eTrade 2003 Annual Report Download - page 42

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Table of Contents
Index to Financial Statements
RISK FACTORS
Risks Relating to the Nature of the Financial Services Business
Many of our competitors have greater financial, technical, marketing and other resources
We face direct competition from retail and institutional financial service companies in each of our lines of business. Many of our
competitors have longer operating histories and greater resources than we do and offer a wider range of financial products and services. Many
also have greater name recognition, greater market acceptance and larger customer bases. These competitors may conduct extensive
promotional activities and offer better terms, lower prices and/or different products and services to customers than we do. Moreover, some of
our competitors have established relationships among themselves or with third parties to enhance their products and services. This means that
better than we can.
Downturns or disruptions in the securities markets could reduce transaction volumes and margin borrowing and increase 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. Like other
disruptions to the securities markets and changes in volume and price levels of securities and futures transactions.
A significant downturn in the U.S. securities markets commenced in March of 2000, resulting in industry-wide declines in transaction
volume. While volumes recently have begun to increase, any decrease in transaction volume may be more significant for us with respect to our
less active customers, increasing our dependence on our more active and professional trading customers who receive more favorable pricing
based on their transaction volume. Decreases in volumes, as well as securities prices, are also typically associated with a decrease in margin
borrowing. Because we generate revenue from interest charged on margin borrowing, such decreases result in a reduction of revenue to
E*TRADE Clearing. When transaction volume is low, our operating results are harmed in part because some of our overhead costs remain
relatively fixed.
Downturns in the securities markets increase the credit risk associated with margin lending or stock loan transactions
We permit customers to purchase securities on margin. When the market declines rapidly, there is an increased risk that the value of the
collateral we hold in connection with these transactions could fall below the amount of a customer’s indebtedness. Similarly, as part of our
broker-dealer operations, we frequently enter into arrangements with other broker-dealers for the lending of various securities. Under
regulatory guidelines, when we borrow or lend securities, we must generally simultaneously disburse or receive cash deposits. We may risk
losses if there are sharp changes in market values of many securities and the counterparties to the borrowing and lending transactions fail to
honor their commitments. Any downturn in public equity markets may lead to a greater risk that parties to stock lending transactions may fail
to meet their commitments.
We may be unsuccessful in managing the effects of changes in interest rates and the interest-bearing assets in our portfolio
The results of operations for the Bank depend in large part upon its level of net interest income, that is, the difference between interest
income from interest-earning assets (such as loans and mortgage-backed and other asset-backed securities) and interest expense on interest-
bearing liabilities (such as deposits and borrowings). The Bank has derivatives to help manage its interest rate risk. However, derivatives
utilized may not be entirely effective and changes in market interest rates and the yield curve could reduce the value of the Bank’s financial
assets and reduce net interest income. Many factors affect interest rates, including governmental monetary policies and domestic and
international economic and political conditions.
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