A Strategic Review of Australia’s Online Broking Industry

By Marc Phillips

In the banking and finance industry, where there is much to gain from the implementation of the Internet, Australian online stock brokers have surpassed the banks and insurance sectors by establishing a new range of Internet services in the last 12 months.

Today, Australia boasts over ten online stock brokers offering investors lower brokerage rates on buying and selling shares from as low as $35 per trade.

The market leader in the Australian online share industry is Commonwealth Securities Ltd., the stock broking arm of the Commonwealth Bank, which claims 6,000 of their 165,000 clients are trading via their website located at http://www.comsec.com.au. According to Paul Rickard, Director of Commonwealth Securities, “although we have 4 per cent of our customer base trading online, this represents 11 per cent of out total trades. Share Direct’s growth in online trades was 164 per cent over the last quarter. The growth comes from new clients as well as from increased trading activity by existing clients. We are currently signing up about 400 new Internet clients a week.”

If we look to the United States as a leading indicator of possible Australian trends, we see that Lombards, the largest US online stock broking company, conducts one third of their total trades via the Internet. Double digit growth is expected within the next 12 to 24 months with some analysts predicting that an average of 25 per cent of Australian investors will conduct some trades via the Internet by the end of 1999.”

The rise of online share trading can be partly attributed to the likelihood of share owners also having access to the Internet. Combined with the privatisation of one third of Telstra, 28.4 per cent of Australians now directly own shares according to the Australia Stock Exchange. This compares to 18 per cent in August, 1995. This percentage will increase with the swag of upcoming floats including NSW TAB, AMP and public utilities in Victoria and South Australia.

Research from the USA points to the emergence of the emerging affluent investor and shows that the online investing market is segmenting individual investors into three main groups; Advice-Hungry Investors, Information-Hungry Investors and Transaction-Hungry Investors.

Whereas the public perception of online stock brokers has been they are another form of price discounters, this is not entirely true. Following the free content Internet business model and in response to the demands of information hungry investors, Commonwealth Securities, Macquarie Bank’s DirecTrade, Pont Securities and the recent Australian launch of the enormously popular US online stock broker E*Trade, these organisations are providing company data at no cost to Internet users.

“Herein lies the flexibility of the Internet” says Brett Spork, Divisional Director of Macquarie Equities, Private Clients. “Having both a full service and online service allows our clients to choose the appropriate trading option. Where they require execution of trades only, DirecTrade via the Internet is the quickest and less costly than where advice is required before buying or selling shares.” DirecTrade is located at http://www.directrade.com.au

This flexibility is appealing to investors and has driven the emerging affluent investors to the sharemarket. No longer are share investors intimidated by not knowing the ins and outs of the stockmarket. Being able to see the screen that the stock broker sees and conduct trades very easily is one of the reasons why online stockbroking is set to boom in the next 2 years.

You always know when a sector of the Internet market has reached a point of profitability when the Americans arrive. Several weeks ago, the Australian based Nova Pacific Securities Ltd. launched E*Trade Australia, located at http://www.etrade.com.au. Licensed from the hugely successful E*Trade online stockbroking service in the USA which handles 40,000 online transactions a day (compared to the average ASX trading volume of 30,000 per day), E*Trade Australia offers investors an unprecedented combination of tools and information.

E*Trade Australia offers value added functionality and investing tools with free online share price quotes, free news services and ASX company data. E*Trade Australia also provides investors with the tools to create ‘What-If portfolios’ with ASX and US listed securities. These portfolios can be created or modified at any time to track a variety of investment strategies.

According to Graham Cook, Managing Director of E*Trade Australia, “E*Trade Australia are positioned differently to full service and discount brokers because we provide a unique website with more investment features that is targeted to investors who are self directed.”

In the near future, E*Trade will also be offering online investors access to buying and selling shares in the United States - highlighting the transparent global application that the Internet offers.

With cross border trading, it is likely that the Australian investor will also benefit from lower trading prices that will eventually filter into the Australia marketplace. This is already evident in the United States, where in 1997 Ameritrade, E*Trade, Fidelity and Suretrade spent $70 million to advertise their services. Most of those ads promoted low commissions, which fell dramatically from an average of $35 at the start of 1997 to $17 by October.

In my opinion, full discount brokerage houses will have no alternative but to introduce an Internet broking system or further suffer an erosion of their market share, in much the same way as they have as a result of the discount stock brokers offering low broking rates in the last 2 to 3 years.

For the established full service brokers such as Merrill Lynch, J.B. Were & Sons, Ord Minnett, Prudential Bache, First Pacific and Deutsche Morgan Grenfell, these companies need to take a good hard look at their business strategies.

These companies need to understand that the costs of online stockbroking operations are fixed to the point where, after a certain volume of online trades, there is a minimal variable cost for processing additional orders unlike full service and discount stock brokers who need people to man the screens and telephones. The exponential profit after online stock brokers reach a certain volume of trades should be viewed as the most powerful threat to the traditional broking world.

Over the next three years, Australia will follow the trends in the United States where online trading has proven to be the long awaited killer application in the financial services market. Today in the United States, brokerage institutions, banks and other financial entities are scrambling to market their online trading services to qualified consumers through promotions and deals with Microsoft and niche online publishers, such as Conde Nast.

It is expected that NineMSN - the joint venture between Microsoft and Publishing and Broadcasting Limited which launched in Australia in March - should be offering Microsoft Investor - a transaction service allowing investors to buy and sell shares at the website http://www.ninemsn.com.au

By the end of 1998, the Australian stock market will not only be facing up to real competition from the online stock brokers but also the powers of a formidable duo - Kerry Packer and Bill Gates! For the Australian stock broking industry, the Internet is no longer a matter of “if” but a matter of “when”.

For further information please contact APT Strategies at info@aptstrategies.com.au