Our E*Trade is mentioned in context of Japan online trading developments. Wondering which development will have more influence on EGRP shares; (a) successful IPO of EGRP Japan, or (b) continuing bad news on margin loan profit and trading
volume decline in the US. Of course the two outcomes could flip around with an icky IPO in Japan, and recovering US margin loan profit. As the January 15 put premium do not seem rich enough, better to stay away.
QUOTE
Issued: August 14 ,2000
Brokers sweat as online trading soars
Net trades New Internet brokers are scrambling to set up operations, but only a few will survive the coming shake-up
ASAKO ISHIBASHI
Staff writer
Online stock trading, while democratizing Japan's stock market, is also making it a more competitive place for brokerages. Stock brokerage commissions were liberalized last October, and the number of online transaction accounts in Japan more than tripled to over 1 million as of this June. Over the same period, the number of brokerages offering online services nearly doubled to 54, and the number is expected to reach 71 by the end of this year.
While only 1.9% of Japanese stocks were traded online as of this March, Takeo Omura, deputy general manager of Daiwa Institute of Research, projects online-trading value to reach about 30% of the total trading and the number of online accounts to multiply to 5-6 million by 2003. Even then, "only the top seven or eight online brokers that can attract actively trading clients will be profitable," Omura predicted.
Thus, both start-ups and large, established brokers are fiercely competing on their Web sites to grab attention from agile Internet investors who often switch freely among multiple-transaction accounts at several brokers. Since commission discounts are already the market norm, online brokers are at pains to differentiate themselves with new products and services. Many start-up online brokers are still not profitable, weighed down by initial investment costs, predominantly in computer systems and advertising. Yet more start-ups are expected to follow Monex Inc., which went public on the Tokyo Stock Exchange's Mothers market on Aug. 4, and make initial public offerings to beef up their capital strength.
Double bind
For online brokers, boosting customer recognition and keeping a lid on operational costs remain a double bind.
Nikko Beans Inc., the online broker established by Nikko Securities Co. in May 1999, suffered 3.1 billion yen ($28.4 million) in net loss in fiscal 1999 ended this March. Most of the loss came from heavy advertising costs, said Shuichi Numaguchi, chief executive officer at Nikko Beans.
"Since our new company started operations last October, we have boosted advertising spending from an initial planned 1 billion yen to 1.8 billion yen in fiscal 1999. This fiscal year, we also plan to spend 2 billion yen on advertising," said Numaguchi. The CEO expects Nikko Beans to start turning a profit on a monthly basis from the second half of fiscal 2001. "Once our earnings get on track, we will consider taking the company public," Numaguchi said. The online broker also sells insurance products by mail order.
In fiscal 1999, DLJdirect SFG Securities Inc. spent 4 billion yen on beefing up its computer system. Last October, the firm was flooded with complaints from online account holders as its computer system became overloaded and investors found themselves unable to log on to the Web site and send their orders. Atsushi Kunishige, representative director at DLJdirect, reckons the company should break even this fiscal year, "although it would depend on how much more we spend on computer systems and advertising."
At the moment, nearly 20% of DLJdirect's orders are made on cellular phones, via i-mode Internet access offered by NTT DoCoMo Inc. Five brokers currently provide online services on the i-mode portal site. "I was surprised to find that elderly investors in their 50s, 60s and 70s are the most frequent users of the i-mode service," said Kunishige. The anonymity of online trading is also giving investors a freer hand in placing orders. Over 25% of orders sent to DLJdirect are either later canceled or revised by clients.
Online brokers such as Monex and E*Trade Securities Co. have popularized IPO stocks by auctioning them on the Internet. For example, Monex auctioned 90,000 of its 150,000 publicly offered shares on the Net, targeting retail investors, prior to its IPO.
E*Trade Securities takes advantage of its connection with its parent company, Softbank Finance Corp., to offer a line-up of IPO stocks to its clients. In June, E*Trade also started offering a private equity fund that invests 15% of its assets in private equities. "Our private equity funds will invest in private ventures within the Softbank Finance group that have high potential of going public in the future," said Taro Izuchi, the company president.
E*Trade itself is scheduled to go public on the Osaka Securities Exchange's Nasdaq Japan market by the end of September. "We don't plan to become a deep-discount broker," said Izuchi. "We'll differentiate ourselves from our competitors with the usability of our products and services, and offer a one-stop-shopping site for financial services in the future."
