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					                                ONLINE TRADING IN TAIWAN


Online trading is still not the mainstream. In December 2001, only 8.7% of the total market
turnover value was conducted online and 16% of total investor accounts were online accounts.
Online trading is offered, mainly to retail investors, as an alternative channel to the traditional
trading method.

Initially, online trading experienced rapid growth along with the rapid development of the
Internet and e-commence but more or less flattened out in the second half of 2001.

Manual re-input is still required for some brokers, while others’ systems enable
straight-through routing of online orders.

Consolidation in the online brokerage industry began in late 1999 when a number of mergers
and acquisitions took place. As of November 2001, 76 out of 158 brokers were online brokers.
They are domestic brokerage firms and maintain strong offline businesses.

The major obstacles to the development of online trading include: insufficient acceptance by
investors; low cost-saving incentive for investors to move to online trading; reluctance of
brokers to switch from traditional business practices; and network security concerns.



CONTENTS

1.    Introduction........................................................................................................................2

2.    Development history of online trading ..............................................................................2

3.    Statistics on online trading.................................................................................................3

4.    Market structure for online trading ....................................................................................6

5.    Regulation of online trading ..............................................................................................8

6.    Obstacles to and prospects for online trading ....................................................................9




[OTT.doc]                                                        -1-                               CSU-Research & Policy, HKEx
                                                                                                                 11 March 2002
Online trading in Taiwan

1.          INTRODUCTION

            Online securities trading in Taiwan began in 1997. As of November 2001, there were
            76 online brokers, all of them having strong offline business. The traditional trading
            method is still preferred by investors. Only 16% of total investor accounts are online
            accounts. The turnover value of online trading accounted for only 8.7% of the total
            market turnover in December 20011.

            The retail participation rate in Taiwan is very high. In December 2001, retail investors
            contributed 87% of market turnover value. Brokers’ online trading services mainly
            cater to retail investors. Brokers usually have a professional sales team to serve
            institutional investors and offer preferential treatment to them, such as rebates. The
            incentive for institutional investors to switch to online trading is, therefore, very low. It
            is believed that online trading is mainly a retail investor phenomenon. This report will
            therefore focus on the retail online trading market.

            In this report, “online trading” refers to trading where investors directly place orders by
            electronic communication channels, such as the Internet. It includes trading for which
            orders are routed directly to the Exchange’s trading system and for which orders need to
            be manually re-input by the brokers into the Exchange’s trading system.


2.          DEVELOPMENT HISTORY OF ONLINE TRADING

            In 1997, Fortune Securities2 started offering online trading services to retail investors
            and four other brokers entered the market in the same year. In October 1997, the
            Taiwan Securities and Futures Commission (SFC) approved the revision of the Taiwan
            Stock Exchange (TSE) Operation Rules to allow investors to place orders through
            electronic channels.

            In 1999, the TSE issued a number of guidelines to accommodate the development of
            online trading. To monitor the development, beginning on 20 August 1998, the TSE
            requires online brokers to report related information and the quantity of online orders to
            them on a monthly basis.

            As Taiwan experienced rapid development of the Internet and e-commence after 1997,
            the number of online brokers increased rapidly to 66 by 1999. Thereafter, the online
            brokerage industry began to consolidate3. Some online brokers merged and some
            discontinued their online business, while some firms started to offer online trading
            services. As of November 2001, there were 76 online brokers out of a total of 158
            brokers in Taiwan. Among them, 8 online brokers are bank-related. (Figure 1)




1
     “證券商電子式每月成交彙總資料查詢表”, Taiwan Stock Exchange.
2
     Originally named Da Shin Securities.
3
     Consolidation began in late 1999, when the nation’s largest broker Yuanta Securities merged with the third
     largest Core Pacific Securities. Since then, a number of mergers and acquisitions have taken place. The
     number of online brokers stabilised and the number of brokers decreased.
[OTT.doc]                                            -2-                        CSU-Research & Policy, HKEx
                                                                                              11 March 2002
Online trading in Taiwan


                                               Figure 1. Number of online brokers
             80
                                                                                        75                  76

             70                                                          66

             60


             50

             40


             30                                   27


             20


             10            5

              0
                          1997                   1998                   1999            2000             Nov 2001

