With the industrial revolution of the 18th century came a need to create entities that were owned not by one or even a few stakeholders but by many. Such entities took the form of corporations and they enabled widespread ownership and investment in assets that expressed all manner of intentions in trade, development, construction or exploration. As popularity for these investment vehicles grew, so did their number and variety of interests. Trading of shares in these entities grew too, as did the level of government and legal requirements in relation to such trading. The complexities involved in such trades and the difficulty in monitoring the movement of trades lead to the development of specialist firms involved primarily in organising contracts for transfer of company shares and dealing with the necessary reporting requirements. We know these organisations today as stockbrokers. With the growth of stockbrokers and their increasing reliance upon one another came the advent of cooperatives that later became known as stock exchanges. Stock exchanges are essentially responsible for fair and honest dealing within their own halls and now impose stringent reporting requirements upon companies listed with an exchange. In Australia the majority of stock bought and sold in incorporated companies is through the Australian Stock Exchange, formerly an association of member brokers entitled to trade companies listed on the ASX by virtue of their membership, and now a public company listed on its own exchange.
The trading of securities listed on the ASX is the exclusive domain of stockbroking firms. Membership of the ASX is limited, and, until recently, a difficult club to break into. This allows broking firms to charge high rates for brokerage, often justifying brokerage by providing in depth research services on listed companies for clients. For as long as clients have sufficient funds to invest, so as to make the brokerage appear insignificant or at least outweighed by the potential for profit, they will continue to invest and maintain the coffers of the broking houses. With the development of the World Wide Web has come an opportunity for brokers to offer limited services at dramatically reduced rates. Following the large establishment costs of creating a site, discount brokerage rates are then possible with limited maintenance in the long term.
The first major international broker to set up exclusively as a discount internet broker in Australia was E*Trade (Australia) Limited, a subsidiary of the discount internet broking firm that was first to break into the new territory of internet trading in the United States in 1996, E*Trade Limited. Another firm that fully grasped the possibilities of internet trading at a very early stage was Charles Schwab Limited. Interestingly, Charles Schwab is yet to open an Australian internet trading branch, but arrived in the UK market well ahead of E*trade in June of last year. Etrade intends to open a trading facility in the UK in the near future.
In the US more than 4 million investors use Internet brokers and one in four trades, or more than 200,000 trades a day, are performed On-line. Since going live in 1996, E*TRADE in the US has attracted 400,000 subscribers to its service and has seen revenue grow 178 per cent in the past year. While there were only a handful of competitors when E*TRADE began, there are now more than 90 competitors, mainly offering a discount broking service via the Internet, taking advantage of the cost efficiencies of the distribution medium. This has caused a price war in the US market where the average brokerage cost of a single dealing has fallen to US$18.95. In some cases the cost has dropped to as little as US$5. The low maintenance nature of internet trading has allowed brokers to save on administration costs, a saving which can be passed on to clients. The effect on the broking industry will be profound. On-line trading is likely to lead to job losses and put some companies out of business as they struggle to hold onto customers. E*TRADE emphasises that the service is not discount broking, but a multi-faceted sharemarket investment service aimed at the self-directed investor. It backs up this claim by providing a range of information and charting services through a client�s on-line account.
"The momentum behind this process is unstoppable. Demand for this service is growing so rapidly that I have no doubt that on-line broking will become the dominant trading system for the private investor within the next two years."
International Data Corporation in the U.S. estimates that overall Internet commerce will grow from US$318 million in 1995 to US$95 billion in 2000. www.Consult has forecast that the internet share-trading industry alone will grow from US$100 million in 1996 to US$600 million in 2001.
Joining Etrade in the on-line investing market in Australia at an early stage was Green Line Investment Services, a Canadian company entering into a joint venture with Australian brokers Pont Securities (note that both URLs take the user to the Greenline web-site). Greenline offers a securities trading service through the Greenline website by affiliation with Pont Securities with a base brokerage of $29 per trade for trades executed over the internet and $60 for other trades. One catch is that a monthly subscription of at least $9.95 is required for provision of the information service to which Greenline is connected, SharesLive, a product of Star Systems Pty Ltd. SharesLive provides live share market information, charting facilities and company news, but acts only as an information provider referring the consumer to their broker for transactions. At present Shares Live provides services primarily to customers of GreenLine and Dicksons Securities Limited.
