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Some Online Brokers Aren't Exactly, Well, Brokering

Investors looking for young online firms may be surprised how little business these companies do.

"JBOH the next EGRP."

"SIEB is good. RFGI taking off."

"SWS 56 & getting stronger."

Online traders and message board denizens looking for the next


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have turned lesser-known Internet brokerages into a volatile trading group. But investors who think they're buying an OLB -- cyberspeak for an online brokerage -- may want to take another look. In many cases, the Internet portion of these brokerages is just a small slice of their overall business.

Although quiet for the past few weeks, shares of these companies have moved as much as 50% up or down in a day in February and again in April. Since January,

JB Oxford


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has outperformed Ameritrade, 692% to 642%.

Siebert Financial

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, the holding company for discount firm

Muriel Siebert

, has soared 244% during the same period, leaving Schwab's strong 113% move in the dust.

"When something big works, they

investors try to look for ones where the horse isn't out of the barn," says Ken Pasternak, chief executive of



, primary market maker for this group of cheaper brokerage stocks.

Their names are less than household -- JB Oxford, Siebert,

Track Data



Rushmore Financial



M.H. Meyerson


-- but each has seen its stock price rise sharply while remaining under $100 per share.

National Discount Brokers



Southwest Securities


also have seen their shares take off.

Yet, for some of these firms, online trading is either limited or still on the drawing board, and because of their smallish market caps and lack of institutional interest, few retail investors have heard much about their financials.

While National Discount Brokers does 70% of its trades online, only about one-fifth of JB Oxford's business is online. Siebert does 40% to 50% online and for tiny M.H. Meyerson, cybertrading is still just a plan. Track Data is primarily a market data company that began online trading in April, and Rushmore Financial is largely an insurance and investment firm that has an Internet daytrading service.

By comparison, industry leader Schwab has converted more than 65% of its trades into the online type, and E*Trade's business is more than 75% online.

But daytraders and online investors looking to make profits from short-term positions don't care.

Take John Chapman, 54, of Phoenix. The retired civil engineer has been trading over the Internet with E*Trade for almost four years and started buying National Discount Brokers and Southwest last month.

"There is no particular reason for being in the brokers," he says via email. "I just go where the money is going and try to be one of the first to go there. It matters little what the company does as long as the chart looks like it is about to break out and the company is in a group that is on the move upward."

Investors are betting on what's to come, not necessarily what's in place, says Michael Flanagan, an independent securities analyst who follows Southwest. In addition to the online brokerage, the company plans to put its clearing on the Internet. Southwest's main business is clearing trades for other brokerages, which involves taking care of the paperwork behind those trades.

"We can view Southwest as we did Schwab a year ago when Schwab's business was increasingly becoming Internet-oriented. I think that's the same type of trend investors are sensing with Southwest," Flanagan says.

But most of these companies have little coverage by analysts, and this lack of pressure enables these firms to reveal much less information about the online brokerage businesses than their competitors.

For instance, Southwest's

doesn't provide account or daily trade figures, two industry stats that many publicly held brokerages do disclose.


, a

Donaldson Lufkin & Jenrette


unit, and


, a

Fleet Financial

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unit, two holdouts on these numbers, began releasing the figures last quarter ahead of planned or expected share issues.

Amar Mehta, an analyst at

CIBC World Markets

, covers Schwab and plans to add E*Trade and Ameritrade to his list. But JB Oxford and others move deeper into the backseat given the upcoming DLJdirect and



"It boils down to resources and interest from my clients. For me to be covering JB Oxford when there isn't a call for it to be made on my side, it doesn't really add any value," Mehta says.

Institutional interest in at least one of these stocks, however, may increase. NDB said Monday it would issue 2.6 million new shares, bringing the number of outstanding shares up to 16.6 million, in an offering underwritten by

BT Alex. Brown


U.S. Bancorp Piper Jaffray


Deutsche Bank

. Currently, the company has 14 million shares outstanding, 3.5 million of which change hands freely.

NDB's issue may also change the second-tier landscape by increasing liquidity, one of the issues that has kept institutions at bay. Through a series of stock splits, E*Trade and Ameritrade have boosted their number of shares outstanding to 115 million and 58 million, respectively, compared with JB Oxford's 14.7 million, Southwest's 10.7 million, Track Data's 14.9 million and M.H. Meyerson's 5.1 million.

Online investors aren't likely to get any competition from institutions for the free-floating shares in Siebert. Its 22 million shares are 96% owned by Chairwoman and President Muriel Siebert, and although the firm is applying to move from


small-cap market to its national market, Siebert hasn't moved to increase the number of shares.

"It would be desirable to have more stock, but I haven't formulated any plans yet," Siebert says.