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									Norinchukin Research Institute

 Vol. 9 No. 4

   April 2000

        Rapidly Growing Online Stock Transactions,
                   Present and Future


      Since stock brokerage commissions were liberalized in October

   1999, online securities transactions have been growing rapidly in

   Japan. The spread of the Internet has raised individual investors to

   the same level as institutional investors, but securities companies

   must determine how to give individual investors valuable advice

   that meets each one’s needs. As a result of the liberalization of

   brokerage commissions, securities companies are now at a crucial

   stage where they must find a way to survive.

                                              Norinchukin Research Institute

   Stock brokerage commissions were liberalized in               transaction. (At that time, the average brokerage com-

October 1999, and since then securities transactions via         mission quoted by discount brokers was about $55.) In

the Internet have been growing vigorously, with the              the United States it is relatively easy to enter the online

participation of not only established domestic securities        securities business because of the clear-cut division of

companies but also foreign-affiliated firms and new              roles in the securities industry. Companies that special-

entrants in the industry. This report will forecast how          ize in back-office jobs have grown rapidly. Existing

Japanese securities companies’ retail business models will       discount brokers, too, have begun online trading. New

change amid the current trend toward increased use of            brokers that specialize in online transactions have also

information technology in securities transactions. We will       debuted. According to the latest data, 157 companies

show some examples of online securities transactions in          were registered as online stock brokers. For this very

the United States, which leads the world in e-commerce.          reason, however, the price war ran its course quickly,

                                                                 and in the second half of 1997 it came to a temporary

1. Online securities transactions in the U.S.                    halt. At present, there is an oligopoly of the 10 largest

“Price busting” by specialized online brokers                    online brokers, together having a 90 percent share of

   In the United States, by the end of 1999 there was a          online stock transactions. Most online stock brokers,

total of 12,990,000 accounts for online securities trans-        however, are operating at or below the break-even point

actions. In the last quarter of 1999, the average daily          because, for one thing, they have to spend extensively on

number of online securities transactions was 807,000.            advertising and publicity to promote their brand images.

The balance of assets deposited for online transactions                       Chart 1. Average daily number of online stock
                                                                                       transactions in the United States
came to $900 billion. Online transactions continued to
                                                                 (1,000 cases)
grow, rising in the same quarter to 43 percent of all                                                                                              807.0

stock transactions by individuals in the United States.          700

   The expansion of online securities transactions in            500
                                                                                                                           505.3           504.6

the United States began when E*TRADE Securities,                 300
                                                                                               186.3 224.0
Inc., a specialized online-only stockbroker, declared its                 117.9 139.5
                                                                 100 96.2

price busting strategy in March 1996. The company                  0
                                                                        1Q     2Q   3Q    4Q     1Q     2Q   3Q     4Q      1Q      2Q      3Q      4Q
                                                                       1997                     1998                       1999

announced a brokerage commission of $14.95 per                     Source: U.S. Bancorp Piper Jaffray

                                                                                  Norinchukin Research Institute

End of price war and diversification of                                                                 online stock brokers with five criteria: (1) ease of use,

strategies for differentiation                                                                          (2) customer confidence, (3) on-site resources, (4) rela-

    Since the end of the price war, all online stock                                                    tionship services, and (5) overall cost.

brokers have been seeking strategies for survival. For                                                     Charles Schwab has become the largest discount

investors who use online transactions, commissions are                                                  broker by practicing such strategies as offering its “One

not the only yardstick for rating and choosing securities                                               Source” service, in which customers can buy or sell

companies to do business with. This is evident from the                                                 several hundreds of mutual funds without transaction

fact that Charles Schwab & Co., Inc., with a relatively                                                 fees, organizing some of the 300,000 financial planners

high commission for online transactions, has the largest                                                in the United States and introducing to them customers

share. The consulting firm Gomez Advisors, Inc. rates                                                   who need investment advice, and executing buy-sell

                                                                                                        orders itself. In its online stock transactions, the com-
      Chart 2. Average stock brokerage commissions at the
               10 largest online brokers in the United States
                                                                                                        pany capitalizes on these strategies and offers services
                                                                                                        comparable to those available from general securities
   50                   46.69
                                                                                                        companies, such as a full lineup of mutual funds and
                                        32.19 31.66                                                     information related to companies that are going public.
   20                                                                                                      E*TRADE spends heavily on advertising and pub-
                                                              15.95 15.53 15.75 15.75 15.75 15.75

