(February 13) – “By dot-com standards, online-brokerage firms have fared pretty well. They are still standing, unlike many online firms beyond the canyons of Wall Street,” writes Randall Smith in today’s Wall Street Journal.

“But a shakeout may soon reduce their ranks.”

“The severe downturn in the Nasdaq Stock Market over the past eight months, which has been even more severe in the Internet-stock sector, has obviously discouraged many casual online traders, who often piled into tech stocks. And now that most full-service brokerage firms have incorporated Web-based trading into their own service menus, analysts and investors say online brokers occupy an increasingly narrow niche. When the dust settles, some say, not all the pioneers may be left standing.”

“The latest straw in the wind was a threatened declaration of default Friday by Standard & Poor’s, the credit-rating agency, on $200 million of debt of Ameritrade Holding, after the big online broker unveiled plans for a debt redemption at a steep discount to face value. Although Ameritrade disputed S&P’s characterization of the swap, the fact that institutional investors were willing to accept 66% of face value on the debt put a spotlight on doubts about the firm’s finances.”

“Scott Appleby, a financial technology analyst at the Robertson Stephens unit of FleetBoston Financial, says that online brokers are ‘finally going to see some merger-and-acquisition activity. Let’s face it, without growth coming organically, the cost structures are too high right here. And the inherent advantages of the Internet are all about scale.’ “

“Henry McVey, who follows securities firms and online brokers at Morgan Stanley Dean Witter, predicts ‘massive consolidation’ in the sector because ‘there’s too much capacity.’ He predicts that the 140 online brokers in the U.S. will dwindle down to a half-dozen or more ‘scale producers.’ “

“Among those likeliest to be snapped up, Mr. Appleby predicts, are Ameritrade and Datek Online Holdings, with either E*Trade Group or TD Waterhouse Group surviving to make such acquisitions. Ameritrade and Datek are more vulnerable, he and other analysts say, because they are the least diversified.”

“Although Charles Schwab and TD Waterhouse are solidly profitable, results have been more erratic at E*Trade and Ameritrade. Mr. Appleby notes that Ameritrade would be squarely in the black if it eliminated its $200 million annual marketing spending.”

“Richard Repetto, who follows Ameritrade at Putnam Lovell Securities, says Ameritrade is the likeliest acquisition candidate because it has focused on online trading without investing in an extensive system of bricks-and-mortar branches. ‘They’re such a clean company; all they do is focus on online trading,’ he says.”