The first stock market operated in Belgium in the 1500s and 500 years later stock trading is just a click away over the Internet. But how feasible is online broking in SA, where day trading has yet to take off in any significant way?
Figures released by the International Data Corporation, an international research company, indicate that over $1 trillion of new US assets will move online over the next four years, while total online assets will approach $2.6 trillion in 2004.
Local research company BMI-TechKnowledge predicts that growth in SA will occur on a smaller scale.
BMI-T analyst Neil Lightfoot says that this year South Africans will have traded R9.7 billion worth of shares across the ether. The company projects that this will grow to R971 billion by 2005.
Running with the bulls
Online trading, a relatively new phenomenon in SA, has gotten off to a relatively slow start.
JSE-listed online broker Tradek.com has taken the route of becoming a completely Internet-based broker, unlike BOE and Investec, which both offer online trading services with the backup of traditional brick-and-mortar facilities.
Tradek has completed its first year of operations, emerging with its head above water despite what the company describes as "patchy" market conditions. Tradek.com released maiden annual results for the year to March which show a net profit of R2.3 million, somewhat below forecasts.
"Unfortunately, the rather patchy current performance of the JSE impacts on our trading profitability and also on our own share price," says Tradek CEO Paul Theron. "We listed on the JSE around a year ago at R1 per share and are currently trading at around 47c.
"While this halving of our share price is not exactly a sterling performance, we have done better than most companies listed on the venture capital boards."
Theron says the difficult conditions within the market, particularly of the small cap companies, have made for lower than expected trades per customer, which in turn negatively impacted Tradek`s profitability for the year.
"In periods of market under-performance, private client trading activity declines. In addition, the down-rating of small cap, financial services and technology stocks on the JSE from the second half of 1999 impacted negatively on private client trading, as Tradek`s client base has traditionally invested in mainly these sectors," says Theron.
Markets causing mayhem
PSG Online, part of the PSG financial services group, also offers private investors the ability to trade shares via the Internet and offers peripheral services to complement the trading portal.
Diedrich Schutte, director of PSG Online, is adamant that merely fulfilling the role of an online broker is not a viable business plan.
"We have taken the stance of giving private investors whatever they need to trade effectively," says Schutte.
Together with Fundamental Information Services, PSG has released a new software product called Informer. "The Informer package will give the private investor access to fundamental information usually only available to institutions."
Schutte concurs with Tradek`s Theron that the number of online traders is dependant on market conditions.
"I think the main reason SA has less online trades going through than the States is that we have been in a bearish market for some time. The US has seen itself in a bull market for the last five years. People are far more likely to play the markets when the markets are looking up.
"The number of day traders in the US is much higher than in SA, but I honestly think this will change when the market picks up. South Africans are also still a little hesitant about allowing personal information out on the Web. Once they become comfortable giving out sensitive information over the Internet, we will see more day traders speculating on our markets," predicts Schutte.
BMI-T`s Lightfoot also sees the culture of the South African public as an inhibiting factor to drawing new Internet traders. He believes SA still has a legacy of conservatism to overcome before online trading takes off.
"We`ve never billed online trading as the next hot thing in e-commerce and I don`t foresee that changing in the near future," notes Lightfoot.
"I feel that the pure players (Internet only) will struggle. The bricks-and-mortar companies have an infrastructure and base that they can leverage off that the other guys don`t."
We are not alone
Schutte believes the entire broking industry is under pressure and the online brokers are not alone in fighting for revenue.
Traditional and online Nasdaq-listed broker Charles Schwab turned in second quarter results that saw profit falling by 20%. Schwab was established as a discount broker 25 years ago.
Analysts in recent months had cut their profit forecasts for Schwab because the Nasdaq stock market and stock trading volumes slumped more than 10% in the quarter.
Online trades made up 81% of all Schwab client trades during the second quarter, up from 67% a year earlier. Industry-wide, Web trading volumes are expected to be down at least 20% to 1.1 million a day in the second quarter, according to US Bancorp Piper Jaffray.
One of Schwab`s online competitors, DLJdirect, also reported a sharp fall in online trading volumes from its record first quarter.
Internet trades contribute 25% of all PSG`s revenue, a figure which Schutte says will increase.
"The percentage of contribution will increase, but the amount really does depend on what our market does. I pray every day for the market to get stronger, but the way things are looking at the moment I really don`t know, we may well stay in this bearish market for a good few more years," he says.
Too many companies, too few trades
Margins on online trades are much smaller than that of the regular broker. Listed online trader U-Trade has a brokerage fee of 0.35% per trade, while PSG Online has a 0.9% fee per trade, but this works on a sliding scale depending on the rand value traded.
This means that for online brokers to achieve significant profits they have to rely on a large turnover. The number of online trades in SA does not immediately provide the necessary quantities.
This fact may lead to market consolidation with various online companies joining up to combine client clout.
The long-awaited E-Data and E*Trade tie-up has failed to materialise and industry rumour has it that E*Trade will enter the local market under its own steam. E*Trade is the second biggest online broker after Charles Schwab.
"Competition will always be rife in this industry, especially with so many companies competing for an admittedly small market. If the rumour is true, one more player coming in, especially such a big one, may very well lead to a consolidation of the market," says Schutte.
Technology as a differential
In order to attract investors and differentiate their services, online brokers have taken their trading facilities into the m-commerce field by Wireless Application Protocol (WAP)-enabling their services.
"The advent of WAP technology is naturally the next step to providing immediate, comprehensive service to our clients," says Tradek`s Theron. Tradek launched the WAP function to its clients in April.
CCH is also cashing in on m-commerce with the launch of the Online Business Anywhere Trader early this year.
The system allows for continuous feedback on share price fluctuation via e-mail, fax or cellphone applications such as short message service. The e-mail interface shows movement on the client`s portfolio in volume and rand value, in graph and table format. This includes comparisons to the JSE All Share index and rand-dollar exchange rate for international stocks.
SA is fast becoming a key investment market for the international community. Swedish financial services group, Brunswick, recently launched the world`s first online brokerages for emerging markets.
Focusing strongly on the JSE as an investment option, Brunswick clients will be afforded the opportunity to invest in South African companies with much stronger currencies and therefore stronger buying power.
International investments and stronger markets may just be what the local investment public needs to encourage it to take the plunge into online trading - something South African broking houses are banking on.
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