In the latest sign that the online brokerage business has lost its luster for big Wall Street firms,

Morgan Stanley Dean Witter

(MWD)

sold part of its online investing arm to Canada's

Bank of Montreal

(BMO) - Get Report

last week for $106 million.

The move is part of a larger wave of consolidation washing over the struggling sector. After spending millions to keep up with online upstarts in the boom years, investment banks are paring back their online offerings to focus on full-service private banking, while those with discount online operations aim to build scale and win active traders.

Morgan Stanley sold 150,000 online-only accounts with some $7 billion in assets to the Canadian bank, small potatoes when compared with the nearly $588 billion in individual investor assets the company had under management at the end of the first quarter. Morgan Stanley held on to those investors who access their accounts online but also use financial advisory services.

Evolving Landscape

"If you look at it from the perspective of the online operations, there's certainly been a dramatic retrenchment across the board that makes holding that asset less profitable and less favorable than it was a few years back," said Dennis Ceru, director of retail brokerage and investing at Tower Group. "And with the obvious consolidation of the online world, it's a natural for this to continue."

While online trading volumes were inflated during the boom years, they crashed harder when the market tanked. In fact, total trades per day for the online firms have fallen almost 25% on a year-over-year basis since May 2000, vs. 8% for full-service firms, says Ceru.

Morgan Stanley, which was the first player in the online brokerage business in 1997, was also one of the last big investment banks to continue servicing online discount accounts.

Earlier this year,

Credit Suisse First Boston

sold its online operation, CSFB direct, to Bank of Montreal for $540 million. Other investment banks have scaled back and shifted their focus to wealthier clients.

Merrill Lynch

(MER)

cut back on advertising for the online segment at the end of 2000, and

J.P. Morgan

(JPM) - Get Report

shelved what were initially more ambitious expansion plans. Now most investment banks simply offer online access to full-service accounts.

Charles Schwab remains the only traditional retail brokerage that offers the full gamut of services, from discount to private banking, analysts said. "You can have both, but no one firm can be all things to all people," says Ceru. "Firms are segmenting out, redefining, focusing on their core competencies."

Looking South

For the Bank of Montreal, U.S. online accounts give it a chance to sell its other banking products to a new customer base. Canadian banks have been raiding the U.S. for growth opportunities; their market is dominated by just five banks, and big mergers have lately been hard to push through.

"It's the company's entree into offering banking services," said Jaime Punishel, a senior analyst at Forrester Research. It's the same tack that

E*Trade

(ET) - Get Report

has been taking lately, adding a wide range of banking services, including insurance products and checking accounts, that it can sell to its online trading customers.

Meanwhile, because the online discounters offer lower prices, they have to keep costs down by spreading them over a wider account base. To compete in the online brokerage business, the bank needs to build scale.

Bank of Montreal will merge its new Morgan accounts into its Harrisdirect online arm with the CSFBdirect accounts it purchased from Credit Suisse First Boston in February. The new purchase brings Bank of Montreal's total accounts up to about 1 million, and assets under management to $38 billion. Bank of Montreal is still playing catch-up with E*Trade and Charles Schwab in terms of assets under management, and it trails Ameritrade in number of accounts.

Online trading outfit

Ameritrade

(AMTD) - Get Report

picked up Datek's actively traded accounts for $1.3 billion in April, bringing its total to almost 2 million accounts and $31.6 billion in assets under management. Shortly afterward, E*Trade grabbed another active trading outlet, Tradescape, for stock worth $100 million. E*Trade now has around 4 million accounts and $46 billion in managed assets. The biggest in the business, Schwab, manages 7.9 million accounts and $858 billion in assets.

"If

Bank of Montreal is paying the right price for it and can leverage existing platforms, leverage its technology expense, maybe they can make it work. That's Ameritrade's bet," said Anton Schutz, portfolio manager of Burnham Financial Services Fund, which manages $35 million in assets. "If you've got the pockets you can wait and build. Bank of Montreal is obviously taking that approach."