   10                                                                                                   licity to attract customers. At the same time, it supplies
         1Q 2Q           3Q      4Q      1Q 2Q         3Q      4Q    1Q 2Q       3Q    4Q     1Q        information about stock prices, market analysis results
        1996                            1997                        1998                     1999

     Source: CS First Boston
                                                                                                        and company information free of charge to registered

                                                                                                        customers. It also ties up with companies that furnish
    Chart 3. Distribution of market shares in online securities
             transactions in the United States                                                          financial services other than securities transactions so its
             (in the 4th quarter of 1999)

                                                                                                        site is recognized as a portal to diverse financial services.
                                                 1.4%                  Schwab

         E*TRADE                                                                   Suretrade
          16.4%                                                                      2.7%               Profile of the online investor

                 DLJdirect                                                      Waterhouse                 What are the characteristics of American investors
                  4.5%                                                            13.4%
                          Ameritrade                                Discovery
                           11.1%                      Fidelity        2.6%                              who conduct stock transactions online? According to a

Source: U.S. Bancorp Piper Jaffray                                                                      survey by the U.S. Securities Industry Association in

                                                    Norinchukin Research Institute

                                Table 1. Profiles of American online and non-online investors

                                                                             Online investors          Non-online investors
       Average age                                                                   42.6                       47.5
       Aged 50 or under (%)                                                            74                         60
       Males (%)                                                                       66                         54
       College graduates (%)                                                           69                         57
       Active investors (%)
       (Active investors/average investors × 100)                                      64                        41
       Average household income ($)                                               97,300                     84,100
       Average financial assets ($)                                              246,300                    215,100
       Average number of transactions in the past one-year period                    30.9                      13.5
      Source: “1999 Annual SIA Investor Survey: Investors’ Attitudes Toward the Securities Industry”

1999, these investors are younger than users of the                      tered representatives or investment information sup-

traditional channels, their investment pattern is slightly               plied by on-staff securities analysts. However, major

more aggressive, their frequency of transactions is                      securities companies such as Merrill Lynch, seeing the

higher, and they have slightly greater annual incomes                    sudden expansion of online transactions as a threat, one

and financial assets (Table 1). The same survey revealed                 after another began online services mid-1999.

that their reasons for trading online are convenience,                       Major securities companies quote commissions

being able to carry out transactions on their own and the                based on the size of assets in trust or on the service

low commission. As many as 30 percent of all investors                   required. The net inflow of funds into the “Unlimited

trading online began less than one year ago. And 92                      Advantage,” Merrill Lynch’s balance-based-commission

percent of all online investors intend to continue at the                online account, reached $9 billion at the end of 1999,

same or higher level in the future. These findings indi-                 indicating the strong expansion of this market.

cate that the growth of online transactions will continue.

                                                                         “Clicks and mortar”

Participation by major securities companies                                  A new race has been kicked off in the American

   Amid the change in both the securities industry and                   securities industry as a result of major general secu-

investor behavior, major general securities companies                    rities companies inaugurating online transactions.

in the past stayed away from online securities transac-                  Charles Schwab purchased CyBerCorp, a day trader,

tions, considering them incompatible with transactions                   and in February began to lower its commissions.

based on the investment advice of experienced regis-                     E*TRADE, which is still operating in the red as a result

                                              Norinchukin Research Institute

of its advertising and publicity expenses, purchased             in November 1999. In this report, she predicted that

Telebanc, a specialized online bank, to diversify its rev-       the balance of deposited assets in online transactions

enue sources. More than two-thirds of new accounts at            would reach $3 trillion in 2003. The report contended

Charles Schwab have been opened through branch                   that regulatory measures should be implemented cov-

offices. This indicates that online brokers, too, have           ering (1) suitability, (2) best execution, (3) market data,

begun to pay attention to the value of offices. Moves to         (4) systems capacity, (5) investor education, (6) on-line

open offices have begun to be seen among specialized             discussion forums, (7) privacy, and (8) portals.

