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Bye-bye, sell sell: The rise and fall of online share trading
Online stock trading services could seemingly do no wrong when markets were booming around the world and volumes traded were high. How things have changed. Sonya Rabbitte looks at how some well-known names have been coping...

By Sonya Rabbitte

Published: Tuesday 13 February 2001

The last month has seen cutbacks and layoffs at online stockbrokers, with investors either holding tight - a problem for transaction-driven businesses - or even moving offline to shed their (mostly) devalued shares.

It seems the very means of trading that helped make many investors money is now being rejected in favour of more traditional channels. A recent survey from online entity Merrill Lynch HSBC found that 74 per cent of investors are putting off trading online because they feel internet sites lack good quality investment information. The majority of respondents are also dissuaded by a lack of familiar brand names, complicated trading systems and little contact with company representatives.

This might sound suspicious coming from the online joint venture of two of banking's blue blooded players, but recent events seem to mirror the study's findings. Ameritrade, the fourth largest US online broker, began the new year with a Q4 profits warning and by laying off 450 staff. Analysts responded with a sharp downgrade of Ameritrade's 2001 forecast, with estimated earnings dropping from 27 cents a share to 12 cents a share.

In the same week, Morgan Online, JP Morgan's internet banking service, halved its workforce with the loss of 150 jobs and announced a shift away from pure financial services.

Swedish internet broker Avanza joined those in trouble when it cancelled plans for pan-European expansion. Company growth had fallen from an impressive 70 per cent in the first quarter of 2000 to nine per cent by the third quarter to zero growth in the fourth quarter.

UK stockbroker Stocktrade ended a disastrous January with a cancelled IPO, the resignation of CEO Andy Hirst, and the announcement of 50 job losses.

Meanwhile, almost half of the 26,000 staff at online broker Charles Schwab started February on a compulsory four day week as the company attempts to cut operating costs.

It all seems to signal a lack of confidence in online trading, and yet those at the core of the industry remain surprisingly upbeat about future progress.

Jane Drew, European head of corporate communication at Charles Schwab, explained that a 30 per cent drop in trading volumes during the past year has made cost cutting a necessity. In Europe this means smaller advertising and marketing budgets. In the US, it means a shorter working week. (US accounting practices mean companies are charged at the end of the tax year for any annual leave not taken by staff.)

However, Schwab remains upbeat about the future market, and Drew says this optimism is behind the company cutting costs rather than laying off staff.

"Laying off staff is a last resort. We want to be well placed when the market bounces back so we'd rather control costs," she added.

Rival multinational Etrade is also keeping an eye on costs, although European MD Johan Bremmer says diversification and international expansion put the company in a relatively buoyant position when it comes to weathering market storms. Etrade moved from pure brokerage services to banking services last year and now 60 per cent of revenue comes from non-transactional business.

"Diversification became more important than we could have anticipated ourselves," says Bremmer.

While Etrade has also seen business drop by as much as 40 per cent in the past year, Bremmer stresses that when companies like Etrade and competitor Charles Schwab introduce cost cutting measures, market watchers shouldn't panic. It's about cost efficiency, not survival, they say.

Stocktrade has not had such good fortune. Even so, director Robert O'Riordan is also optimistic, if cautious about current market conditions.

While the company is reviewing expenditure and organisational strategies, O'Riordan is confident Stocktrade will manage to maintain a break even situation this year.

He said: "The market hasn't fallen off, but we haven't seen the anticipated growth. It's more a case of growth deferral. Our most stringent cost cutting measure has been our people. I think sustainable growth will come but probably not as fast as anticipated, and over a longer time scale."

One company that could not afford to wait for an up turn in the market was ISP themutual.net, the parent company behind investment site freequotes.co.uk

In an interview with silicon.com at the end of last year former MD Simon Wajcenberg claimed the company's focus on top quality editorial and high profile expert advice would elevate themutual.net's investment community above other similar sites.

It didn't work quite as planned. In December the company restructured, abandoning the editorial content of the online communities in favour of an email marketing model.

It's a move that, according to current MD Ben Heaton, has lowered monthly costs from £180,000 in December to a break even expenditure of £60,000 in January.

November's purchase of thestreet.co.uk customer database turned out to be a shrewd move. With 180,000 new members on board, the wholly owned subsidiary Freequotes turned out to be a profitable operation. It is the only mutual.net online community still up and running.

Cutbacks and layoffs have come as no big surprise to the industry. It seems inevitable that as tech stocks stumble, the early movers who ventured online to enable easy trading take time out to nurse their own burnt fingers. But in an industry that thrives on risk, there are still those placing bets on an upturn in the market.