|Editorial: Going for Broke on Online Trades - Publication: SMH Magazine - Issue: September 2000
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As a core component of the booming e-commerce sector and the "new economy", online broking has attracted a swarm of vendors looking to profit from one of the Web's most successful business areas.
Making a buck out of customers is proving elusive for this sector, though, with customers being the main winners through lower prices. And the market is still set for huge growth.
According to a recent study undertaken by the IT research firm IDC, 30 per cent of individual investors will have online trading accounts by 2002, generating about $US5 billion ($8.7 billion) in commission fees.
\Ian Struthers, managing director of financial services provider and discount broker TD Waterhouse, says the growth of on-line brokerage is due to several key factors.
"It is partially about the democratisation of investment information that was once tightly held by the investment community, about the proliferation of the Internet, and about the growing number of investors who want to make their own investment decisions," he says.
With intense competition the rule, price has been a huge factor as well. Twelve months ago, online brokers were charging $49.50 per transaction. Now rates as low as $10 to $15 are on offer.
Australian Stock Exchange spokesman Gervase Greene says online trades now account for about 15 per cent of the total 80,000 to 100,000 daily trades on the ASX, though the prevalence of small-time traders is evident when the market is measured by value rather
than volume. Then online trades fall to only about 3 to 4 per cent of total trades.
The market isn't lacking for choice, with players offering different models that are actually expected to turn a profit. At present, the market is segmented into three key areas. Occupying the lower end of the scale are deep discounters, often large financial companies whose core activity does not involve shares and securities. A major player in this sector at present is YourProsperity, an arm of the financial services company MLC, which charges as little as $9.90 per transaction.
The highly competitive rate is explained by the fact that it is available only to Your Prosperity customer who have signed up for MLC's more profitable investment trust service.
Commonwealth Securities, a subsidiary of the Commonwealth Bank, and Westpac Financial Services also have budget offerings. Their rates, which recently dropped to about $15 per trade, are also heavily qualified.
Trading on CommSec's service must be settled through a Commonwealth Direct investment account. Those who require use of their own bank to settle the trade will find ComSec's rate immediately jumps to $29 per transaction.
The next rung from deep discounters are service suppliers, whose main business is the securities market. Their rates are about $25 per transaction and their services usually go beyond the simple facilitation of online trades which has become a low-margin service. The top of the online trading ladder is occupied by full-service brokers who charge time-poor, cash-rich investors deluxe prices for first-class services.
One of the companies in the middle rung is E*Trade Australia Securities, which claims to have about 30 per cent of the online market (behind ComSec with about 45 per cent). E*Trade's executive director, Kerry Roxburgh, says that if the deep discount rates were unbundled, it would show the true basic price for straight online trades now sits "somewhere in the low-to mid-twenties".
Included in this market are the bricks-and-mortar stock brokers who are adjusting to the inevitably lower prices on the Web. Less than a year ago, Merrill Lynch executives publicly denounced Internet-based trading, calling it a threat to Americans' financial lives.
Since then, online brokers such as Charles Schwab and E*Trade have experienced remarkable growth rates, acquiring many customers from full-service firms like Merrill Lynch.Continue on Next Page
And while some traditional broking houses have done an about turn, and are offering assorted online brokerage services, they aren't forgetting the bottom line in the process. Online services range from traditional financial-consultant relationship structure at full
commission price, to a self-directed, $29.95 per trade service.
The strategy is a smart one given that questions are being asked about the viability of the pure online players, and especially as higher investments are called for to keep up with the intense competition.
E*trade is one player which is already feeling the effects as it postponed its target for becoming profitable, originally predicted for June this year, until next year.
The answer seems to be to team up with other players that can drive in more customers: in the case of E*Trade, ANZ Bank took a shareholding and launched a co-branded service that accounted for 16 per cent of all trades executed by E*trade in the June quarter.
Written by Craig Stephens
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