eTrade 2001 Annual Report Download - page 60

Volatile market conditions in the latter half of fiscal 2000, followed by a general market decline through fiscal 2001 and coupled with
our focus on revenue diversification beginning in fiscal 2000, have resulted in a reduction in transaction revenues as a percentage of
net revenues. Transaction revenues as a percentage of net revenues have decreased to 32% in fiscal 2001 from 54% in fiscal 2000,
which remained flat from 53% in fiscal1999.
Commission revenues, which are earned as customers execute domestic securities transactions, decreased 46% from fiscal 2000 to
fiscal 2001 and increased 107% from fiscal 1999 to fiscal 2000. Commission revenues are primarily affected by total domestic
brokerage transactions, which decreased 36% from fiscal 2000 to fiscal 2001. This decrease reflects the sustained economic downturn
experienced through fiscal 2001 as unfavorable economic news impacted investor trading. The increase in commission revenue in
fiscal 2000 reflects the unprecedented growth in the market through the second quarter of fiscal 2000, which was somewhat offset by a
decline in the latter part of that year. Active domestic brokerage accounts increased 15% from fiscal 2000 to fiscal 2001 compared to a
90% increase from fiscal 1999 to fiscal 2000. Daily average domestic brokerage transactions decreased 32% from fiscal 2000 to fiscal
2001 compared to an increase of 144% from fiscal 1999 to fiscal 2000. The average commission per domestic transaction decreased to
$13.16 in fiscal 2001 from $15.52 in fiscal 2000, which decreased from $18.35 in fiscal 1999. The decline in average commission per
domestic transaction is a result of promotional activities, changes in the mix of revenue generating transactions and the August 1999
implementation of the Power E*TRADE program, a component of which includes reduced
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commissions for active traders. Commission revenues as a percentage of net revenues are expected to decrease as we continue to
diversify revenue streams and execute on cross-selling initiatives across business lines.
Revenue from order flow is comprised of rebate income from various market makers and market centers that process our transactions.
We use many market makers including Dempsey, a market-making specialist firm which we acquired October 1, 2001, and other
broker-dealers to execute our customers’ orders and, in recent years, have derived a significant portion of our transaction revenues
from these broker-dealers. Rebate income from transactions processed through Dempsey subsequent to October 1, 2001 is eliminated
in our consolidation. The practice of receiving payment for order flow is widespread in the securities industry. Under applicable SEC
regulations, receipt of these payments requires disclosure of such payments by us to our customers. Payments for order flow decreased
36% from fiscal 2000 to fiscal 2001 and increased 110% from fiscal 1999 to fiscal 2000. This decrease primarily reflects the 36%
decrease in domestic brokerage transactions processed from fiscal 2000 to fiscal 2001 and the 145% increase in domestic brokerage
transactions processed from fiscal 1999 to fiscal2000.
Further impacting revenues from order flow, in January 2001, the listed marketplace implemented the move from fractional-based
trading to decimal-based trading, commonly referred to as decimalization. The Nasdaq initiated decimalization in March 2001. The
implementation of decimalization, which resulted in reduced market-maker and market center spreads, has decreased the order flow
payments they are willing to make. Further, with the acquisition of Dempsey in October 2001, revenue from order flow decreased in
the fourth quarter to the extent we directed order flow to Dempsey. Other revenues have increased from the date of acquisition
reflecting principal market-making revenues earned by Dempsey of $25.9 million, offsetting the decrease in order flow revenues. The
decrease in order flow revenue associated with equity transactions has been partially offset by the receipt of option order flow
beginning in October 2000. We cannot be certain that rebates per transaction will continue at the same levels in future periods.
However, at this time, we are unable to quantify the future impact on net revenues. Further, there can be no assurance that we will be
able to continue our present relationships and terms for such payments for order flow. Also, 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 harm our business. See “Item 2.
Risk Factors—Restrictions on the ability of, or decreased willingness of, third parties to make payments for order flow or potential
payments by us to third parties for handling orders could reduce our profitability.”
Interest Income and Expense
2002. EDGAR Online, Inc.