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. Last Updated: 07/27/2016

U.S. Merrill Lynch to Offer Web Discounts




NEW YORK -- In a move that may spark price cutting across the brokerage industry, Merrill Lynch & Co. said by December it will enable its 5.4 million U.S. customers to trade over the Internet at a sharp discount.


It is a bold and risky move for the flagship of Wall Street's full-price, full-service brokerage fleet, and it is a powerful acknowledgment of the changes that online trading has brought to the financial-services industry.


For investors, it will mean lower trading fees across the board, as the rest of the traditional brokerage industry is sure to follow suit, analysts said.


Indeed, Morgan Stanley Dean Witter & Co., Citigroup Inc.'s Salomon Smith Barney unit, and PaineWebber Inc. reportedly are preparing online-trading offerings for later this year. With less fanfare, Prudential Securities last month unveiled its own, less radical Internet and discount-trading strategy.


Another wave of consolidation may sweep the industry, as big companies scramble to acquire online trading companies as a way of gaining quick access to the business, experts said.


Internet trading volume has exploded to an average of 499,000 trades per day in the first quarter of 1999 from 190,000 trades a day a year earlier, according to C.S. First Boston. Online trading now accounts for 14 percent of all stock transactions, by individuals and institutions combined, the company said.


Merrill customers today often pay commissions of $300 per trade, or 10 times the $29.95-per-trade price that it will begin offering Dec. 1.


Another option Merrill will offer to customers with assets of $100,000 and up is unlimited, commission-free trading at a minimum annual fee of $1,500.


"They've undercut their entire business model of nice, fat commissions,'' said William Doyle, an analyst with Forrester Research in Boston. "This is uncharted territory for these guys. They're going to have to find some way to make it up.''


Merrill's move is partly meant to staunch the flow of customers to online brokerages, especially to Charles Schwab Corp., the San Francisco-based discounter that has become the biggest online brokerage.


It was no accident that Merrill chose the $29.95-a-trade figure: That's the price - to the penny - that Schwab charges.


"When somebody as big as Merrill Lynch turns 180 degrees from its previous philosophy and attempts to adopt your business model, you don't need to overreact,'' Schwab spokeswoman Tracey Gordon said Tuesday.


In fact, Merrill's move was seen as a bigger problem for its fellow full-service companies, most of which have yet to embrace online trading and have fought ferociously against discounting. Up to this point, Merrill fought by their side.


Once it decided to act, Merrill was more aggressive than Wall Street thought it would be.


Merrill acknowledged that its price cutting may cost it brokerage revenue, but Chairman David H. Komansky said the company expects to recover over the long haul with more advice-based fees, rather than commissions, from the assets it manages and by gathering more assets.


Investors calculated that Merrill's brokerage profit margins will fall sharply and punished the company's stock. Tuesday was a poor day for brokerage shares, but Merrill stood out, dropping 10 percent on the New York Stock Exchange.