Mellon to Buy Los Angeles Discount Brokerage

Mellon Bank Corp. said Monday it has agreed to buy a discount brokerage with a large on-line trading operation.

The purchase of Pacific Brokerage Services, Los Angeles, is expected to close in the fourth quarter. Terms of the deal were not disclosed, but an analyst said the brokerage, with 100,000 customers, would command no more than $100 million.

The acquisition would give Mellon a foothold in a rapidly growing part of the investment business. Pacific averages 6,000 to 7,000 trades a day, and 60% of them are done over the Internet, versus 20% in July 1996, a Mellon spokesman said. The company's monthly trading volume has doubled over the last year.

"The on-line brokerage industry has been on fire the last year and a half," said Bill Burnham, electronic commerce analyst at Piper Jaffray Inc., Minneapolis. "A lot of banks have looked enviously at that growth and want a part of it."

He has estimated on-line trading will generate about $2.2 billion in commissions by 2001, up from $270 million last year.

Pittsburgh-based Mellon has built a vast investment management and brokerage business in recent years. Its Dreyfus Corp. unit, which manages $84 billion of assets, is the 11th-largest U.S. mutual fund company, according to the Investment Company Institute.

Mellon and Dreyfus have teamed up to develop innovative products such as the Lion Account, a combined bank and brokerage account, said Christopher M. "Kip" Condron, vice chairman of Mellon and president and chief executive of Dreyfus.

"The one channel of distribution we really have a void in is the Internet," Mr. Condron said. Although on-line trading won't appeal to every investor, "for those doing business that way, we want them to do it with us" he said.

Mellon isn't alone in eyeing the on-line brokerage business. Two brokers seen as potential takeover targets-Donaldson, Lufkin & Jenrette and the discount firm Quick & Reilly-have on-line capabilities that might increase their attractiveness to banks or other potential acquirers. And Morgan Stanley, Dean Witter, Discover & Co. agreed to buy Lombard Securities last December to tap the Internet trading business.

The Internet capabilities Pacific currently offers are limited to stock and option trading, Mr. Condron said. But they hope to expand the on-line offerings quickly, including mutual fund sales.

Buying an established Internet brokerage rather than building one would give Mellon an immediate level of expertise that it could offer to its existing customers, said Les Dinkin, a consultant at NBW Consulting, Westport, Conn. "Banks are looking for ways to increase their presence in the investment business, and this represents a growth segment in that business."

Pacific's Internet trading is fully automated, said Steven Wallace, chief executive officer. Trades over a certain size are stopped and examined for compliance reasons.

The brokerage's trading technology was designed so that additional services and products could easily be added, he said.

Mr. Wallace said he is not surprised banks are interested in his business. "It's a natural for financial services companies, as long as it is done right."

Pacific charges an average of $15 per trade, putting it firmly in the "deep discount" end of the brokerage business.

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