             Source: "On-line Trading - Are there any Limits?", Taiwan Stock Exchange




3.          STATISTICS ON ONLINE TRADING

            Online trading value increased substantially by 490 times from NT$739 million in July
            1997 to NT$363 billion in January 2000. It then fluctuated sharply in 2000 and 2001,
            influenced by the change in the overall market sentiment. The market share of online
            trading, however, increased quite steadily from its launch in 1997 until November 2000.
            Since the second quarter of 2001, the market share has declined slightly. One possible
            reason may be the arousal of security concerns among investors, especially after a
            report on securities firms’ systems being hacked 4 . In December 2001, the online
            turnover value was NT$521 billion, accounting for 8.7% of market turnover (Figure 2).
            The number of online transactions and percentage share of market total number of
            transactions have similar pattern. In December 2001, the number of online transactions
            was 2.9 million, accounting for 7.2% of the market total (Figure 3).

            The number of online investor accounts rose rapidly in 1999 and 2000 and then at a
            diminishing rate in 2001. As of December 2001, there were two million online investor
            accounts, or 16% of the total 13 million investor accounts in Taiwan. (Figure 4)




4
     On 3 July 2001, Taiwan newspaper 聯合晚報 reported that a hacker entered at least two securities firms’
     systems and stole information on 2000 clients. The information was then used by the hackers to trade stocks
     involving a transaction value of about HK$2 million. This was the first reported case of securities firms’
     systems being hacked.
[OTT.doc]                                                         -3-                          CSU-Research & Policy, HKEx
                                                                                                             11 March 2002
Online trading in Taiwan


                                                                                  Figure 2. Online trading value and market share
                                  600
                                                               Online trading value
                                                               Online trading as percentage of market turnover value                                                                                                                                               8%
                                                                                                                                                                                                                                       8.7%
                                  500                                                                                                                                                                                                 Dec-01
                                                                                                                                                                                                                                       521
            (Billion NT Dollar)




                                                                                                                                                                                                                                      Dec-01
                                  400                                                                                                                                                                                                                              6%


                                  300
                                                                                                                                                                                                                                                                   4%

                                  200

                                                                                                                                                                                                                                                                   2%
                                  100


                                    0                                                                                                                                                                                                                              0%
                                                                                  Apr-98




                                                                                                                                     Apr-99




                                                                                                                                                                                   Apr-00




                                                                                                                                                                                                                             Apr-01
                                                      Oct-97




                                                                                                            Oct-98




                                                                                                                                                             Oct-99




                                                                                                                                                                                                          Oct-00




                                                                                                                                                                                                                                                 Oct-01
                                                                    Jan-98




                                                                                                                         Jan-99




                                                                                                                                                                        Jan-00




                                                                                                                                                                                                                    Jan-01




                                                                                                                                                                                                                                                          Jan-02
                                        Jul-97




                                                                                               Jul-98




                                                                                                                                                 Jul-99




                                                                                                                                                                                              Jul-00




                                                                                                                                                                                                                                        Jul-01
                     Source: " 證券商電子式每月成交總資料查詢表 ", TSE.




                                                          Figure 3. Number of online transactions and percentage share
                                  4,000
                                                                    Number of online transactions
                                  3,500                             Online transactions as percenatage of the total number of transactions                                                                                                                         8%
                                                                                                                                                                                                                                       7.2%
                                                                                                                                                                                                                                      Dec-01
                                  3,000
                                                                                                                                                                                                                                      2,927
            (in thousand)




                                                                                                                                                                                                                                      Dec-01                       6%
                                  2,500

                                  2,000
                                                                                                                                                                                                                                                                   4%
                                  1,500

                                  1,000
                                                                                                                                                                                                                                                                   2%

                                   500

                                        0                                                                                                                                                                                                                          0%
                                                                                      Apr-98




                                                                                                                                        Apr-99




                                                                                                                                                                                     Apr-00




                                                                                                                                                                                                                             Apr-01
                                                           Oct-97




                                                                                                                Oct-98




                                                                                                                                                               Oct-99




                                                                                                                                                                                                           Oct-00




                                                                                                                                                                                                                                                 Oct-01
                                                                         Jan-98




                                                                                                                            Jan-99




                                                                                                                                                                          Jan-00




                                                                                                                                                                                                                    Jan-01




                                                                                                                                                                                                                                                          Jan-02
                                             Jul-97




                                                                                                   Jul-98




                                                                                                                                                    Jul-99




                                                                                                                                                                                               Jul-00




                                                                                                                                                                                                                                        Jul-01




                       Source: " 證券商電子式每月成交總資料查詢表 ", TSE.




