Europe: Days of Many Trade-Only E-Brokers Seen Numbered
February 28, 2001 11:12 am EST
By Huw Jones
LONDON (Reuters) - The days of Europe's many execution-only online brokers are increasingly numbered, and most will either go bust, quit the business or turn themselves into wealth management services, analysts said on Wednesday.
Although the rise in online trading has been intimately tied to small investor interest in techs, the burst tech bubble has not dampened enthusiasm for online financial services, said Benjamin Ensor, analyst at research company Forrester.
"We are still in the middle of a revolution and consumer behavior has not been affected by the falloff in tech stock prices," Ensor told a Westminster and City online broking conference.
Goldman Sachs, which has launched its own online venture PrimeAccess, estimated that Europe's retail investment in equities totaled 2,000 million euros in 1999 and will rise to 3,000 million in 2004.
"The long term opportunities are looking encouraging," said Philip Holzer, managing director of Goldman Sachs International equities division.
Execution-only online brokers, who carry out trades but offer no advice, investment tools or other packages, underserve the mainstream consumers.
"The firms that will succeed will offer wealth management," Ensor said. This means providing account data, financial analysis and advice as well as execution of orders, a costly step not all e-brokers can afford.
Industry consultant Nic Stuchfield said these broad based services would also offer execution-only services as well as an entry point to wealth management packages. Only about 12 online brokers in Europe have more than 100,000 accounts, but the number of e-brokers has grown rapidly. Germany tops the league with 750. The UK, though with 30-40, trails in terms of the number of trades, Blue Sky consultancy said.
"You have relentless negativity in the press about online sharetrading in the UK," said Blue Sky's Suzan Nolan. Others blamed stamp duty or tax on share trades, and use of paper for share certificates. Goldman Sachs said Europe's top five e-brokers have combined trading volumes equal only to the third largest player in the United States, TD Waterhouse.
In the fourth quarter of last year, there were 12.9 million shareholders in the UK, but only five percent or 250,000 had active online accounts, while of Germany's 7.2 million shareholders, 14 percent or one million, traded online, said Blue Sky's Nolan. In Blue Sky's latest survey of 10 best European e-broking sites, half were German with Comdirect and Consors top, with a few Swiss, Spanish and Italian sites, but not a single UK site.
COMMISSIONS VOLATILE
Brokers largely depend on commissions which are volatile -- they fell by a third last year in the United Kingdom as payment for order flow, common in the U.S. is not prevalent in Europe.
Online wealth management is already emerging in Europe and there is likely to be too many players within a couple of years, Ensor said.
"The number of companies coming up with wealth management strategies is staggering, but execution varies from quite good to pathetic," Ensor said.
Those likely to succeed are Consors of Germany, Schwab Europe, a subsidiary of the U.S. group, and Britain's Egg, Ensor said. Some of the big German stockbrokers and UK retail banks were in quite weak positions, he added. A few specialist players like Durlacher and Killick will serve very rich clients, while others like Stocktrade in the UK will offer "white label" services whereby banks who don't want to set up their own e-broking execution division, outsource it, Ensor said.
The Germans were also leading the way in added services, with Consors offering terrestrial investment seminars targeted at women, or topics like how to read annual reports and derivatives trading. Comdirect offered customized news pages, Nolan said.
CROSS BORDER.
Goldman's Holzer estimated there are 230,000 daily online trades in Europe -- well behind the 1.1 million in the United States -- and "almost minimal" cross border, though long-term this could rise to 15 to 20 percent of daily transactions. Blue Sky's Nolan estimated that for the leading e-brokers in Europe, foreign trades represent 10 to 25 percent.
Holzer said cross border trade in Europe is hampered by multiple regulations, inefficient clearing and settlement, and excessive international transaction costs which are seven to 10 times trading costs in the United States, a market of comparable size.
"The most important issue is how you get clearing and settlement in place," Holzer said. "But we feel there is long term demand for international investment." Retail investors are already prompting exchanges to open later, with some German e-brokers offering markets on Saturday and Sunday, while some regional German exchanges offer very late trading or alliances with brokers, steps which the Deutsche Boerse will be forced to respond to even though there is some worry about the lack of liquidity in after hours trading at the moment, Holzer said. |
