Size Matters Online Amid Unstable Times

The Age

Monday January 12, 2009

By VANESSA O'SHAUGHNESSY, INVESTMENT REPORTER

THE online trading market is contracting as customers seek the larger players with the biggest profiles.

A tougher market environment has already prompted a so-called "flight to quality" in banking and in equity markets, where larger companies have been considered safer bets than smaller companies.

And the trend is continuing in the online trading market, making it more difficult for new entrants to establish a niche for themselves.

Estimates vary, but there are believed to be about 2million people with online trading accounts in Australia.

CommSec, a division of Commonwealth Bank, has more than 50per cent of the market.

The ANZ bank's online trading division, E*Trade, accounts for about another 25 per cent.

It is followed by Westpac, National Australia Bank and other online players such as Macquarie Group, Bell Direct, Sonray Capital Markets, State One's amscot Discount Stockbroking, CMC Markets and OneTrade.

In all, there are 97 licensed stockbrokers in Australia, although many of them operate full-service brokerage businesses and do not offer online broking. However, a number of the online brokers purchase back office and clearing and settlement facilities through IWL, a formerly listed brokerage that was purchased by Commonwealth Bank in August 2007.

And E*Trade provides share trading and execution for StGeorge, stockbrokers Joseph Palmer & Sons and Asgard.

Less than 10% of Australia's online trading market remains outside the universe of either CommSec or E*Trade.

CommSec managing director Matthew Comyn said CommSec enjoyed a competitive advantage as first mover in the online trading market.

And a strong brand awareness and relationship with Commonwealth Bank have also helped it maintain market share during times of high volatility.

"I think it's very hard for the smaller players, particularly in the current market," Mr Comyn said, citing the online trading "churn rate" of between 2 per cent and 3per cent.

"It's very difficult to turn a profit unless you have sufficient scale."

Online trading started in earnest in 1998, and by 1999 and 2000 there were many new entrants on the Australian market.

Then the sharemarket contracted from 2001 to 2003, reducing the incentive for investors to buy shares and other traded products online.

However, over the past four or five years, there has been a period of rapid growth in the online trading market, with companies developing sophisticated trading systems using tailored technology.

During 2008, even as the market hit a 4-year low, online trading volumes reached record levels.

"The introduction of online trading offered investment opportunities that were previously out of reach to many new investors," said E*Trade managing director Stuart Sayers.

"Australia has the largest investing community per capita in the world, with many of us confident that share trading is a sound wealth-creation strategy."

E*Trade experienced a record number of account openings during November, and account registrations are increasing by 30 per cent year on year.

Newer entrants, such as Bell Financial Group's Bell Direct, are also growing client numbers as people seek out low-cost trading options.

But chief executive Arnie Selvarajah said that to be successful, an online trading division had to make sense for the rest of the business rather than just offer an alternative to CommSec or E*Trade.

"It's hard to compete with that kind of scale," he said.

However, Mr Selvarajah, who used to work for CommSec, said smaller businesses could be more agile and customer-focused than their bigger competitors.

"Scale isn't necessarily leading to better service," he said. "It's become a scenario now where size is actually a disadvantage."

National Australia Bank general manager and head of online trading Nathan Walsh said customer service was also his main focus. NAB's online trading business is an integral part of its private and institutional wealth divisions, and has about 100,000 customers.

The back office and clearing and settlement functions continue to be provided by Commonwealth Bank's IWL, but Mr Walsh said it was the "front-end" experience that customers were interested in.

In recent months, NAB has experienced record account openings, as private wealth clients mix the way they manage their money, using online trading as well as advisers to balance their portfolio.

However, Mr Walsh confirmed the trading environment was challenging for small and mid-market players. There had been a real move back to what were seen as stable and secure players, he said.

© 2009 The Age

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