NEW YORK -- The slump in trading volume that followed the market's springtime decline has taken a heavy toll on online brokerages. Investors who pointed and clicked their way to the top of the bull market are now hedging their bets, trading cautiously and much less frequently.
Online brokerages have already warned Wall Street that the drop in volume will take a toll on their profits in the current quarter. Now, in an effort to stabilize revenues and smooth out seasonal fluctuations, many of the brokerages are branching out from trading and into financial advice, research and real-world retail sites.
The April-June quarter is generally the slow season for online brokerages. The start of a new year brings a wave of money from year-end bonuses; by December, trading volume spikes as investors settle their portfolios.
In between, ''it's tough to match the vigor of the first and fourth quarters,'' said Greg Smith, online brokerage analyst with Chase H&Q. ''I was fully expecting a pullback going into the quarter.''
But while a seasonal decline was factored into Wall Street analysts' projections, few predicted the catastrophic decline in the Nasdaq Stock Market, which sent the Nasdaq composite index tumbling as much as 37 percent below its March 10 high. The Nasdaq's heavy concentration of technology stocks had been the focus of online investors, and when those stocks fell, many investors fled, including the quick-fingered day traders who had helped pump up trading volume.
As a result, volume dried up as much as 20 percent from the first quarter to the second.
''You can't beat the tape,'' Smith said. ''There's been a sharp decline in volume across the board, and the brokerages can't overcome that.''
Shares of every major Internet brokerage have tumbled since March, and are now well below the 52-week highs most reached last June or July. DLJ Direct is now trading at $8.75 per share, down nearly 73 percent from the 52-week high of $32 reached last June. Before the Nasdaq's decline, shares hovered around $15.
To boost their business and stock prices, online brokerages are expanding services. Recently, E-Trade Group Inc. formed an alliance with the accounting firm Ernst & Young to provide financial advice online and in offices.
DLJ Direct opened a walk-in office in Boca Raton, Fla., and E-Trade announced plans to set up shop within a SuperTarget store in Roswell, Ga.
Analysts say the companies are looking for new clients who want financial advice the brokerages didn't provide in their earliest days.
''A majority of the online brokers are looking to diversify revenues and become less transaction-dependent,'' said Richard Repetto, an online brokerage analyst for Lehman Brothers. ''They're mimicking what has worked best for the most successful brokerages.''
The largest discount and Internet brokerage, Charles Schwab Corp., has long had a network of 5,800 financial advisers who have helped the firm broaden its customer base to wealthier clients.
New incentives aside, many market watchers expect the online brokerages to thrive again at the end of the year. At the very least, the seasonal surge will boost bottom lines. Also, many of the companies are fundamentally strong, with solid business plans, argued Richard Zandi, online brokerage analyst at Donaldson, Lufkin & Jenrette.
''The near-term view is that it's going to be a rough quarter,'' he said. ''In the long term, the democratization of financial services really favors the online brokers.''
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