[OTT.doc]                                                                                                                             -4-                                                               CSU-Research & Policy, HKEx
                                                                                                                                                                                                                      11 March 2002
Online trading in Taiwan


                                                                                     Figure 4. Number of online investor account
                                     2,500



                                     2,000


                                                                                                                                                                                                                                                                                   2,008.4
                                     1,500                                                                                                                                                                                                                                         Dec-01
             (Thousand)




                                     1,000



                                      500



                                           0
                                                             Oct-97




                                                                                         Apr-98




                                                                                                                    Oct-98




                                                                                                                                                Apr-99




                                                                                                                                                                            Oct-99




                                                                                                                                                                                                           Apr-00




                                                                                                                                                                                                                                          Oct-00




                                                                                                                                                                                                                                                                         Apr-01




                                                                                                                                                                                                                                                                                                     Oct-01
                                               Jul-97




                                                                          Jan-98




                                                                                                      Jul-98




                                                                                                                                  Jan-99




                                                                                                                                                              Jul-99




                                                                                                                                                                                              Jan-00




                                                                                                                                                                                                                             Jul-00




                                                                                                                                                                                                                                                            Jan-01




                                                                                                                                                                                                                                                                                        Jul-01
             Source: " 證券商電子式每月成交總資料查詢表 ", TSE.



            At the beginning stage after online trading was introduced in July 1997, the average
            online deal size was significantly lower than the overall average deal size. After one
            year of development, online investors had more knowledge about the new trading
            method. Since September 1998, the average online deal size became more or less in
            line with the overall average deal size. Beginning from September 2000, the average
            online deal size stayed consistently above the overall average deal size (Figure 5).
            However, the online deal size may be capped by online brokers’ risk management
            procedures: brokers impose daily limit restrictions on the dollar amount of online
            trading orders from each client.

                                                             Figure 5. Average deal size of transactions made online in
                                                                     comparison with overall average deal size
                                     350
                                                                         Average deal size of online transactions
                                     300                                 Overall average deal size
              (Thousand NT Dollar)




                                     250
                                                                                                                                                                                                                                                                           178
                                                                                                                                                                                                                                                                          Dec-01
                                     200

                                     150

                                     100
                                                                                                                                                                                                                                                                           148
                                                                                                                                                                                                                                                                          Dec-01
                                      50

                                       0
                                                                                Mar-98




                                                                                                                                      Mar-99




                                                                                                                                                                                                Mar-00




                                                                                                                                                                                                                                                             Mar-01
                                                                                         May-98




                                                                                                                                               May-99




                                                                                                                                                                                                         May-00




                                                                                                                                                                                                                                                                      May-01
                                           Jul-97




                                                                       Jan-98




                                                                                                  Jul-98




                                                                                                                             Jan-99




                                                                                                                                                         Jul-99




                                                                                                                                                                                     Jan-00




                                                                                                                                                                                                                    Jul-00




                                                                                                                                                                                                                                                   Jan-01




                                                                                                                                                                                                                                                                               Jul-01
                                                    Sep-97




                                                                                                                                                                  Sep-99




                                                                                                                                                                                                                              Sep-00




                                                                                                                                                                                                                                                                                        Sep-01
                                                              Nov-97




                                                                                                           Sep-98
                                                                                                                    Nov-98




                                                                                                                                                                           Nov-99




                                                                                                                                                                                                                                       Nov-00




                                                                                                                                                                                                                                                                                                 Nov-01




                                     Source: " 證券商電子式每月成交總資料查詢表 ", TSE.




[OTT.doc]                                                                                                                                        -5-                                                                                   CSU-Research & Policy, HKEx
                                                                                                                                                                                                                                                     11 March 2002
Online trading in Taiwan

4.          MARKET STRUCTURE FOR ONLINE TRADING

            The online trading process in Taiwan is not a wholly “straight-through” process: some
            online brokers still require manual re-input for their online orders received. The trading
            mechanism is described below, followed by a description of the business practice of
            online brokers.


