Correction to This Article
The Washington Investing column in the May 16 Washington Business section incorrectly said the founders of E-Trade Financial Corp. left the firm in 2000. Founder and chairman emeritus William A. Porter continues to serve on E-Trade's board and plans to retire this month.

Online Investing: Consolidate Or Go Home

Mitchell H. Caplan of E-Trade is pursuing consolidation.
Mitchell H. Caplan of E-Trade is pursuing consolidation. (J Carrier - Bloomberg News)
By Jerry Knight
Monday, May 16, 2005

As chief executive of E-Trade Financial Corp., Mitchell H. Caplan is determined to be a winner in the multibillion-dollar game of musical chairs in the online investing business.

Trouble is, so are Charles Schwab, who still runs the discount brokerage firm he founded; J. Joe Ricketts, who controls rival Ameritrade Holding Corp.; Rodger O. Riney, the founder of Scottrade Inc.; and the Canadian bankers who own TD Waterhouse Group Inc.

But there probably aren't going to be more than three seats available when the music stops.

That is why Caplan, after weeks of discreet courtship, went public last week with a $6 billion offer to buy Ameritrade.

Consolidation is inevitable in the online brokerage business, Caplan argued in an interview recently at E-Trade's offices in Ballston. Although officially based in New York, E-Trade operates out of Arlington, where Caplan and other top executives have their offices.

Online Broker Market Share
Caplan has roots in the Washington area. He got into the online financial services business a decade ago by turning a tiny Northern Virginia savings and loan into Telebanc Financial Corp., which grew to become the nation's biggest online bank.

At the height of the Internet boom in 2000, Caplan and his early partners sold Telebanc to E-Trade, another hard-charging Internet pioneer. E-Trade catered to the first generation of online traders, investors who tried to make money by jumping on the latest hot technology stocks.

After the Internet bubble burst and the Nasdaq Stock Market cratered in the spring of 2000, the online trading fad faded rapidly. The number of active traders and the pace of trading plunged. E-Trade lost so much money that its founders were forced out. Telebanc's online banking operation became the tail that wagged the dog, and Caplan began running the company in 2003.

Online trading continues to contract, pushing the industry into survival strategies that look like what the airlines are doing -- cutting costs ruthlessly and cutting prices recklessly. Stock trading commissions, which can be as high as $100 at some full-service brokerage firms, have fallen as low as $7.99 per trade for the most active traders.

As with the airlines, overcapacity is a problem. The online brokerage systems were built when millions of individual investors were playing the frequent-trading game. As those people mature from traders into long-term investors, trading volume falls.

"Financial services by and large are pretty commoditized," said Caplan, who thinks E-Trade's diversified operations give it an advantage over firms like Ameritrade and Scottrade, which get almost all their revenue from trading fees. Caplan figures it is futile to compete on price alone when fewer and fewer people are trading.

But cutting the pie into fewer slices would help, Caplan said. Now, for the second time, he is the leading player in consolidation talks.

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