eTrade 2001 Annual Report Download - page 81

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The security of our computers could be breached or confidential customer information transmitted over public networks
could be breached or misused, which could deter customers from using our services and significantly damage our reputation
Because we rely heavily on electronic communications and secure transaction processing in every aspect of our businesses, we must
protect our computer systems and network from break-ins, security breaches, both physical (e.g., at our ATMs and retail locations) and
electronic (e.g., through “hacking”), and other disruptions caused by unauthorized access. We must also provide for the secure
transmission of confidential information over public networks and prevent unauthorized use of confidential customer information. The
open nature of the Internet makes protecting against these threats more difficult. Unauthorized access to our computers could
jeopardize the security of information stored in and transmitted through our computer systems and network, which could harm our
ability to retain or attract customers, damage our reputation and subject us to litigation and financial losses. We have been in the past,
and could be in the future, subject to denial of service, vandalism and other attacks on our systems. We rely on encryption and
authentication technology, including cryptography technology licensed from a third party provider, to provide secure transmission of
confidential information over public networks. Advances in computer and decryption capabilities or other developments could
compromise the methods we use to protect customer transaction data, which could harm our ability to retain or attract customers. In
addition, we must guard against damage, fraud, embezzlement and unauthorized trading or publication of private information by
persons with authorized access to our computer systems, including individuals employed by us. The security and encryption
technology and the operational procedures we implement to prevent break-ins, damage and failures may be unable to prevent future
disruptions of our operations. Our insurance coverage may be insufficient to cover losses that may result from these events.
As a significant portion of our revenues come from online investing services, downturns or disruptions in the securities
markets have harmed and could further significantly harm our business, including by reducing transaction volumes and
margin borrowing and increasing our dependence on our more active customers who receive lower prices
A significant portion of our revenues in recent years has been from online investing services, and although we continue to diversify our
revenue sources, we expect this business to continue to account for a significant portion of our revenues in the foreseeable future. We,
like other financial services firms, are directly affected by economic and political conditions, broad trends in business and finance and
changes in volume and price levels of securities and futures transactions. The terrorist attacks in the United States on September 11,
2001, for example, resulted in the closing of U.S. financial markets for an unprecedented four days. Future disruption could cause
further decreased activity and may result in the continuation of market volatility and decreased investor activity referred to below. The
U.S. securities markets are characterized by considerable fluctuation and downturns in these markets have harmed our operating
results, including our transaction volume and the rate of growth of new accounts, and could continue to do so in the future. Significant
downturns in the U.S. securities markets occurred in October 1987 and October 1989, and a significant downturn has been occurring
since March 2000. Consequently, transaction volume has decreased industry-wide, and many broker-dealers, including E*TRADE
Securities, have been adversely affected. The decrease in transaction volume has been more significant with respect to our less active
customers, increasing our dependence on our more active Power E*TRADE customers who receive more favorable pricing based on
their transaction volume. When transaction volume is low, our operating results are harmed in part because some of our overhead costs
remain relatively fixed. The possibility exists that U.S. securities markets will continue to be volatile and that prices and transaction
volumes will continue to move downward, either of which could harm our business going forward. Some of our competitors with more
diverse product and service offerings might withstand such a downturn in the securities industry better than we would.
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Downturns in the securities markets increase the risk that parties to margin lending or stock loan transactions with us will fail
to honor their commitments and that the value of the collateral we hold in connection with those transactions will not be
adequate, increasing our risk of losses from our margin lending or stock loan activities
2002. EDGAR Online, Inc.