On-line trading volumes have grown 44% in the last six months, to 137,978 per day, according to a report by Piper Jaffray Inc. senior analyst Bill Burnham.
"The firms are generating tremendous volumes, are coming of age, and are getting respect from the financial services industry," said Mr. Burnham. "I think the most significant development is that on-line trading is rapidly becoming an important part of the capital markets."
Though the top five providers of on-line brokerage control 74% of the market, Mr. Burnham said, "there is a big pot of honey and lots of bees."
The one significant change in the pecking order was E-Trade Group's displacing of Fidelity Investments in the No. 2 slot. E-Trade's 15% share trailed only Charles Schwab & Co.'s 33%.
To date in 1997 E-Trade's account total has doubled to 225,000, and its daily trade volume, including those initiated by telephone, has grown by 124%, to 24,096.
A newcomer, privately held Datek Securities, jumped into fourth place with 10,000 trades a day in the third quarter. DLJ Direct is in fifth place; it has 370,000 accounts and about 7,800 trades a day.
By the end of 1998, Mr. Burnham said six of the top 10 U.S. banks and several top insurers would offer some form of on-line trading.
"There are a number of banks and insurers planning launches of their own, and the potential for acquisitions is a real possibility," he said.
Recent bank acquisitions of brokerages include Fleet Financial Group's purchase of Quick & Reilly and Mellon Bank Corp.'s buying Pacific Brokerage.
"Acquisitions become more attractive as the costs to acquire customers increase," Mr. Burnham said. "Anyone who is independent is a potential takeover target."
Quick & Reilly's new offshoot, SureTrade, is expected to have an impact with its deeply discounted $7.95 trade price. The company is expected to spend $30 million advertising the service.
In general, on-line trading firms are expected to spend more than $250 million on marketing in the next 12 months.
"In the short term, advertising expenditure is increasing faster than the market, effectively making it costly to acquire new customers," said Mr. Burnham.
"The real focus in the industry is not on pricing issues but on a shift toward customer acquisition costs. Firms need to control their customer acquisition costs and hold on to the customers they have."
Mr. Burnham, who conducted his research over the last month, reported commissions charged by the top 10 firms have on average dropped by 50%, to $17.24 this year.
Fidelity was the most aggressive price-cutter, reducing its standard commission rates twice. In mid-August it set a flat rate of $28.95 for Internet trades and dropped it to $19.95 in October.
Schwab continues to charge the highest fee at $29.95. At the end of September it had 4.6 million accounts and generated an average of 46,100 trades a day during the third quarter.
