Eight Online Brokerage Firms Downgraded As Market Declines

New NASD Rules Compound Online Broker Problems

PALM BEACH GARDENS, Fla., April 9, 2001 — Eight online brokerage firms were downgraded based on recent deterioration in their financial condition according to a ratings update issued by Weiss Ratings, Inc., the only rating agency to monitor the financial safety of U.S. brokerage firms. The downgraded firms are:

A B Watley Inc New York, N.Y. from A to B+
Accutrade Inc. Bellevue, Neb. from B+ to C+
Ameritrade Inc. Omaha, Neb. from B+ to C+
Firstrade Securities Flushing, N.Y. from A to A-
National Discount Brokers Jersey City, N.J. from A to A-
Suretrade Inc. New York, N.Y. from A to B+
TD Waterhouse Inv. Svs. New York, N.Y. from B+ to C+
Thomas F. White & Co., Inc. San Francisco, Calif. from A- to B+

Weiss Safety Rating: A = Excellent; B = Good; C = Fair; D = Weak; E = Very Weak

“With a bear market upon us, the financial picture for online brokerage firms has suddenly turned dim," commented Martin Weiss Ph.D., chairman of Weiss Ratings. “The current market environment has many investors sitting on the sidelines while others have given up on do-it-yourself investing and returned to traditional full service brokerage firms."

Because online brokers typically offer low commission rates, they rely on large trading volumes in order to generate enough commission dollars to cover their expenses. When trading activity declines as it has recently, online brokers feel the sting more acutely than their more traditional brokerage competitors. Further evidence of online brokers' troubles can be seen in the recent layoff announcements at several prominent online firms including Ameritrade, Charles Schwab, CSFBdirect and TD Waterhouse.

Adding to the difficulties of online brokers, the National Association of Securities Dealers (NASD) issued new investor suitability standards in April which are expected to have a negative impact on online trading. These standards address a common practice at some online firms whereby the firms analyze an investor's trading patterns and then use “push" technology to automatically generate an email recommending a specific trade. The NASD's action represents a setback to online brokers' efforts to boost trading volume while serving to bring these companies in line with similar suitability requirements already in place for discount and full-service brokers.

Despite the adversity, three online brokers merited upgrades: Bull & Bear Securities (from B- to B), Castle Securities Corp (from B- to B+) and Wall Street Discount Corp (from B- to B). The Weiss Safety Ratings for another three online brokerage firms remained unchanged.

Discount, full-service and institutional brokers fare better

In total, Weiss Ratings tracks the financial safety of 475 brokerage firms, including institutional, full-service, discount, and online firms. In addition to the eight downgraded online brokers, Weiss lowered the ratings for 24 other brokerage firms while issuing a comparable number of upgrades (26) to firms outside of the online arena. Major companies receiving a rating downgrade include:

Marion Bass Securities Corp. Charlotte, N.C. from B- to C+
Morgan Keegan & Co., Inc. Memphis, Tenn. from A- to B+
Raymond James & Assoc., Inc. St. Petersburg, Fla. from A- to B+

Large brokerage firms receiving a rating upgrade include:

Legg Mason Wood Walker Baltimore, Md. from B to B+
Nikko Securities Co. Int'l, Inc. New York, N.Y. from C to B
RBC Dominion Secs. Corp. New York, N.Y. From B- to B+

The Weiss ratings are based on an analysis of a brokerage firm's capitalization, leverage, earnings, liquidity, and stability. The latter category combines a series of factors including size and growth, strength of affiliate companies, and risk diversification. In addition to evaluating a company's financial stability, Weiss also collects information on each firm's commission rates, services offered, and branch locations.

Weiss issues safety ratings on over 16,000 financial institutions, including securities brokers, banks and thrifts, insurers, and HMOs. Weiss also rates the risk-adjusted performance of more than 11,000 stock, bond, and money market mutual funds. It is the only major rating agency that receives no compensation from the companies it rates. Revenues are derived strictly from sales of its products to consumers, businesses, and libraries.

Consumers needing more information on the financial safety of a specific company can purchase a rating and summary analysis for as little as $7.95 through the Weiss Ratings web site at www.WeissRatings.com. Ratings are also available by phone (1-800-289-9222) starting at $15.

15430 Endeavour Drive, Jupiter, FL 33478 · (561) 627-3300 · www.weissratings.com