4.1         Trading mechanism

            An online order input by a client is routed to the broker’s online system for primary
            checking on login identity and then to the broker’s workstation terminal for approval.
            Currently, most online brokers enable auto-approval for online orders that are below the
            preset credit limit on the client. For orders exceeding the limit, the broker may reject
            the order or may approve the order manually on a case by case basis. Online brokers
            that require manual re-input of online orders normally do not have the facility for
            auto-approval in their system. After approval, orders will be transmitted through a
            closed network (分封網路) to the TSE’s trading system — Fully Automated Securities
            Trading (FAST) system — for auto-matching. The FAST system also sends out order
            confirmations and trade reports to brokers. The broker will then notify the client of the
            transaction after receiving the trade report. (Figure 6)

                              Figure 6. Mechanism for online trading in Taiwan

                                                  Order input online
                                                     by investor


                                                 Broker’s online system
                                                for primary checking on
                                                      login identity

 Broker with                                                                                     Broker without
 auto-approval function                                                                   auto-approval function
 (straight-through)                                                                            (manual re-input)
                         The system check                                   Manually check
                        whether within preset                             whether within preset
              No                                                                                       No
                         credit limit on the                               credit limit on the
                              investor                                          investor

                                  Yes                                           Yes

                           Automatically                                     Manually input
      Reject                                                                                            Reject
                           transmitted to                                      order at
      order*                                                                                            order*
                              exchange                                        workstation


                                                     FAST system in
                                                        the TSE



* On the broker’s discretionary decision, they may have follow up action on the investor to approve the order.


[OTT.doc]                                               -6-                     CSU-Research & Policy, HKEx
                                                                                              11 March 2002
Online trading in Taiwan

4.2         Online brokers

            The Taiwan brokerage industry is dominated by domestic brokerage firms. There are
            only 15 brokers of overseas origin and they mainly target institutional investors. Many
            local firms maintain extensive branch networks throughout Taiwan. As of December
            2001, there were 158 brokers with 978 branch offices throughout Taiwan. The number
            of branch offices is almost double the 592 at the launch time of online trading in 1997.
            However, the total number of brokers reduced from 205 in 1997 to 158, as a result of
            industry consolidation. It appears that the brokers in Taiwan are not shifting their
            business online, but are expanding both their online and offline business network in
            order to better serve customers under the fierce competition.

            The business practices of online brokers in Taiwan are discussed below.



4.2.1 Business practices

            •   Online brokers generally offer multiple order capturing channels, including the
                Internet, interactive voice recognition system (IVRS) ( 語 音 下 單 ) and other
                electronic channels. The main channel for online trading is through the Internet.

            •   Online brokers are offering low fees — at about half the price for offline trading —
                in order to capture market share in a short period of time. Many online brokers are
                still not making money in their online business.

            •   Online brokers also compete by offering quality customer services. They usually
                set up a customer service hotline to serve online investors. They also offer a
                personalised online interface, and more functionalities with investment and
                analysis tools.

            •   Online brokers usually promote online business aggressively to attract new
                customers and build up reputation, even though the profitability of online trading is
                currently compressed by the low price and low user acceptance. This is to prepare
                for the future when online trading is expected to become the mainstream.

            •   However, online brokers generally tend not to promote online trading actively to
                existing offline customers. One reason is the internal resistance from account
                executives whose salaries are based on commission on offline trades from existing
                customers. The other reason is that the profit on offline customers is more
                attractive.

            •   Online brokers usually don’t promote online trading services to their large
                customers. Instead, they usually assign a designated account executive to handle
                accounts of large investors in order to build a stronger bond with them.




[OTT.doc]                                        -7-                     CSU-Research & Policy, HKEx
                                                                                       11 March 2002
Online trading in Taiwan

4.2.2 Percentage share of online investor accounts among brokers

            The percentage share of online investor accounts is concentrated in a few online
            brokers. The top five online brokers already share half of the market total, leaving 71
            online brokers to fight for the remaining market share (Table 1). These top-five brokers
            are all major domestic securities firms. They have a long history and well-established
            brand name in Taiwan. In addition, they maintain extensive branch networks as their
            main service distribution channels.

