The Success of Pure Play Online Brokers Lies in the Hands of a Few

Business Wire, April 13, 2000

Business Editors

NEW YORK--(BUSINESS WIRE)--April 13, 2000

A New Report from Bear Stearns Identifies the Pivotal Customers

and Keys to Success for Pure Play Online Brokers

As online brokers battle for market share, Bear Stearns financial technologies analyst Amy Butte says it is important for them to identify the most profitable customers and do the things necessary to satisfy them. In a report entitled "Day Trading and Beyond: A New Niche is Emerging," Butte dissects the online trading industry and identifies which customers provide profits and which companies are in the best position to capitalize from them. "Our research uncovered some enlightening facts about the online trading business," says Butte. Of the estimated 12.5 million on-line accounts in the U.S., Butte found that "semi-professional traders," defined as customers that trade 25 to 40 times per day, were the most profitable to pure play online companies. Described as former Wall Street types, the semi-professional trader plays a major role in the online market according to Butte. "Although semi-professional traders represent an estimated 50,000 people (.04% of the market), they account for a whopping 75% of all daily on-line trades and are driving the profits for on-line companies," explains Butte.

Discerning Customers

Whether operating from their home or office, Butte notes that these semi-professional traders require direct access to the market, sophisticated routing technologies and speedy execution. If they do not receive this type of service, the customers will be quick to move to another online company. For pure play online brokers this is a discouraging trend. Companies such as E-Trade, Ameritrade, Datek and DLJdirect, that cater to "active traders" (customers who trade 25 to 50 times a year) lack the sophisticated trading mechanisms necessary to keep customers once they graduate to the semi-professional level and become profitable. "It is a tough business model for many pure play online brokers," commented Butte. "They have to spend a tremendous amount of money to attract customers, who will then be difficult to retain once they begin actively trading and graduate to the next level."

There are companies however that have the most advanced technology and are in position to capture the majority of semi-professionals, according to Butte's research. The main contenders appear to be RediPlus, which is described as one of the largest providers of active trading technology, and CyBerTrader, which is regarded as the most comprehensive active trader. Realtick whose technology is reportedly the basis for many proprietary order execution systems in use also received high marks.

Pure Play online retail sites are not the only ones who are feeling pressure from demanding online traders. Butte believes wholesalers, such as Knight Trimark (NITE), will also be vulnerable to the semi-professional traders' Internet choice. "When the on-line brokerages lose business, the wholesalers who they use to process the trades will also lose business," concludes Butte.

Diverse Brokers are Better Insulated from Consumer Demand

Online Brokers that provide more content and an overall investment experience are better insulated from the competitive atmosphere produced by the semi-professional online trader. The reason, according to the report, is that online companies such as Charles Schwab, TD Waterhouse and Fidelity cater to a different client pool. These companies cater to a group of traders described as "self-directed asset managers." According to Butte they represent roughly 69% of total online accounts but just 3% of the daily average trades. These investors, who generally trade less than 10 times a year have a long term investment orientation and use the Internet as tool for convenience, as well as for gathering information and investment analysis. "These sites do not need traders to trade 40 times a day for them to make a profit, instead the internet provides a means to enhance the client relationship for companies that provide comprehensive financial planning," concluded Butte.

To obtain a copy of the full report, "Day Trading and Beyond: A New Niche is Emerging," or to speak with Amy Butte please contact Karina Rentas 212 -272 -9438 or Michelle O'Brien 212-272-6659.

Founded in 1923, Bear, Stearns & Co. Inc. is a leading worldwide investment banking and securities trading and brokerage firm, and the major subsidiary of The Bear Stearns Companies Inc. (NYSE:BSC). With approximately $23.2 billion in total capital, Bear Stearns serves governments, corporations, institutions and individuals worldwide. The company's business includes corporate finance and mergers and acquisitions, institutional equities and fixed income sales and trading, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear, Stearns Securities Corp., it offers global clearing services to broker dealers, prime broker clients and other professional traders, including securities lending. Headquartered in New York City, the company has more than 10,200 employees located in domestic offices in Atlanta, Boston, Chicago, Dallas, Los Angeles, San Francisco and San Juan; and an international presence in Beijing, Buenos Aires, Dublin, Hong Kong, London, Lugano, Sao Paulo, Shanghai, Singapore and Tokyo. For additional information about Bear Stearns, please visit our Web site at http://www.bearstearns.com.