Schwab Sees Stock Trading Slide 28% in May as Online Fever Cools

NEW YORK — Word of a sharp drop in monthly stock trading activity at Charles Schwab Corp. sparked a sell-off in its shares and those of other online brokerages Monday and prompted some analysts to say that the online-trading frenzy has peaked.

Others saw the sell-off as an overreaction.

San Francisco-based Schwab, the biggest discount and online brokerage, said commission stock trades overall fell to an average of 150,000 a day in May, down 28% from April and the lowest since December.

The decline coincided with the beginning of the latest severe slide in Internet stocks, which have accounted for a large proportion of online trades.

The Inter@ctive Week Internet stock index, for example, is down 28% from its April 26 peak. On Monday, the index plunged 8% as all but three of its 50 stocks lost ground.

“If we’re in a secular bear market for Internet stocks--and I think we are--it could have a long way to go,” said Sheldon Grodsky, chief executive of Grodsky Associates, a full-service brokerage in South Orange, N.J.

Stunned by plunges of 40% to 60% in such Internet stalwarts as America Online, EBay Inc. and Amazon.com in recent weeks, many investors have retreated to lick their wounds, at least temporarily depriving online brokerages of some of their most active customers, Grodsky said.

Net stocks continued to slide on Monday, with AOL off $9 to $90.50 and EBay down $29.88 to $136.

Grodsky and other analysts anticipate a hiatus in the growth of online trading activity, which in April reached 496,000 trades a day industrywide, from virtually zero five years ago.

Fears of a retrenchment sent online brokerage stocks reeling Monday. Schwab fell $10.31, or 11%, to $83.94. Ameritrade Holding dove $12.69, or 16%, to $66.06, and E-Trade Group sank $5.75, or 15%, to $32.

Even after Monday’s drop, Schwab shares are still selling for nearly four times their year-ago price of $22.

The decline is “probably healthy for the group,” said analyst Amar Mehta of CIBC Worldwide. Schwab is selling for more than 60 times estimated earnings for the year ahead, which Mehta said is extremely high for a brokerage stock.

Although trading slowed at Schwab, the firm noted that customer assets at the end of May had dipped only 1%, to $560.7 billion from an April peak of $564.3 billion.

Some experts thought the market overreacted to a notoriously volatile statistic.

Trading tends to peak in the busiest months for corporate earnings announcements--January, April, July and October--and to recede afterward, said analyst Bill Burnham of CS First Boston.

True, the May figure was the lowest this year, but investors naturally respond to a weakening market by reducing their trading, he said. Schwab’s May volume still was up 78% from a year earlier.

For the Nasdaq and NYSE markets overall, trading volume dropped 17% and 10% from April to May, respectively.

It’s important to separate the fortunes of an arguably overblown Internet stock sector from the long-term migration of investors to the low cost and convenience of online trading, Burnham said.

“The trend toward online investing is irrevocable,” he said.

Indeed, Merrill Lynch, which had long fretted about the dangers of online investing, just two weeks ago dropped its resistance and announced its own Internet trading strategy for clients--including $29.95-per-trade commissions or unlimited trading for a flat annual fee.