eTrade 2004 Annual Report Download - page 38

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Table of Contents
Index to Financial Statements
principal transactions. For both 2004 and 2003, commissions, which constitute the largest portion of our net brokerage revenues increased 4%
and 14%, respectively, from the prior comparable year.
•
DARTs increased in both 2003 and 2004 from the prior comparable year primarily as a result of a resurgence in market activity, which
rose from the relatively low levels reached in 2001 during an industry-wide drop in trading activity, our acquisition of professional
traders and our customer segmentation initiatives. During the first quarter of 2004, we launched Priority E*TRADE. Priority
E*TRADE targeted Serious Investors and created a third tier in our retail price structure, offering base commission rates on equity and
option trades for qualified customers of $12.99 per trade from $22.99 per trade. In June 2002 we implemented a program for Active
Traders, creating a second tier in our retail price structure, offering a simplified $9.99 flat base commission rate program. Also in June
2002 we completed the acquisition of E*TRADE Professional which included professional traders that generally execute trades at a
higher rate than our other customer segments.
Principal transactions include revenues from institutional customers, market-making revenues and net gains on proprietary trading. The
Company provides institutional customers with global trading and settlement services, as well as worldwide access to research provided by
third parties, in exchange for commissions based on negotiated rates. As such, our principal transactions revenues are influenced by overall
trading volumes, the number of stocks for which we act as a market maker, the trading volumes of those specific stocks and the trading
performance of our proprietary trading activities. Principal transactions increased from 2003 to 2004 due to increased market-
making and gains
on proprietary trading, partially offset by decreased institutional trading revenues. Principal transactions increased from 2002 to 2003 due to
increases in institutional trading revenues and net gains on proprietary trading, offset by decreased market-making revenues.
•
With the implementations of the above mentioned retail pricing programs, average commission per revenue trade decreased in both
2004 and 2003 to $10.75 and $11.32 per trade, respectively from $13.48 in 2002. The overall decline in average commission per
revenue trade came from increased volume from professional traders, reductions in the pricing offered to certain active traders, whose
trades represented approximately half of retail trades and approximately one-third of total trades, and a reduction in commission per
revenue trade from our international trading. Increased trading by professional traders reduces our average commission per revenue
trade because professional traders are generally charged lower commissions than retail customers. Of the total $0.57 decrease in
average commission per revenue trade from 2003 to 2004, pricing reductions and changes in the trade mix within each of the
businesses contributed the majority with a decrease of $0.67 per average revenue trade. This was partially offset by a $0.10 increase
resulting from the change in the mix of trades executed between domestic, international and professional businesses. Of the total $2.16
decrease from 2002 to 2003, the full year impact of professional traders contributed $1.65, change in retail pricing contributed $0.43
and our international operations contributed the remaining $0.08.
•
Market-making revenues increased from $81 million to $91 million from 2003 to 2004 due to significantly increased volume from
bulletin board stocks and to a lesser extent listed stocks, coupled with an increase in revenue capture on over-the-
counter traded shares.
Market-making revenues decreased from 2002 to 2003 by $8.7 million, although overall volumes of equity shares traded were nearly
50% higher in 2003 than in 2002, as trading in bulletin board stock comprised a larger portion of the mix of securities in which we
make a market.
•
Net gains on proprietary trading increased from $24 million to $36 million from 2003 to 2004 due to increases in the number of trades,
shares traded and revenue per share. Proprietary trading increased from 2002 to 2003 due to our acquisition of E*TRADE Professional
in June 2002.
32
•
Institutional revenues were $125 million in both 2003 and 2004 as institutional trading activity remained relatively consistent from
2003 to 2004. Institutional revenues increased from 2002 to 2003 due primarily to our acquisition of Engelman in December 2002.