Matsui Securities Co., a Tokyo broker founded 82 years ago, offers some of the deepest discounts among online brokers. Matsui started online broking in May 1998, and now almost all its orders are placed online. From September, Matsui will make further discounts on its commissions, charging 3,000 yen per day, regardless of the number of transactions made, for aggregate daily transaction value of up to 3 million yen.
Many of Matsui's clients trade on margin. In April and May, Matsui was second in volume of margin transactions among the 123 member brokerages of the TSE. "Our main targets are Japan's traditional stock investors, such as small-business owners, lawyers and doctors. These people have money and the capacity for some risk," noted Megumu Motohisa, chief operating officer at Matsui. "Many of our customers are day-traders who trade very actively. They will buy or sell if the stock price moves just 1 yen. With our commission structure, they can still make a profit on their transactions."
Traditional brokers, such as Nomura Securities Co. and Daiwa Securities Co., have not only been quick to adopt online services, but are also keeping up their traditional face-to-face services, which are more expensive.
Japan's top brokerage, Nomura, boasts the largest number of online accounts, totaling over 280,000 as of the end of June. About half the accounts have been opened by new clients. While Nomura's online commission fees are cheaper than its full-service commissions, they are still more expensive than commissions charged by dedicated online brokers. A limit order of 1 million yen, for example, would have a 9,200 yen commission at Nomura's online service, while its comprehensive securities service, which provides consulting, charges 11,080 yen. The same order at Monex, for example, would charge 1,500 yen commission.
"We pursue strategies as an integrated securities house," said Yoshihiko Kan, manager of retail strategy at Nomura. Online clients can also call Nomura's salesmen at its branches to make inquiries without extra charge if they need to.
Daiwa Securities Co., started the first online-brokerage service in Japan, Daiwa Direct, in April 1996. Now, the broker has over 230,000 online accounts, and 32% of its total retail orders are placed on the Net. Mamoru Takahashi, deputy general manager of the Daiwa Direct department, believes that sooner or later there will be no distinctions among online services offered by major brokerage houses and dedicated online brokers. "Now, young couples in their 20s and 30s often come to our investment seminars. They're already thinking about managing assets for their retirement."
Charles Schwab Tokio Marine Securities Co., is also offering multi-channel securities services in Japan from April 21. The joint venture between Charles Schwab Corp., the top U.S. online broker, and Tokio Marine & Fire Insurance Co., has an information center in Otemachi, Tokyo's central business district, where clients can get advice from consultants. Plans are under way to open a second center in Akasaka, another major Tokyo business district, this fall.
At the moment, the broker only offers U.S. securities products, but it will start selling Japanese stocks and equity funds by the end of this year.
New dynamism
The new dynamism in personal investing is directing reforms in Japan's stock-transaction infrastructure. Online brokers say that about 60% of online orders are made from 5 p.m. or later, after trading hours. In July, officials at the Tokyo Stock Exchange have begun discussions on starting after-hours trading operations, possibly starting early next year.
Some Japanese online investors are moving beyond the local market and reaching out directly to the offshore market.
Since January, DayTrading Systems Inc. in Tokyo has been offering "boot-camp" seminars that teach investors the techniques of trading U.S. equities online by directly accessing the U.S. Nasdaq Stock Market. The company charges 300,000 yen for the four-day session, which lasts seven hours each day. About 15 investors attend each seminar, most of whom are male, aged around 35.
"About 50% of the participants are salaried workers, 30% are business owners and 20% are unemployed," said Yasuyuki Takada, president of DayTrading Systems. "Really rich people don't come here. Most participants are thinking of investing 4-5 million yen in day-trading."
Takada himself quit his job at Intel Corp.'s operation in Japan last year to become a professional day trader. "Day-trading involves trading shares and making profits in a few minutes. But it is not gambling. You have to make a systematic trading plan ahead of time and stick to it. A successful day trader needs to have the self-control not to act recklessly. My advice is not to trade for more than one to two hours a day, otherwise you'll lose your concentration."
By the end of this year, DayTrading Systems will open a subsidiary-online brokerage in Hawaii. The broker will service Japanese day traders, offering Japanese language and system support to facilitate accessing the Nasdaq market from Japan.
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