Internet stock brokerage firms have thrived on the hyperactive trading that has driven the stock market to dizzying highs. But the party is winding down, analysts and executives say, as the price of a trade--and the number of them--is poised to tumble.

The competition to break out of the pack is becoming so intense that online brokers are expected to spend $1 billion in advertising next year. Indeed, financial giant American Express Co. had suddenly waded into the arena, offering a radical new way to pay--or even not pay--for what used to be an unquestioned all-in-one fee. And other brokers are experimenting with different pricing plans.

Just today, an online broker that offers free trades for Nasdaq orders of at least 1,000 shares went public. Shares of Web Street Inc., whose accounts have grown from 5,700 to 73,000 in 18 months, rose 12.5 percent, to $12.37 1/2. The company charges $14.95 for all other orders.

The initial public offering, the first by an online brokerage since June, came a week after American Express began offering free Web trading to customers with more than $100,000 in their brokerage account--and free purchases to those with $25,000. The maximum is 3,000 shares.

"We're getting in a day the number of new accounts we expected in a week," gushed Ruediger Adolf, a senior vice president of strategic planning at American Express, who calls trade execution an "absolute commodity."

Henry H. McVey, a Morgan Stanley Dean Witter & Co. analyst, said in a recent report that the move is massively threatening to brokers who rely on trades for a hefty part of their income. "It's just the beginning of a slippery slope as commissions head toward zero."

McVey predicts that the average for all commissions will fall from $80 today to $28 in 2003. That may pose problems for old-line brokers such as Merrill Lynch & Co. and Morgan Stanley Dean Witter, which have moved online by charging higher trade fees but providing additional advice and information. Merrill Lynch plans to offer online trades for $29.95 a pop, beginning Dec. 1, a fee that now looks relatively high.

"Why pay even $15 for a trade when you can do it for free?" asks Steve Galbraith, an analyst at Bernstein Research. "Soon, they will be giving away free toasters."

In a new report, Galbraith predicts an imminent plunge in the cost of trading--and therefore the profitability of more than 100 online firms that have mushroomed on the Internet.

For one, Galbraith predicts that many people will realize that rapid-fire trading is self-defeating. "We expect to see a profound deceleration in trades in a period of lower market returns," Galbraith's report said. "The novelty factor of the Internet brokerage business is wearing off--and fast."

Most Internet brokerage stocks are down 50 percent this year from their highs. Still, the recent run-up of tech stocks that has given the Nasdaq a two-week winning streak has kept hyperactive investors on board--at least for the moment.

It is hard to pin down precise numbers for the industry, because many online companies are not public and those that are part of larger public companies typically do not break out results.

But anecdotal evidence shows a recent slowdown in online trading, with a smattering of positive results. E-Trade Group Inc.'s losses have risen sharply in recent quarters, particularly because of marketing expenses. National Discount Brokers Group Inc., which lost money last year, posted a profit of $435,000 for the most recent quarter. Charles Schwab Corp.'s net income rose 27 percent, to $125 million.

So far this year, Galbraith said, commissions have stayed steady, Over the next few years, he predicted, they will fall 50 percent.

Picture this: A typical Merrill client with a $500,000 traditional account can leave $150,000 in a fee-based account to maintain an advisory relationship, which costs $1,500 a year, and move the balance to the discount offering. Galbraith estimates that the customer then can cut 45 percent off his annual brokerage bills.

Brokerage firms have said they will counteract with new products. Schwab, for instance, is trying to expand in the underwriting arena, with a new plan to bring the roadshows of companies going public to small investors over the Internet.

When Bernstein surveyed senior Wall Street executives on whether they would advise their children to become brokers, none gave an unconditional "yes" answer. Some, however, said they might suggest becoming an Internet analyst.

Staff researcher Richard Drezen contributed to this report.

CLIENTS AND BROKERAGES IN PROFILE

These are the characteristics of the average clients and three major stock brokerages:

Merrill Lynch

Age: 60

Income: $150,000 in investable assets

Revenue per client: $2,000

Assets per client: $250,000

Annual client trades: 4 plus

Number of clients: 5 million

Total retail trades: 17 million

Estimated commission per trade: $155

Schwab

Age: 35-55

Income: $90,000 plus

Revenue per client: $600

Assets per client: $90,000

Annual client trades: 8 plus

Number of clients: 6 million

Total retail trades: 48 million

Estimated commission per trade: $40

E*Trade

Age: 28-45

Income: $75,000

Revenue per client: $500

Assets per client: $25,000

Annual client trades: 20 plus

Number of clients: 1.4 million

Total retail trades: 28 million

Estimated commission per trade: $20

SOURCE: Bernstein Research