                    Table 1. Top five online brokers in terms of number of securities accounts,
                                                as of August, 2001

             Rank      Broker                                    Number of online   Percentage share of
                                                                    accounts           market total
             1         Polaris (寶來證券)                                  353,433               18.7%
             2         Yuanta Core Pacific (元大京華證券)                    216,150               11.4%
             3         Sino-Pac (金華信銀)                                 159,097                8.4%
             4         Capital (群益證券)                                  106,745                5.6%
             5         Master Link (元富證券)                              103,882                5.5%
                           Subtotal                                       939,307              49.6%
                       Others                                          950,281               50.4%
                           Total                                        1,889,598             100.0%
            Source: “On-line Trading - Are there any Limits?”, TSE.




5.          REGULATION OF ONLINE TRADING

            To accommodate the development of online trading, the relevant rules and regulations
            have been amended since 1997. In 1999, the TSE issued three sets of guidelines for
            securities firms who offer online trading services. The key provisions in the regulations
            and guidelines on online trading are summarised below.

            (1) Investors, whose maximum trading amount for a given day would be NT$1 million
                or less, are exempted from opening an account in person at a securities firm’s place
                of business. These investors can open accounts online or by mailing. However, the
                account opening process should be completed with the investor’s signature and
                approval from the broker, which may involve face-to-face contact.

            (2) A securities firm that accepts securities trading orders solely by means of telephone
                or electronic means may be exempt from the requirement of establishing a business
                floor and counter for taking client orders.

            (3) An online order received may be validated automatically by the broker’s computer
                system provided that the investor’s IP address and the order file are recorded and
                saved for at least 5 years.




[OTT.doc]                                             -8-                     CSU-Research & Policy, HKEx
                                                                                            11 March 2002
Online trading in Taiwan

            (4) Starting from May 2001, both brokers and online investors should use digital
                signatures issued by Certificate Authorities5 for the transmission of orders and
                order report.

            (5) In relation to the use of e-mail, electronic bulletin boards and websites, securities
                firms must install firewalls and certificate authentication systems and at the same
                time properly supervise the business practices of the operational staff.

            (6) Online brokers are required to report on a monthly basis to the TSE their online
                trading statistics, including number of online investor accounts and number and
                value of online transactions.

            (7) Brokers who plan to launch online trading services are required to report to the TSE
                the order flow mechanism in their online systems and related information.



6.          OBSTACLES TO AND PROSPECTS FOR ONLINE TRADING

            In Taiwan, the share of online trading in total market turnover and the proportion of
            investors who are online investors remains low. This section summarises the major
            obstacles to the development of online trading and then discusses the prospects for
            online trading in Taiwan.



6.1         Major obstacles

            •   Insufficient acceptance by investors. As many brokerage firms maintain
                extensive branch networks, investors can easily find a branch near them. Investors
                can also place orders conveniently by offline methods. As a result, investors have
                low incentive to switch to the new trading method. In addition, similar to other
                regions like Hong Kong, Taiwan’s Internet population consists mainly of young
                people, while the majority of existing investors are middle-aged. These existing
                investors may not be very receptive to new methods and do not have enough
                computer knowledge to use the Internet to make trades.

            •   Low cost-saving incentive to investors for online trading. Under the keen market
                competition, the order handling fees for traditional trading are already very low.
                The room for attracting investors to trade online by price-cutting is quite limited.
                The current price differential offered by online brokers is not very effective.




5
     There are a number of Certificate Authorities in Taiwan. One of them is the Government Certification
     Authority (GCA). People can apply for digital signatures from GCA in person or online for people having an
     account in the HiNet, the main Internet Services Provider owned by Chung Hwa Telecom (中華電信).
[OTT.doc]                                            -9-                        CSU-Research & Policy, HKEx
                                                                                              11 March 2002
Online trading in Taiwan

            •   Conservatism of brokers. Although online brokers usually make big efforts to
                promote their online trading business, they still prefer to maintain a strong presence
                in traditional business. These online brokers do not encourage existing customers
                to switch to online trading and still run a large number of branches throughout
                Taiwan. They would not take the risk to move the profit-making offline business to
                the profit-uncertain online business. Another reason may be the internal resistance
                from account executives whose income is based on commission. Customers
                switching from account executive-based traditional trading methods to online
                trading would seriously affect account executives’ income.

