Online brokerages are in the midst of the biggest battle of their young lives.
The combination of potential government legislation to protect day traders from themselves, and continued service outages at their web sites, could signal the end for some of these upstart companies. Unfortunately, for the online brokers, bad news loves misery, and with traditional brokers like Merrill Lynch and Morgan Stanley finally making serious, well-capitalized moves onto the Web, the online brokers can expect to see their market share and trading fees drop as the companies scamper to stay alive. Like there brethren, the online retailers, online brokers are responding to the renewed competition by flooding the media with advertising. As the e-retailers know if you increase the amount you spend on advertising, you get lower margins. That shortfall leaves online brokers reliant on interest income from margin trades as the only way to stay solvent.