eTrade 2002 Annual Report Download - page 51

Table of Contents
Index to Financial Statements
implementation of a simplified $9.99 flat commission rate program for the active trader segment in June 2002. This new program, combined
with an increase in the transactions generated by this customer segment for fiscal 2002 compared to the same period in 2001, accounts for a
majority of the decrease in average commission per brokerage transactions over the same period. The decrease in fiscal 2001 from fiscal 2000
was also impacted by transaction mix, with option transactions, which have higher commissions than equity transactions, representing a smaller
percentage of total transactions in fiscal 2001, compared to fiscal 2000. Commissions from professional traders are based on share volumes as
compared to transactions. The decrease in brokerage transactions during fiscal 2002 was partially offset by commission revenues from
professional trading as a result of the acquisition of E*TRADE Professional Trading in June 2002.
Principal transactions , which comprise institutional and market-making revenues, increased 37% from fiscal 2002 to fiscal 2001 and 7% from
fiscal 2000 to fiscal 2001. These increases are primarily due to the impact of a full year in fiscal 2002 of market-making revenues following our
October 2001 acquisition of Dempsey.
Other brokerage-related is comprised of account maintenance fees, implemented in December 2001, mutual fund management fees, payments
for order flow from outside market makers, BSG revenue, professional trading rebate revenues, fees for brokerage-related services and ECN
fees. Other brokerage-related revenues increased 14% from fiscal 2001 to fiscal 2002 and decreased 4% from fiscal 2000 to fiscal 2001. The
increase from fiscal 2001 to fiscal 2002 is primarily due to an increase in account maintenance fees, mutual fund revenues, revenues associated
with the internalization of the money market funds that are offered to brokerage customers beginning in October 2002 and professional trading
rebate revenues from our acquisition of E*TRADE Professional Trading in June 2002, offset by a reduction in payment for order flow revenue.
The increase also includes a $6million gain on the fiscal 2002 sale of the Company’ s shares in the Toronto Stock Exchange. The decrease from
fiscal 2000 to fiscal 2001 is primarily due to a decrease in payment for order flow revenue partially offset by an increase in other
brokerage-related fees. The decrease in payment for order flow revenue is primarily due to competitive forces and the advent of decimalization
in the major market exchanges beginning in January 2001 and implemented by Nasdaq in March 2001. Further, following our acquisition of
Dempsey in October 2001, customer orders executed through Dempsey no longer give rise to order flow revenues but instead result in
market-making revenues included in principal transactions.
Interest income from brokerage-related activities is primarily comprised of interest earned by our brokerage subsidiaries on credit extended to
customers to finance purchases of securities on margin, interest earned on cash and investments required to be segregated under Federal or
other regulations and fees on customer assets invested in money market accounts. Brokerage interest income decreased 40% from fiscal 2001 to
fiscal 2002 and 34% from fiscal 2000 to fiscal 2001. The decrease in brokerage interest income primarily reflects the decrease in average
customer margin balances, which decreased 40% from fiscal 2001 to fiscal 2002 and 53% from fiscal 2000 to fiscal 2001. The sluggish
economy and continued market decline over the past year, which has decreased the value of net assets held by investors, has reduced borrowing
on margin by customers.
Interest expense from brokerage-related activities is primarily comprised of interest paid to customers on certain credit balances, interest paid to
banks and interest paid to other broker-dealers through a brokerage subsidiary’ s stock loan program. Brokerage interest expense decreased 86%
from fiscal 2001 to fiscal 2002 and 61% from fiscal 2000 to fiscal 2001. The decrease in brokerage interest expense primarily reflects an
overall decrease in interest rates and reduced margin borrowings.
Banking Revenues
Gain on sales of originated loans is comprised of gains on loans originated by E*TRADE Mortgage, which we acquired in February 2001.
Gain on sales of originated loans increased 35% from fiscal 2001 to fiscal 2002 due to an increased level of volume of direct-to-customer
originations driven by higher refinance and home purchase volumes as mortgage interest rates decreased to record lows throughout fiscal 2002.
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