Notebook: Online Broker Margin Rates Keep Rising

Net-stock volatility is forcing online brokers to keep raising their already elevated margin rates.

The rapid rise of many Internet stocks over the past six months, coupled with the spectacular decline of some, has prompted many online brokers to change how much they'll let investors borrow to buy stocks. They've done this by raising margin maintenance requirements, the minimum amount of equity an investor must have in an account as a percentage of a stock's value.

By January, some brokers had boosted margin maintenance requirements to 100% on some stocks, ending borrowing to buy them. In the past couple of months, several top brokers, including Charles Schwab (SCH Quote) and E*Trade (EGRP Quote), have expanded their restrictions.

"DLJdirect is particularly concerned about margin trading of volatile and Internet-related stocks," Blake Darcy, the firm's chief executive, writes on its site. "We believe that investors placing trades in these stocks should do so only with funds that they can afford to lose. ... The potential for overextending yourself in this type of market, through this type of transaction, is very high."

Of course, brokers protect themselves from risk as well by raising margin requirements.

DLJdirect, the No. 7 online broker by fourth-quarter online trading share, has barred margin trading on 127 stocks. For another 10 stocks, the firm is forcing customers to have enough cash in their accounts to pay for a trade when the order is placed. Typically, customers with good credit have three days to make sure there's enough cash in the account to cover a trade.

Schwab, the No. 1 online broker, now has 25 stocks with maintenance requirements of 70% and has 64 stocks with a maintenance requirement of 50%. That's a longer list than in January. Schwab also continues to restrict Internet trading of certain IPOs on their first day of trading.

E*Trade's list of volatile stocks continues to grow, too. It has 14 stocks with 100% margin maintenance requirements and 52 with requirements of 40% to 60%.

Online Brokerage Ads, Part 2

Wacky online broker ads just keep coming, much to the growing chagrin of some industry watchers.

From over-the-top Discover Brokerage Direct ads featuring online trading teens with helicopters to E*Trade ads featuring big houses and smarmy brokers, humorous ads allude to easy money from investing online. Wealth may seem within reach, with the Dow busting through 10,000 and the last bear market so long ago it's hard to remember. But some observers are concerned that online brokers are teasing the boundaries of responsible advertising.

A recent offering comes from Ameritrade (AMTD Quote), which shows two women, one of whom cuts their afternoon jog short to get home to trade. She shoos her kids off the computer and seconds later sells a biotech stock for $1,700 profit, to cheers from her kids. The other looks on with some puzzlement and amazement. At the end of the ad she reveals proudly: "I have mutual funds." One impression the commercial leaves is that it's better to trade stocks than invest in mutual funds.

The ads are part of Ameritrade's efforts to show a range of people in everyday places trading online. Peter Horst, Ameritrade's vice president of marketing, says the ads were thoroughly researched and the feedback has been positive.

"The overwhelming reaction we heard from women was 'Wow, that looks like my life,'" says Horst. "We had no intention of denigrating mutual funds or the people who buy them."

He says many people do start off investing in mutual funds, of which Ameritrade offers over 7,000. As they become more experienced, many add individual stocks to their portfolio. The ad, with one experienced investor and one relative newcomer, is intended to appeal to a range of investors, he says.

The jocular approach featuring only successful online traders has not gone unnoticed by regulators. In a February notice to members, NASD Regulation said communication with the public must not omit material information about the risks of trading.

"One step that both firms and regulators should take is to scrutinize advertisements carefully, and I will say that some of the ads I have seen are close to the edge," said Mary Schapiro, NASD Regulation's president, in a Feb. 25 speech. "Few people really believe that they're going to acquire an island paradise by trading online. But often there is an underlying bandwagon mentality promoted and a message that investing is easy and risk-free."

What do you think of the spate of humorous online broker ads? An amusing way to get the message across. Harmless advertising exaggeration. They do it with beer, right? Promotion of easy money from stock trading is just not funny.

Online Trading Growth Could Slow

The rush to online trading may be overstated.

One financial research and consulting firm says over half of the growth in online brokerage accounts comes from the conversion of traditional discount brokerage accounts. As a result, says John Payne at Boston-based Cerulli Associates, there are only about 3 million new brokerage accounts, with the rest of the 7 million or so online accounts simply transformed discount accounts. Once that conversion loses its fervor, the online brokerage industry's torrid growth may slow.

The idea that the top brokers have been converting their traditional customers is not new. Conversions are a big driver of Fidelity's growth in online trading activity, for example. Fidelity is the No. 2 discount broker and has grown to the No. 5 online broker, with about 32,000 online trades a day in the fourth quarter, according to Credit Suisse First Boston. And Schwab is the No. 1 discount and online broker, with about 93,000 trades a day in the fourth quarter.

Payne points to the fact that traditional brokers with online services -- Schwab, Fidelity, Toronto Dominion (TD Quote) unit Waterhouse and National Discount Brokers (NDB Quote) -- control 71% of the top 10 online brokerage accounts. Those brokers also control 88% of the top 10 brokers' customer assets.

But at least one broker disputes this notion. Only about 5% of people who sign on to Quick Way Net, an online channel of the No. 3 discount broker and Fleet Financial (FLT Quote) unit Quick & Reilly, previously did business with firm, a spokesman says. In addition, six pure online brokers have pushed their way into the top 10.

Online brokers tend to attract more active, experienced traders. But many are pushing for the bigger middle market of investors, people who invest but don't necessarily have a relationship with a broker. It remains to be seen whether that growth will make up for a slowing in customers switching from traditional discount accounts.