Online Broking's Sad Scene
By Derek Moscato, AsiaWise
16 Jan 2002 11:08 (GMT +08:00)
During a recent TV airing of the McLaughlin Group -- a shout show devoted to American public affairs -- panelists were asked to throw out some New Year's resolutions for 2002. One of the pledges: To somehow muster the guts to wade back into the stock markets during the next 12 months.
Even while issues on both the Nasdaq and the New York Stock Exchange inch their way back up to redemption, ticker talk is far from the conversation topic of choice around most water coolers lately. Many part-time stock market enthusiasts -- in America and Asia -- have been scared off for months now, thanks to serious volatility in technology, in particular the well-publicized meltdown of dot-com stocks.
Retail driven stocks, such as Yahoo and Amazon.com, have certainly felt the pinch -- not to mention legions of small-cap outfits that rely on investment hobbyists for their capital.
Online brokers have also been hit. While the Big Hurt for e-brokers reached its North American low point some time ago, the brutal times on the Asian front continue unabated.
Hong Kong, with 100 brokers offering online trading, has been a flashpoint. Online broker Boom Securities recently announced major layoffs cutting its ranks by nearly half, by some accounts. Managing director Mark Duff cited "a long road ahead --18-24 months of stiff competition, price wars and potentially low turnover in the markets" for the downsizing.
In mid-December, fellow e-broker 2cube Securities announced it was folding its operations and sending its 4,600 active customer accounts into the hands of American rival E-Trade Group. After January 14, it's game over for the 50-50 joint venture between Pacific Century CyberWorks and JP Morgan. Stateside power-brokerage Charles Schwab also gave up on Hong Kong during December.
Several factors are at play in Hong Kong, including the performance of global markets, and the weak showing of the Hang Seng Index over 2001. But capital gains aren't everything, and investment culture is also part of the bigger picture. Online trading just hasn't caught on in Hong Kong as it has in the United States -- or even South Korea. While about a quarter of all trades are made online in the U.S., only 10% of trades go that route in Hong Kong.
Japan has also felt the brunt of the consolidation trend. Along with Hong Kong, Schwab also bailed on the country in December. To hear executives from E-Trade Japan tell it, the firm's downfall was charging higher trade fees in exchange for a higher quality of service. E-Trade may be onto something -- especially in light of fee-slashing battles that ravaged Japanese brokers last year.
Price-point-conscious E-Trade Japan, a collaboration of E-Trade Group and Softbank, has fared much better. During the first business half year of 2001, it enjoyed an 83% increase in operating profits. Still, it only lays claim to under 10% of online traders in the country -- which explains its diversification outside of the retail broking business, into financial planning and investment banking.
Back on the Hong Kong front, E-Trade is talking up an aggressive growth strategy. The broker's managing director for Asia-Pacific and Latin America, Jarrett Lilien, recently commented that more deals in Greater China are on the way during 2002.
The expansion of geographic reach, not to mention a move toward traditional banking, has helped E-Trade differentiate itself from the so-called "pure plays", which deal only with online trading. With trading volumes at disappointing levels, and the demise of discount commissions as stand-alone cash cows, that diversification strategy is already winning favor with the investment community.
As TheStreet.com's James Cramer mused in December: "E-Trade's shocking news that it will make more money than expected is the result of an intense shakeout where only a few players are left just at the time when people are thinking, 'you know what, maybe it's time I got back in the market again.'"
Those sentiments aside, further consolidation for Asia's online brokers is expected for at least the next year or so. Even as global players like E-Trade weather the storm, fortunes for the industry as a whole shouldn't be counted on as saviors for Internet-heavy portfolios.
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