While online trading volume is on the rise, it is still down 45% from its peak in the first quarter of 2000, according to a recent JPMorgan H&Q report.

waters settling

Datek, based in Jersey City, N.J., drew interest from many buyers, including some banks, because there are so few independent online brokerage firms left to buy.

Last year, Bank of Montreal purchased CSFBdirect Inc., also in Jersey City; E*TRADE Group Inc. in Menlo Park, Calif., bought Web Street Inc. of Deerfield, Ill.; and Ameritrade of Omaha, Neb., acquired the online business of Jersey City’s National Discount Brokers Group Inc.

FleetBoston Financial Corp. merged its online broker, Suretrade, into its Quick & Reilly unit.

Days after the Ameritrade-Datek deal was announced, E*TRADE agreed to purchase Tradescape Corp., a New York online trading firm, for as much as $280 million in stock.

Now, after this spate of activity, the waters actually may settle.

“I think the lines are drawn, at least in my view, pretty squarely now,” says Richard H. Repetto, an analyst with Putnam Lovell Securities Inc. of San Francisco.

“You’ve got Ameritrade focused on the active trader, E*TRADE offers a suite of diversified financial products, and [San Francisco’s Charles] Schwab really is going after the assets of the affluent segment,” he says. “There could be an outside-the-brokerage-industry buyer, but I think they’ve drawn the lines. They’ve made a stand on how they think they’re going to be successful.”

Smaller online firms that have survived the consolidation wave, such as privately held Scottrade Inc. in St. Louis, may be able to stay independent, says Mr. Townsend.

“The companies who were looking to exist or were realizing they couldn’t build the mass themselves have already pulled out. Scottrade, for example, seems to be operating just fine and taking advantage of the attrition that is occurring from the other larger mergers.”