July 20, 1998
U.S. Online Brokers Eye European Market
By JOHN TAGLIABUE
ONDON -- Alan English has an addiction, and he's not ashamed to discuss it.
Roger Scruton for The New York Times
Alan English, a computer consultant, at home and at the keyboard in Sheffield, England. An enthusiast, he helps publish an online magazine for Web investors.
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"I log on every day, sometimes from the office, in the morning and in the evening," English, a 51-year old computer consultant, said like a boy taken with a new toy. "Some days I don't trade; some days I trade four or five times a day."
"At the end of the day, the cost of a trade and the spread on shares can be quite significant," English said, still hooked a year and a half after he began shopping for stocks over the Internet.
English is one of a growing number of Europeans with online investment fever. After years of relying on elaborate social security systems, Europeans are being urged by their governments to take a greater hand in planning their financial futures. The result is a stock market boom. And as surfing the World Wide Web gains popularity, more and more Europeans are logging on to shop for financial products, retrieving detailed financial information and buying and selling shares.
True, compared with the United States, where about 20 percent of all stock trades are now entered over the Internet, the movement is in its infancy. But as the trend gathers force, U.S. Internet brokers have begun moving into Britain and are increasingly setting eyes on the Continent.
Their arrival poses a challenge for the few and fledgling European online trading companies -- whose ambitions are for the moment limited to individual national markets, in contrast to the global strivings of their U.S. competitors.
Thus, experts expect the arrival of the Americans to accelerate big changes in the securities business that are already under way as Europe forges itself into a single market.
Nowhere is the trend more apparent than here in Britain. In April, Charles Schwab started an online trading service, and in June, the E-Trade Group, based in Palo Alto, Calif., announced a joint venture with a British partner, as well as licensing agreements in Germany. Other Internet brokers, like Ameritrade and DLJ Direct, part of Donaldson, Lufkin & Jenrette, are studying moves to catch up.
U.S. brokers, under competitive pressure at home that is reducing profit margins, are being drawn to the lucrative potential of Europe, where the idea of a discount broker is still novel, said Stephen Eckett, author of "Investing Online," a leading guide to Internet investment.
Eckett said that fees at full-service brokers in Britain for the purchase of $10,000 of stock in a British company would amount to about $120, while the going commission for acquiring over the World Wide Web the equivalent amount of U.S. depository receipts, securities distributed in the United States based on the same foreign stock, could be as low as $9.
Though Europeans can already use U.S. online brokers to buy shares in the United States, the Americans do not actively promote this business for fear of rankling European securities regulators.
Thus, at the start, the U.S. online brokers operating in Europe, like Schwab, are offering their customers the chance to trade only on individual national exchanges. The long-range goal, however, is to gradually expand the system into a truly global marketplace where investors in any country will be able to trade shares freely across national boundaries.
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The U.S. online brokers, despite their aggressive plans, will not have it easy. Computer penetration of European households lags behind that in the United States, and those that do have computers often do not use the Web -- in part because many Internet programs are in English, rather than other European languages.
But price is a factor, too, as the cost of Internet access in Europe averages about $85 for 20 hours -- about four times that in the United States -- according to a recent study of electronic commerce by the business information group Phillips Tarifica.
While European Internet use still lags behind that in the United States, it is expected to burgeon in the next several years. In Britain, for example, more than 12 million people, or about 20 percent of the population, are expected to be using the Internet by 2001, sharply higher than the 5.5 million at the end of 1997, according to the market analysts IDC Research. That compares with a projection of 40 percent in the United States by 2001.
On a recent trip here, English, who lives in the northern city of Sheffield, met with dozens of amateur Internet traders -- ranging in age from the 20s to the 70s -- to forge plans for Web investor clubs throughout Britain and to gain readers and contributors to a weekly magazine that he and fellow private investors post on the Web.
In Europe, unlike the United States, banks provide both banking and full brokerage services. As a result, many people turn to their banks or the banks' brokerage affiliates to trade securities.
For European banks and brokers, the results of the U.S. invasion will be to accelerate the spread of electronic financial services that is already well under way, and presumably to bring prices down. In Finland, 420,000 customers of Merita Bank, more than a quarter of its client base, bank on line, including trading stocks by computer. In Sweden, SE Banken operates a thriving online banking and brokerage business, and one of the largest brokers, DT Securities, lets customers trade on the fully electronic Stockholm exchange through an online subsidiary called Nord Net.
In Germany, banks including Deutsche Bank and Dresdner Bank operate all-electronic banks, and the main activity is stock brokerage. In France, Groupe Wargny, whose brokerage arm is 19 percent owned by Dresdner, has established a strong presence with its Telebourse online trading system.
Moreover, the European single currency, which is to gradually replace national currencies beginning on Jan. 1, 1999, is expected to foster the spread of stock trading across national borders. For instance, the stock exchanges in Frankfurt and London recently announced they would merge and invited other European exchanges to join.
