eTrade 2000 Annual Report Download - page 41

fiscal 1998. The decreases in payments for order flow in fiscal 2000 and 1999 are due to changes in the order flow mix, a decrease in
the average shares per equity transaction, and the continued impact of the SEC’ s order handling rules, which reduced the bid/ask
spread, thereby reducing market maker margins and limiting their ability to pay for order flow. Also contributing to the decline from
fiscal 1998 was the loss of Roundtable earnings, which ended when Roundtable was reorganized as Knight/Trimark, Inc. and went
public in July 1998. Until its initial public offering, Knight/Trimark would allocate a portion of its earnings to its owners, including the
Company, based on the percentage its owners contributed to Knight/Trimark's total order flow. The Company previously recorded the
amounts it received under this allocation as payment for order flow revenue. There can be no assurance that we will be able to
continue our present relationships and terms for such payments for order flow. In addition, there can be no assurance that payments for
order flow will continue to be permitted by the SEC, the National Association of Securities Dealers Regulation, Inc. (“NASDR”) or
other regulatory agencies, courts or governmental units. Loss of any or all of these revenues could have a material adverse effect on
our business, financial condition and operating results. See “Item 7. Risk factors—Loss or reductions in revenue from order flow
rebates could harm our business.”
Interest Income and Expense
Interest income from brokerage-related activities is comprised of interest earned by our brokerage subsidiaries on credit extended to
customers to finance their purchases of securities on margin and fees on customer assets invested in money market accounts. Interest
expense from brokerage-related activities is comprised of interest paid to customers on certain credit balances, interest paid to banks
and interest paid to other broker-dealers through our brokerage subsidiary's stock loan program. Interest income from banking-related
activities reflects interest earned on assets, consisting primarily of loans receivable and mortgage-backed securities. Interest expense
from banking-related activities is comprised of interest-bearing banking liabilities that include customer deposits, advances from the
Federal Home Loan Bank of Atlanta (“FHLB”) and other borrowings.
Brokerage interest income increased 163% from fiscal 1999 to fiscal 2000 and 105% from fiscal 1998 to fiscal 1999. Increases in
brokerage interest income in fiscal 2000 and 1999 primarily reflect the overall increase in average customer margin balances and
average customer money market fund balances. Assets in domestic brokerage accounts totaled $59,901 million in fiscal 2000, an
increase of 111% from $28,445 million in fiscal 1999, which was an increase of 155% from $11,175 million in fiscal 1998. Increases
in brokerage interest expense in fiscal 2000 and 1999 are mainly due to an overall increase in average customer credit balances and
average stock loan balances.
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The following table sets forth the increases in average customer margin balances, average customer money market fund balances,
average customer credit balances and average stock loan balances for the years indicated (dollars in millions):
Percentage Change
Years Ended September 30, 2000 1999
versus versus
2000 1999 1998 1999 1998
Average customer margin balances $ 4,379 $ 1,853 $ 925 136 % 100 %
Average customer money market fund balances $ 6,793 $ 3,207 $ 1,396 112 % 130 %
Average customer credit balances $ (1,397 ) $ (493 ) $ (244 ) 183 % 102 %
Average stock loan balances $ (3,597 ) $ (1,098 ) $ (683 ) 228 % 61 %
Banking interest income increased 158% from fiscal 1999 to fiscal 2000 and 92% from fiscal 1998 to fiscal 1999. Increases in
banking interest income in the past two years reflect an increase in the average interest-earning banking asset balances, average interest
yield, active banking accounts, net new banking accounts and total deposits in banking accounts. Average interest-earning banking
assets increased 134% from fiscal 1999 to fiscal 2000 and 103% from fiscal 1998 to fiscal 1999. The average yield on interest-earning
banking assets increased to 7.73% in fiscal 2000 from 7.01% in fiscal 1999, which decreased from 7.28% in fiscal 1998. Active
banking accounts increased 196% from fiscal 1999 to fiscal 2000 and 92% from fiscal 1998 to fiscal 1999. Net new banking accounts
increased 308% from fiscal 1999 to fiscal 2000 and 74% from fiscal 1998 to fiscal 1999. Total deposits in banking accounts increased
121% from fiscal 1999 to fiscal 2000 and 83% from fiscal 1998 to 1999. Banking interest expense increased 165% from fiscal 1999 to
fiscal 2000 and 78% from fiscal 1998 to fiscal 1999. The increase in banking interest expense in fiscal 2000 reflects an increase in the
average interest-bearing banking liabilities coupled with an increase in the average cost of the borrowings. The increase in banking
2002. EDGAR Online, Inc.