Australia�s leading on-line broker is Commonwealth Securities Limited a wholly owned subsidiary of the Commonwealth Bank. Commonwealth Securities, or ComSec, recently indicated that 300,000 investors had registered with the bare-boned on-line securities trading service and that this number was continuing to grow. This far exceeds the size of any other broker servicing the Australian market, traditional or otherwise. Upon free registration ComSec offers customers a broking service with all of the bare necessities of do-it-yourself share-trading - up-to-date prices (just keep clicking the refresh button), basic graphing capabilities, easy to use watch-lists, a brief daily market report and economic reviews - with an across the board brokerage of $29 for on-line trades and $50 for telephone trades for trades less than $10,000. This compares to Etrade which offers free upon membership: up-to-date prices, watch lists/portfolios, customised front page, up to the minute ASX announcements and notices received, news links cross referenced by company name and Reuters financial information services, and, importantly, full details of up-to-the-moment market depth, putting the trader right at the trading room, formerly the sole province of the stockbroker. But at a cost of $50 per transaction consumers could be convinced to go to ComSec for their trading essentials.
But, are they really competing in separate markets? Do investors value personalised service to such an extent that they are willing to pay up to a 300% premium in brokerages just for that service? Many share-traders believe this is not so, complaining about delays in receiving advice from traditional brokers through traditional channels. The reality is that individuals who are willing to trade on-line are intelligent, savvy investors. They are pursuing methods of individual research and investment and finding the tools to do so on the internet without the assistance of a broker.
One wonders whether Kerry Roxburgh is agreeing with the traditional brokers in an effort to play-down any advantage they might obtain by converting to on-line broking.
Many of the traditional broking houses, like Dicksons, have made the move to establish on-line services, primarily in the way of access to research material and advice compiled by in-house researchers and advisers. Few are yet to make the transition to live transfer of shares through the internet. Two of the first local companies to take share trading on-line in Australia were William Noall Ltd, claiming to be the first in December 1997, and, later,Henderson Charlton Jones Ltd. The services offered by William Noall, the second oldest Australian broking firm, and Henderson Charlton Jones come at a minimum cost of $20 per month to a maximum of $100 per month, before brokerage, for full access the ASX equities market, ASX options and warrants markets and the Sydney Futures Exchange. One attraction of this product will be the dynamic market up dates and near instantaneous trading. All transactions are maintained automatically in downloaded software interface from ASSET Software Inc. In their race to arrive on the on-line trading scene ahead of their competitors William Noall may have missed a massive potential target market. Deterred by monthly charges and an overly complex user interface built into the trading system users are likely to be intimidated by the complexity of the ASSET programs and drawn towards the cheaper simpler internet brokers. Other Australian brokers such as Sanford Securities, Macquarie Bank, Morgan Stockbroking Limited, Dicksons Investment Services Limited have also set up internet sites with access to client information that can be purchased for a monthly fee. These services seem intent more on retaining an existing customer base than joining the race to gain access to the wider market of internet share-trading that we are seeing in the tail end of the 1990�s.
"What we're about, using the Internet, is making people more familiar with the stock market, giving them direct access to the Australian Stock Exchange. You become your own stockbroker. For the first time investor, buying and selling shares with E*TRADE can be a very pleasant experience."
He rightly points out that an individuals first contact with the stock-market can be intimidating, but that once those initial experiences turn out pleasantly, for instance when stock prices rise, they are likely to quickly become more familiar with the market. The number of semi-professional home traders are growing rapidly, and in market segments that are unexpected at first glance. For example Charles Schwab & Co in the US has entered a joint venture with SeniorNet, an organisation dedicated to the enrichment of educational programs for senior citizens, with a vision of bringing independent investment opportunities to seniors. As the demographic of internet access shifts from the 18-25 year old towards the 50+ age group, funds build up in independent super funds and life expectancies continue to lengthen, the senior market will become an increasingly important one, as individuals embrace responsibility for their own finances. Even so, the Etrade experience has been that 85% of all share-traders thus far, both in the US and in Australia, are male and between the ages of 20 and 44.