Internet-based stockbrokers.                                        Indications are that online securities transactions

   In the United States, “clicks and mortar” has                 in the United States are spreading from equities and

become a phrase in the vogue. “Clicks” (representing             mutual funds to other financial products, such as bonds,

online securities transactions) are expanding, and               and from the secondary market to the primary market.

“mortar” (a metaphor for “real-world” face-to-face               In view of this trend, the SEC is expected to establish

transactions) is being appreciated again in a new light.         online securities transaction rules that suit the realities

How should a system comprising online transactions,              of Internet-based business.

investment advisory services and commissions be struc-

tured? American securities companies are searching for           2. Online securities transactions in Japan,

a business model for retail trade.                                  present and future

                                                                 Securities companies entering online market

SEC’s recommendation of stricter regulations                     with “price busting” strategies

   Online transactions have immeasurably facilitated                Online securities trading in Japan was pioneered by

stock transactions by individual investors but have also         Daiwa Securities Co. in April 1996. Encouraged by the

spawned a number of problems, such as system out-                shift of securities companies from the license system to

ages, an increase in day traders (speculative individual         the registration system in December 1998 and the com-

investors), and an increase in fraudulent practices.             plete liberalization of stock brokerage commissions in

   Regarding these problems, Securities Exchange                 October 1999, a succession of Japanese subsidiaries of

Commissioner Laura S. Unger compiled a report titled             foreign securities companies and Japanese companies

“On-Line Brokerage: Keeping Apace of Cyberspace”                 outside of the securities industry have begun online secu-

                                                                                                                                   Norinchukin Research Institute

                   Chart 4. Online stock transaction accounts in Japan                                                                                                  lular telephones leading the way. Telecommunication
  (1,000 accounts)
 700                                                                                                                                                                    charges are slowly falling. It is forecast that the number
                                                                                                                                                                        of online securities trading accounts will reach between
                                                                                                                                                                        2 million and 3 million by the end of this year.


                                                                                                                                                                        Users of online transactions in the incipient

       1998 June
                                                               1999 Jan.
                                                                                                                                                        2000 Jan.
                                                                                                                                                                           According to a survey of foreign-affiliated special-
  Source: Daiwa Institute of Research                                                                                                                                   ized online stockbrokers that recently entered the busi-

                                                                                                                                                                        ness and which had more than 40,000 accounts in

rities transactions. More than 50 companies now engage                                                                                                                  February, 88 percent of their customers are males, 62

in this business. Some specialized online stock brokers                                                                                                                 percent are people in their thirties and forties, and 50

that recently entered this business have announced a                                                                                                                    percent reside in the Kanto area. In a nutshell those

commission of just over ¥1,000 per transaction. This is                                                                                                                 involved in online stock transactions are salaried work-

a 98 percent discount from conventional commissions.                                                                                                                    ers who reside in or near Tokyo and are experienced in

They are attracting customers with this extremely low                                                                                                                   investment.

commission as their selling point. The synergy of this                                                                                                                     Many people in their twenties and thirties who use

low commission and a bull market stimulated the growth                                                                                                                  the Internet regularly have begun trading stock online

of online transactions, and the number of online                                                                                                                        despite their lack of investment experience. This is

accounts has sharply increased. At the end of January                                                                                                                   because they can do so easily using the Internet. In

2000, the number of accounts topped 600,000, three                                                                                                                      addition, some people place limit orders at night from

times the number at the end of September 1999. An                                                                                                                       their home computers and then change the limit prices

estimated 28.3 million individual investors are active in                                                                                                               by cell phone after learning the opening prices the fol-

Japan, or one out of every 50 individual investors (dis-                                                                                                                lowing day. Such orders represent 60 to 70 percent of

regarding the possibility that some individual investors                                                                                                                online transactions. Cell phones enable one to learn

may be using more than one online account). Use of the                                                                                                                  stock prices on a real-time basis. Some people expect

Internet is spreading in Japan, with Internet-linked cel-                                                                                                               stock transactions by cell phone will become the main

                                             Norinchukin Research Institute

form of transactions by defined contribution pension            tion are estimated at slightly more than ¥1,000, includ-

schemes, which will be introduced next year.                    ing the back-office expenses and mailing cost.

