eTrade 2000 Annual Report Download - page 52

To date, during our systems failures, we were able to take orders by telephone; however, with respect to our brokerage transactions,
only associates with securities brokers’ licenses can accept telephone orders. An adequate number of such associates may not be
available to take customer calls in the event of a future systems failure, and we may not be able to increase our customer service
personnel and capabilities in a timely and cost-effective manner. Our inability to process customer orders by the telephone during
systems failures or degradation could result in customer losses, harm to our reputation, loss of existing customers, difficulty attracting
new customers and customer litigation.
Our inability to expand our technology could seriously harm our business
The rapid growth in the use of our services has occasionally strained our ability to adequately expand technologically. As we acquire
new equipment and applications quickly, we sometimes have a short time to test and validate hardware and software, which could lead
to performance problems if there are undetected hardware or software problems. In addition, we rely on a number of third parties to
process our transactions, including online and Internet service providers, back office processing organizations, other service providers
and market-makers, all of which will need to expand the scope of the operations they perform for us. Any backlog caused by a third
party’ s inability to expand sufficiently to meet our needs could have a material adverse effect on our business, financial condition and
operating results.
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As a significant portion of our revenues come from online investing services, any downturn in the securities industry could
significantly harm our business
A significant portion of our revenues in recent years has been from online investing services, and 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 U.S. securities markets are characterized by considerable fluctuation and a downturn in these
markets could adversely affect our operating results. Significant downturns in the U.S. securities markets occurred in October 1987
and October 1989. The U.S. securities markets have recently been more volatile than usual, and prices have moved mostly downward
since March 2000. Consequently, transaction volume has decreased industry-wide and many broker-dealers, including E*TRADE,
have been adversely affected. When transaction volume is low, our operating results may be adversely affected because overhead
remains relatively fixed. Severe market fluctuations in the future could have a material adverse effect on our business, financial
condition and operating results. Some of our competitors with more diverse product and service offerings might withstand such a
downturn in the securities industry better than we would. See “Item 7. Risk Factors–Our business will suffer if we cannot effectively
compete.”
Our brokerage business, by its nature, is subject to various other risks, including customer default and employee misconduct and
errors. We sometimes allow customers to purchase securities on margin, and we are therefore affected because we are subject to risks
inherent in extending credit. This risk is especially great when the market is rapidly declining and the value of the collateral we hold
could fall below the amount of a customer’ s indebtedness. Under specific regulatory guidelines, any time we borrow or lend securities,
we must correspondingly disburse or receive cash deposits. If we fail to maintain adequate cash deposit levels at all times, we run the
risk of loss if there are sharp changes in market values of many securities and parties to the borrowing and lending transactions fail to
honor their commitments. Any such losses could have a material adverse effect on our business, financial condition and operating
results.
Changes in interest rates may reduce the Bank’s profitability
The results of operations for the Bank depend in large part upon the level of its net interest income, that is, the difference between
interest income from interest-earning assets, such as loans and mortgage-backed securities, and interest expense on interest-bearing
liabilities, such as deposits and borrowings. In addition, changes in market interest rates could reduce the value of the Bank’ s financial
assets. Fixed-rate investments, mortgage-backed and related securities and mortgage loans generally decline in value as interest rates
rise. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic
and political conditions.
The Bank attempts to mitigate this interest rate risk by using derivative contracts that are designed to offset, in whole or in part, the
variability in value or cash flow of various assets or liabilities caused by changes in interest rates. There can be no assurances that
these derivative contracts move either directionally or proportionately as intended. SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities , which the Company adopted on October 1, 2000, requires that the hedge ineffectiveness, or the
change in value of the hedged item versus the change in value of the hedging instruments, be recognized in earnings as of the reporting
date. Our financial results may prove to be more volatile due to this new reporting requirement.
2002. EDGAR Online, Inc.