Whether or not they have set up overseas operations, most U.S. online brokers already have European customers. Michael Anderson, president of Ameritrade, based in Omaha, Neb., which is studying expansion into Europe, said that "something under 1 percent" of Ameritrade's customers are overseas, notably investors in countries like Britain and France who are mainly interested in acquiring shares in U.S. companies. Ameritrade, he said, like other online brokers that accept such business, requires customers to have U.S. tax identification and have cash on deposit in their accounts before they can trade.
To build a European business, the U.S. brokers are applying formulas that often correspond to those that worked at home. Schwab, for example, built a beachhead in Britain, first by acquiring Sharelink Investment Services, one of the largest British discount brokers, in 1995 and earlier this year introducing online brokerage services like it has in the United States.
But Schwab also offers full-service brokerage services, and an interactive phone system like its Telebroker service in the United States.
Next, Schwab wants to encourage customers in Britain and the United States to trade across the Atlantic, by enabling them to buy and sell shares on both countries' stock exchanges -- which requires payment, clearing arrangements and regulatory approval in New York and London.
"Once we have the Web architecture," said Guy Knight, the spokesman for Charles Schwab Europe, "we will have the capacity to release that across Europe."
Other U.S. companies, like E-Trade, are signing up local partners, and licensing their systems to spread the risks. This spring, E-Trade announced a joint venture in Britain and licensing deals for Germany and Central Europe. Those moves followed the start of operations in Canada and Australia, and go hand in hand with expansion into Asian countries like Japan.
"We are moving parallel on a number of markets," said Judy Balint, E-Trade's head of global marketing.
Such aggressive expansion has European stock market regulators off balance. With most brokers still aiming for customers in their individual countries, regulatory systems have yet to be tested. E-Trade began advertising its services in Britain even before forming a joint venture there, but was whistled back by British stock exchange regulators.
Although most U.S. online brokers accept European customers for trades on United States exchanges, they refrain from actively advertising for such business so as to avoid rankling European regulators, who worry about their inability to protect investors who trade outside their jurisdiction.
Beyond that, differences between European governments and Washington on how to protect consumer privacy have led to a clash over computer browsing technologies that threatens to slow the evolution of the Internet into a global supermarket for electronic commerce, including securities trading. Web browser software like the Netscape Navigator and the Microsoft Internet Explorer, which are among the most commonly used in Europe, do not comply with European privacy guidelines. They are seen as too easily enabling businesses to collect information about Web surfers without their permission.
In the meantime, European banks and brokers are not waiting for governments to protect their business. In Britain, Barclays PLC, one of the largest banks with 2,500 branches throughout the country, will be the first to fight off the competition when it introduces its online brokerage service in September, complete with financial information and a real-time share trading service.
Phillip Bungey, head of research and development at Barclays Stockbrokers, said the system would quote prices to customers, who would then have 15 seconds to respond. Barclays will let customers trade shares in about 2,000 companies on the London Stock Exchange and the Alternative Investment Market, a small-company market. In the future, he said, Barclays wants to enable its customers to trade electronically on U. S. markets, like Nasdaq, though clearing and settlement problems remain to be settled.
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Privacy fears abound; the key Web browsers do not meet guidelines.
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Justin Urquhart Stewart, the director of corporate development at Barclays Stockbrokers, said brand loyalty could give domestic European brokers a leg up on U.S. competition. "We control 15 to 20 percent of the British market" for stock trading, he said.
He cited the example of the insurance industry, which was shaken in recent years when retailers like supermarkets began selling insurance policies, only to see customers return en masse to name-brand insurers like Prudential. "Name brands are important to people," he said.
And indeed, some U.S. players have already dropped out of the European game. Earlier this year, Fidelity Investments announced it was shutting down its online discount brokerage business in London, after computer problems drew criticism from London securities regulators.
Increasingly, too, U.S. online brokers may be squeezed by the very revolution they have helped start. Investing Online's Eckett predicts a "major collapse" of commission fees. He said that in the United States, commissions on Internet trades had dipped as low as $5 a transaction since Web trading began about four years ago. "The same will happen in Europe," he predicted, as consumers surf the Internet in search of cheaper financial services.
Yet some experts are betting that the change in European investors' habits will ultimately play into the hands of the U.S. online brokers and their global investing approach.
In the old days in Britain, said Julian Costley, chief executive of Electronic Share Information Ltd., the financial information company that E-Trade chose for its British partner, "the idea of the stockbroker was slightly feared and respected."
But he predicted that Europeans would increasingly come to regard stockbrokers the same way they do bank tellers -- as irrelevant holdovers from an earlier, pre-electronic era.
"There are now longer queues at the ATM than inside at the teller," he said, "and hundreds of thousands of investors are out there, playing into the hands of stateless companies, global companies, with no brand baggage."
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* Charles Schwab Online Trading
* E-Trade
* Ameritrade
* DLJ Direct
* English's "B-B-Bugle" online magazine
* SE Banken (in Swedish)
* Deutsche Bank
* Dresdner Bank
* Groupe Wargny (in French)
* Wargny Telebourse (in French) |