   In the insurance industry, online sales of motor vehi-          In the United States, securities dealers called

cle insurance policies are growing. Likewise, for trans-        specialists participate in stock transactions at the

actions in general-purpose financial products that do not       exchanges. Online brokers place orders with them and

require explanation to investors, such as money man-            obtain a payment in return as legal income. This enables

agement funds and index funds, online transactions will         them to quote very low commissions. At Japanese

become a mainstream business. A survey by Nikkei                securities exchanges, on the other hand, stock transac-

BP has revealed that “security” ranks second after              tions are executed in the order of price priority and time

“commissions” among the things that are important to            priority, so online brokers receive no such income.

investors who use the Internet to buy and sell stocks. If       Specialized online brokers have to compete in services,

the security problem is solved, the expansion of online         which heavily taxes their financial strength from the

stock transactions will get additional momentum.                beginning.

Difference between Japan and U.S. in online                     Major securities companies stay away from

transaction infrastructure                                      price war

   A bottleneck in the expansion of online securities              In Japan, several second-tier securities companies

transactions in Japan is evidenced by the difference            have begun specializing in online securities trans-

between Japan and the United States in their securities         actions. But the majority of major and second-tier com-

markets and securities industry infrastructures. First,         panies are avoiding this price-based competition,

back-office business in Japan is under an oligopoly of          although they, too, are engaging in online transactions,

major securities companies. Documents for contract              considering the Internet one of their channels for

conclusions have to be mailed, and prospectuses must            receiving customer orders. This is probably based on

be written on paper (the current Diet is expected to pass       their awareness of the difference in the infrastructure

a bill to permit the use of e-mail to send the prospec-         between Japan and the United States and the changes in

tus). Such existing rules for securities transactions are       American securities companies’ management strategies.

hampering cost reduction. Variable costs per transac-              Major securities companies, however, do not think

                                                Norinchukin Research Institute

that face-to-face transactions and online transactions             publicity race among online brokers have made securi-

are incompatible. In fact, they are working to increase            ties transactions familiar to individuals who had little

the number of online accounts. This is probably based              business with securities companies in the past. In fact,

on dual viewpoints: they expect that online transactions           fund inflows into investment trusts have begun to swell.

will become the main venue for general-purpose finan-                 As is clear from the recent sharp declines of

cial products, and they also see that the Internet is much         Internet-related stocks, however, securities companies

more efficient than the conventional method in provid-             are sticking to their conventional policy of earning as

ing stock price information and investment information             much brokerage commission as possible by urging cus-

from analysts and in executing buy-sell orders. Each               tomers to buy and sell frequently instead of long-term

online account at a major securities company is used               investments.

only several times a year, so it is clear that general                An increasing number of investors will be able to

investors other than day traders expect to obtain advice           manage their assets by making investment decisions

about such things as investment timing in person at                themselves based on information obtained through the

securities companies’ branches or by telephone, even if            Internet. In the United States, investment in stocks and

this means a higher commission payment than in an                  mutual funds has spread among individuals to the extent

online transaction with a specialized broker. In a nut-            that it has, because American securities companies have

shell, major securities companies’ retail strategy seems           been steadily developing new products and new services

to be to supply general information and execute buy-               and educating investors since May 1, 1975 (the day

sell orders online but provide advice to customers at              when stock brokerage commissions were liberalized).

their branches or by telephone.                                       The management stance of each securities company

                                                                   (to provide investor education through asset manage-

Investor education an ongoing problem                              ment advice) is the key not only to the survival of each

   Individuals, too, as a result of the protracted zero per-       securities company but also to encouraging investment

cent interest rate policy, have begun to value the return          in stocks and investment trusts among individuals

on assets. The service competition and advertising and             in Japan.                           (By Yoshihiko Horiuchi)

                                                                                 Issued by Norinchukin Research Institute
                                                                                 8-3, Otemachi 1-chome, Chiyoda-ku,
                                                                                 Tokyo 100-0004, Japan
                                                                                 Telephone : (03) 3243-7311 Facsimile : (03) 3270-2233


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