The on-line trading industry grew so quickly that it could barely accommodate record volumes at the last week of October. Stock of companies with significant exposure to on-line trading appreciated an average of almost 50 percent from July to October. Charles Schwab kept its top position, but E*Trade squeezed Fidelity out of the second spot. Takeover activity heated up; Quick & Reilly sold to Fleet Financial. Yet price wars slashed the average commission in the top 10 firms by 45 percent in the same period. Piper Jaffray examines the tumultuous industry and offers an outlook for the near term, with acquisitions taking center stage. Excerpts follow.

As commission prices continue to fall dramatically, there has been speculation in the industry that commissions could eventually be eliminated and rebates established for some trades, unnerving investors with visions of profit margins evaporating along with commission rates. While rates could decline and even be eliminated, this will only occur if firms can generate sufficient revenues from assets under management and margin balances to offset lost commissions. The Internet may be magic, but it is not immune from the basic laws of economics.

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