eTrade 2002 Annual Report Download - page 76

Table of Contents
Index to Financial Statements
The Bank’s diversification of its asset portfolio to include riskier, higher-yielding investments may increase the level of charge-offs
As the Bank diversifies its asset portfolio through purchases and originations of higher-yielding asset classes, such as automobile, marine and
RV loans and retained interests in asset securitizations, we will have to manage assets that carry a higher risk of default than our existing
portfolio. Consequently, the level of charge-offs associated with these assets may be higher than previously experienced. In addition, if the
overall economy continues to weaken, we could experience higher levels of charge-offs. If expectations of future charge-offs increase, a
corresponding increase in the amount of our loan loss allowance would be required. The increased level of provision for loan losses recorded to
meet additional loan loss allowance requirements could adversely impact our financial results if those higher yields do not cover the provision
for loan losses.
Risks associated with trading transactions at our specialist/market maker could result in trading losses
A majority of our specialist and market-making revenues at Dempsey are derived from trading by Dempsey as a principal. Dempsey may incur
trading losses relating to the purchase, sale or short sale of securities for its own account as well as trading losses in its specialist stocks and
market maker stocks. From time to time, Dempsey may have large position concentrations in securities of a single issuer or issuers engaged in a
specific industry. In general, because Dempsey’ s inventory of securities is marked to market on a daily basis, any downward price movement in
those securities will result in a reduction of revenues and operating profits. Dempsey also operates a proprietary trading desk separately from its
specialist and market maker operations, which may also incur trading losses.
Reduced spreads in securities pricing, levels of trading activity and trading through market makers and/or specialists could harm our
specialist and market maker business
The listed marketplaces have moved from trading using fractional share prices to trading using decimals. As a result, spreads that specialists
and market makers receive in trading equity securities have declined and may continue to decline, which could harm revenues generated by
Dempsey. Also, the advent of decimalization led to a decline in order flow revenue received by us from market makers and marketplaces.
Similarly, a reduction in the volume and/or volatility of trading activity could also reduce spreads that specialists and market makers receive,
also adversely affecting revenues generated by Dempsey.
Alternative trading systems that have developed over the past few years could also reduce the levels of trading of exchange-listed securities
through specialists and the levels of over-the-counter trading through market makers. In addition, ECNs have emerged as an alternative forum
to which broker-dealers and institutional investors can direct their limit orders. This allows broker-dealers and institutional investors to avoid
directing their trades through market makers. As a result, Dempsey may experience a reduction in its flow of limit orders.
If we do not successfully manage consolidation opportunities, we could be at a competitive disadvantage
There has been significant consolidation in the online financial services industry over the last several years, and the consolidation is likely to
continue in the future. Should we fail to take advantage of viable consolidation opportunities or if we overextend our efforts by acquiring
businesses that we are unable to integrate or properly manage, we could be placed at a competitive disadvantage. Acquisitions entail numerous
risks including retaining or hiring skilled personnel, integrating acquired operations, products and personnel and the diversion of management
attention from other business concerns. In addition, there can be no assurance that we will realize a positive return on any of these investments
or that future acquisitions will not be dilutive to earnings.
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2003. EDGAR Online, Inc.