Australia represents a vibrant market for on-line businesses, due to the combination of high per-capita income and escalating Internet usage. Indeed, Australians are recognised as early technology adopters; they have similar penetrations for PC, modem and mobile phone use as in the U.S., and Australia is considered to have the second-highest Internet usage outside North America. Given that our economy is moving steadily on-line and the demographic that is moving on-line is the financially independent, tertiary educated and investment savvy individual that is the traditional customer of the stockbroker, Australian stock brokers need to reassess their role in the changing landscape of investment in Australia and take more notice of the growing market size of internet share-trading. If they believe that they are existing in a distinct market from the discount and on-line brokers then they are suffering from "marketing myopia" and would benefit from a reading or re-reading of the memorable marketing insights of the same name written by Theodore Levitt in 1960.
The real mover in the Australian market is Etrade (Australia) Limited. Etrade made a loud and early entrance into the market and has established market awareness of the trade name. It assists that the name Etrade will, for many people new to share trading, be synonymous with trading shares electronically. Much is being made of early internet entrants and the power of establishing on-line brand names. For instance Amazon is now almost synonymous with the on-line purchase of books and new entrants to the market will have difficulty competing without a reliable brand name to rely on. Etrade is currently expanding through partnerships with companies like Telstra and Harvey Norman , continuing to build brand awareness through blanket advertising and is now looking for partnerships with financial planners, banks and developers of investment products with a view to opening new business through the existing client base. In December 1998, after 8 months of business, Etrade had 6000 registered users and claimed to process 1.2% of the 30,000 or so trades conducted daily on the Australian Stock Exchange.
Such phenomenal growth is ominous. Traditional brokers will ignore the tide of new share-traders to their own peril. Justifying their existence by the provision of services that ordinary investors can now receive by subscription to a secondary source will not be sufficient to save the traditional broking services (see for example Huntley�s Shareholder and Briefing.com). The challenge is for local and traditional brokers to make the move on-line to fully automated service provision. Traditional brokers must continue to provide for their existing clientele in the form of detailed and effective advice and also for the new market of affordable share-trading without all of the trimmings. Brokers will quickly find that their hard earned business is moving elsewhere in search of a better deal.
In a great show of technological capability and our willingness to embrace change, Australia is moving into the next millennium on the rising tide of the internet. The stock market is no exception as the Australian Stock Exchange recently unveiled the SEATS automated electronic transfer system and showed that the barriers to up-to-date share price and market depth information in every living room no longer exist. No longer do stockbrokers "on the floor" have access to privileged information that allowed decisions to be made on information unavailable other investors. With the information and communication revolution behind us stockbrokers have lost their edge over the rest of us. For the savvy investor everything that a stockbroker used to provide - up-to-date prices and market depth, charting capabilities, company information, news reports as they break, economic information - is now available through on-line service providers at a fraction of the cost. The core service, the brokerage of a share transaction, is no longer a protracted complex arrangement and can be managed by pure brokers (ie brokers for which provision for the transaction itself is the only service) at rates greatly discounted to the traditional broker.
The industry appears to be in denial with claims that the traditional role of the old brokers will somehow be preserved by the good customer service they provide. Any suggestion that consumers will continue to pay a high premium for personalised service in a global environment that is dragging consumerism into a world in which quality, efficiency and price are paramount, is simply an illusion. Australia�s traditional brokers, perhaps with the exception of those maintaining their own massive product portfolios (e.g. Macquarie Bank, Bankers Trust), are looking at a rapid demise if they fail to meet the expectations of the market and anticipate the move to future equities trading that will be exclusively live and electronic, care of the internet or its successor.