Newest Trick of the Trade

By JON D. MARKMAN

Oct. 29, 1996 12 AM PT

Just in time for the next stock market rally, a price war has broken out among discount brokerages on the Internet. As a result, you may be able to trade virtually for free.

According to a new study from a technology think tank, the battle among a dozen tiny firms to lure you online with offers of trades at less than $20 a pop is the start of something big. The report, issued in September by Forrester Research in Boston, forecasts that the number of investors trading stocks online will rocket from nearly 1.5 million today to 10 million by 2001.

It sounds, in other words, as if legions of America’s hyper-caffeinated baby boomers are about to hang up on their fathers’ cronies at the Merrill Lynch trust department and begin trading stocks at their PCs.

Unlike the way it is with a lot of conventional wisdom on our wired future, this actually could happen. The increase in competition has already punctured the high price of trades so dramatically that the transaction cost need no longer be a consideration. At a full-service broker, the purchase of 500 shares of computer networking giant Cisco Systems could cost more than $300, a big deal. At the least expensive Internet brokerages today, the cost is a flat $12.

Said Rebecca Patton, a senior executive at E-Trade (https:// www.etrade.com), one of the fastest-growing online brokerages: “You stop thinking about the price of a trade and just do it.”

She says transactions at her firm’s World Wide Web site are growing 10% a month. The average client is making 25 trades a year--six times the number that most traditional discount brokerages claim.

At the beginning of the year, fewer than half a dozen brokerages offered trading on the Web. Now three or four online brokerages are sprouting up every month, with tiny ProTrade of Santa Barbara (https://www.protrade.com) and mighty American Express of New York (https://www.americanexpress.com/direct) opening sites in October.

According to Forrester, 34 financial institutions offer customers either account access or transactions on the Internet, and 52 more plan to add Web service within the next 12 months. By 2001, the researchers estimate, Americans will have $524 billion in accounts online, representing 8.5% of the nation’s retail investment assets.

That still doesn’t mean online trading is for everyone yet. Several smart, Net-savvy traders I have encountered while prowling stock discussion groups like the ones at Silicon Investor (https://www.techstocks.com) still use actual human brokers or Touch-Tone phones. They cite PC fatigue, the comfort of a human voice and the fun of sharing wins and agonizing over mistakes with an understanding (albeit expensive) friend.

Some also cited security concerns, though that appears for the moment to be more illusion than reality. No legal authorities I contacted could cite a case yet in which hackers had stolen some cyber-Buffett’s stock tips or drained a brokerage of virtual capital; one firm boasts that it hired a team of Defense Department cryptographers to erect a series of electronic barriers, called firewalls, to keep out predators.

Others cite concerns that their market orders are not executed as swiftly as at full-service brokers.

While the industry toddles away from infancy, three tiers of online discounters are emerging, with trades treated as a commodity at the bottom, news offered as a premium in the middle and brand recognition offered as a hook at the top. Only the middle- and upper-tier operations so far allow trading of options, futures or mutual funds.

The lowest-priced operations, such as eBroker (https://www.ebroker.com) of Omaha, offer what amounts to raw transaction efficiency at $12 per trade, with no hidden fees but also no frills such as a toll-free help line. Demonstrating how fast the niche has moved since eBroker opened on the Web in June, upstart ProTrade charges the same flat $12 per trade but offers an impressive range of free investment news. The site also provides terrific interactive help.

The second tier, populated by the likes of E-Trade and Lombard Institutional Brokerage (https://www.lombard.com), offer trades for $15 to $20. E-Trade offers a tall stack of free stuff, such as a subscription to the ultra-cool online investment news service Briefing.com and access to the world-beating charts of a company called Baseline. Lombard’s handsome green-and-tan site offers the best intra-day, tick-by-tick charts as well as a free subscription to the investment news service Bloomberg Personal and the extensive fundamental data of Thomson MarketEdge.

V. Eric Roach, chief executive at Lombard in San Francisco, said he learned that price was more critical to Web investors than a pretty face and smart data in September when he slashed the cost of most trades placed through the firm’s Web site from $36.50 to $15. Roach said he thought it would take the young brokerage six months to break even at that price by doubling its trading volume. Instead, he said, “it took four days.”

Top-tier discounters American Express Financial Direct and E.Schwab (https://www.eschwab.com)--online subsidiaries of famous parents--offer trades at pricing levels that require an advanced degree in mathematics to decipher, but appear to range from $29 to $40. Both figure they can charge a premium for the comfort many new Internet customers will feel with their brand names. Amex’s site is way more attractive and offers a far better array of free information.

In an orbit of its own, for now, is PC Financial Network (https://www.pcfn.com), a division of Donaldson, Lufkin & Jenrette Securities. The pioneering online discounter offers the cleanest, fastest investment site on the Web and stocks it with a vast, easy-to-access closet of informational freebies. But PCFN’s price scheme is perplexing and strangely dear, ranging from $40 to more than $100 a trade.

To choose, visit the sites and poke around their demonstration accounts. If you make three or four trades a month and lust for information, it might make sense to keep a minimum amount of stock or cash in a middle- or top-tier broker but trade your account at the deepest discounter. If you fear that a bear market may sweep the really little guys away, then you might try Lombard or E-Trade. If you want a gold card with your stock certificates and would prefer to deal with a brokerage your mother and golf buddies have heard of, then stick with one of the brand names.

When it comes to trade confirmations and account statements, however, the online brokerages are comfortingly low-tech: They use the mail.

Where do the full-service brokers fit in? Neal Goldsmith, publisher of the insightful online magazine BusinessTech (https://www.businesstech.com) believes that the big boys have too much overhead--real estate, executives, research staffs--to compete on price. So he believes that the day may come when the Gruntals and the Smith Barneys give away trades as a loss-leader while keeping their advice at a premium.

“Information is becoming a commodity, trades are already a commodity, but analysis and decision making is still a highly valuable product,” he said.

Which raises the other nice thing about trading online: When you make a bad investment on your own initiative, there’s no smarty-pants broker to say he told you so.

Street Strategies explores tactics that the nation’s savviest private and institutional investors use to maximize gains and minimize risk. Jon D. Markman is a Times staff writer. He can be reached at [email protected] or at (818) 772-3312.

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Online Services: Pro and Cons

Here are seven of the several dozen brokerage firms with a presence on the Internet.

Broker: eBroker

Phone: (402) 339-6893

Cost*: $12.00

Uptick: Cheap!

Downtick: Don’t call us; $10,000 minimum

Broker: ProTrade

Phone: (805) 563-9017

Cost*: $12.00

Uptick: Great news engine, interactive help