            •   Security concerns. Although securities firms are required to comply with the
                TSE’s standards about network security, there are still reports of people being
                defrauded through online trading. Such reports adversely affect the confidence of
                investors and make investors reluctant to engage in online trading.



6.2         Prospects
            A number of potential developments in Taiwan and its brokerage industry may directly
            or indirectly support the growth of online trading. The growing Internet penetration in
            Taiwan is also expected to have positive effect on online trading. This section attempts
            to discuss the prospects for online trading in Taiwan in the light of such changes.
            •   Opportunities to expand domestic the online customer base. Internet penetration
                in Taiwan is deepening. As of 2001, 34% of the total Taiwan population have
                access to the Internet6 and 15% of the Internet users are broadband Internet users7,
                up from 27% and 14.3% respectively in 2000. Although the penetration rate for
                Taiwan is relatively low when compared with some other Asian countries8, given
                the sizable population in Taiwan, the increasing number of Internet users should
                provide opportunities for Taiwan online brokers to expand their business. In
                addition, one major online broker believes the usage of online trading will be
                higher when more young people, who are heavy Internet users, hit the investment
                age.
            •   Enhancements in brokers’ online systems to attract new customers. After its
                accession to World Trade Organisation (WTO) in December 2001, Taiwan will
                start to open the domestic retail securities industry to overseas firms. That means
                foreign securities firms will enter the domestic retail market which is currently
                dominated by domestic firms. To face the challenge, Taiwan local brokerage firms
                would have to increase their competitiveness. One way is internal technological
                advancement to increase operational efficiency. Online brokers tend to introduce
                continuously new investment management systems and enhance their existing


6
    “Taiwan Internet User Survey (我國網際網路用戶數調查統計)”, September 2001, Institute for Information
    Industry.
7
    Statistics from the Directorate General of Telecommunications, 2001, Ministry of Transportation and
    Communications.
8
    The Internet penetration rate for Hong Kong and Korea are 43% (Source: Statistics Department, HKSAR
    Government, 2001) and 45.9% (Source: NetValue Korea, July 2001) respectively.
[OTT.doc]                                        - 10 -                   CSU-Research & Policy, HKEx
                                                                                        11 March 2002
Online trading in Taiwan

                in-house trading systems. Such systems move towards a straight-through trading
                process, with a more user-friendly interface, and more functionalities for online
                trading. Such enhancements are expected to stimulate more investors to trade
                online.
            •   Globalisation for online brokers. Taiwan brokers are eager to expand their
                businesses overseas. Given the similarities in culture and language, the two major
                overseas markets are Hong Kong and China. In fact, Taiwan brokers have already
                been in the Hong Kong market for a few years and are now expanding their online
                brokerage business here. Examples are KGI and Core Pacific-Yamaichi, a
                subsidiary of Yuanta Core Pacific. Such expansion is expected to benefit the
                domestic online trading industry as Taiwan investors can invest in Hong Kong
                stocks online and vice versa. The China stock market, however, is still relatively
                closed to overseas brokers. Similar to Hong Kong’s online brokers, Taiwan online
                brokers monitor closely the opening of the China market that is expected to provide
                a huge potential investor base for online trading.




References

1.   網際網路證券交易專題研究, Nov 1999, Taiwan Stock Exchange.

2.   Monthly statistics, Taiwan Stock Exchange.

3.   Big is better for brokers, 28 Feb 2000, Taipei Times.

4.   Online trading booming, 24 Mar 2000, Taipei Times.

5.   On-line Trading - Are there any Limits?, November 2001, Mr. Ted Peng, Taiwan Stock Exchange, presented
     at Asian Securities Analysts Federation 2001 Conference.

6.   證券商開辦網際網路委託及語音下單配合事項, 13 November 2001, Taiwan Stock Exchange.

7.   Yuanta sees Taiwan brokerage shakeout, 18 July 2000, Reuters.




[OTT.doc]                                           - 11 -                  CSU-Research & Policy, HKEx
                                                                                          11 March 2002

				
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