Online share trading - Are this lot out of a job?

The business of share trading in the UK is changing. This change is happening fast and it’s being driven by the internet. One reason is cost - online trading charges are between 10 and 20 per cent of traditional prices; another is speed - transactions can happen in seconds and in real time, using a format identical to that of the official stock market. And it’s fun: everyone from retired teachers to rocket scientists are able to make informed decisions on how their investments are performing.

The business of share trading in the UK is changing. This change is

happening fast and it’s being driven by the internet. One reason is cost -

online trading charges are between 10 and 20 per cent of traditional

prices; another is speed - transactions can happen in seconds and in real

time, using a format identical to that of the official stock market. And

it’s fun: everyone from retired teachers to rocket scientists are able to

make informed decisions on how their investments are performing.

According to The Association of Private Client Investment Managers and

Stockbrokers (APCIMS), the official watchdog of UK stockbrokers, online

share trading rose by 73 per cent to 51,000 trades for the last quarter, a

figure which equates to nearly a #1 billion in traded assets each


Such growth is causing many of the big UK financial institutions to

rethink their business development. Merrill Lynch will shortly unveil its

online share trading platform, as will NatWest, and Goldman Sachs has

announced backing for an internet trading business called,

which it plans to have up and running by the end of the year. All this for

a market which still represents less than one per cent of total share

trading in the UK.

But then if the US is any kind of indicator, big things are going to

happen. Internet share trading in the US now represents 30 per cent of all

trades, or by value $415 billion for 1998, and the market is still going

up. If growth continues at this pace, the value of online trading in the

US market will be worth more than $3 trillion by 2003, according to

research by Jupiter Communications. More importantly, the rise of internet

trading is giving investors the ability to make decisions without

professional advice.

Online broking is new in the UK - less than two years old. Unlike

traditional broking, which requires a trader to physically buy or sell on

the floor of an exchange, the online trader and investor can do it all for

themselves on their home or work PC.

Online brokers give the trader all sorts of options for what kind of

service they might want to buy - subject to information supply, access to

live prices and cost. They provide full portfolio information in a format

which enables the trader to quickly identify any gains and losses and then

trade should they want to. To get the most recent stock prices, a user is

able to click for an update. A further click takes the investor through to

a purchasing position, from which the broker will seek confirmation of

purchase before the transaction is completed.

The current UK online market is dominated by Charles Schwab Europe, part

of the Charles Schwab Corporation based in San Francisco. Schwab is now

the biggest online broker with 75 per cent of the 70,000 people currently

trading online in the UK. Research by APCIMS gave Schwab 83 per cent of

the UK online market based on a total number of 80,384 online trades for

the first half of the year. ”Our priority is functionality,” says Guy

Knight, vice president and head of marketing for Schwab. ”First, the

client needs to see their portfolio, then see the changes, then check up

on prices and then make a trade. Once we achieved that, we added Reuters;

more and different kinds of accounts; then we offered free web trading for

all new customers in July; and most recently dropped all charges to new

clients for a 30-day period just to encourage potential investors to have

a go.”

Trading systems are evolving as swiftly as the market is developing.

Indeed, the steady arrival of new brokers into the market place is pushing

prices down. Before internet trading, traditional brokers used to charge

between #50 and #100 plus commissions. Today, a traditional broker such as

Edward Jones charges #40 per transaction with a commission of 1.5 per cent

of the value invested between #600 and #6,000.

Contrast this with Schwab’s minimum price of #15 and a sliding scale of

commissions and it’s clear that internet trading is less than half the

cost. The minimum Schwab transaction charge doesn’t reflect what most of

its customers pay, because it targets investors who make just three or

four trades a year. Those making 20 to 25 trades opt for a frequent-trader

account and pay a flat rate of #19.50 for each trade with no extra

commissions. By comparison, E*Trade, a new arrival from the US, undercuts

Schwab at #14.95, minus management fee, and another US new arrival, DLJ

Direct, charges #15 and one per cent commission up to #2,500, and 0.1 per

cent thereafter. As a response, traditional brokers such as Barclays have

slashed their charges, to #11.99 with a flat rate commission of one per

cent, although Barclays doesn’t really compare because it still relies on

paperwork and a stockbroker making the deal for you.

Many traditional brokers believe that internet trading will only lead to a

rise in demand for their expertise. Edward Jones is a US firm offering

personal advice on investments. Since opening for business in the UK in

March 1998, it has grown to 59 UK outlets and 5,000 worldwide. UK chief

executive Allan Anderson is convinced that the internet can only benefit

business by raising awareness of all financial services. ”We don’t see the

internet as a threat to our market because we recognise that it’s part of

the change the industry is going through,” he says. ”What’s more, it can

only help to improve the confusing lack of focus which runs right across

the provision of every kind of financial product. Right now, investors

don’t know where to get independent advice.”

Clearly he would say that, but Edward Jones is growing fast, both in North

America and in the UK, precisely because investors - faced with every kind

of institution pushing their own products - don’t know where to get

impartial advice. And not many of the older retired and wealthy bracket

can be bothered to sit in front of their PCs and manage their portfolios -

particularly when they can afford to have a professional do it for


Another sector eager to downplay the impacts of online share dealing is

the established stockbrokers. ”It’s all over the place,” says Justin

Urquart Stewart, director of Barclays stockbrokers. He believes it’s still

far from clear exactly how the internet can best be used by investors and

indeed, what it can actually do. Many forms of online trading he dismisses

as little more than ”Nike dealing”, because they involve passing an

electronic message through to a dealer who runs across the floor to carry

on much as before. ”Most people don’t know how the markets work,” he says.

”They don’t know how stocks and shares work and they also don’t really

know how the internet and online trading works. Put all this together with

different kinds of online trading system, such as email, online quotation

and direct trading, add in systems which occasionally crash and you have

the makings of a glorious confusion.”

He’s right. Internet share dealers don’t have the experience and expertise

of the professional brokers. Equally, having so many new and comparatively

green investors with easy access to share buying helps explain part of the

hype surrounding internet shares. But neither does Urquart Stewart believe

that the huge growth of online trading in the US will follow here:

internet and stock market cultures are just too different and will combine

with security fears to limit the market. This view might underestimate

both the wider growth of internet share culture and the increasing level

of safety features being built into online trading. But Barclays does

represent a traditional approach and seeks to sell itself on old-fashioned

values. It is interesting that Urquhart Stewart should criticise the

engine of e that growth - a position which he’s quick to defend. ”Online

share trading is not a threat to traditional brokerage,” he says. ”We’re

doing them a favour by bringing more clients into the market. Our main

rivals aren’t the other brokers, they’re the fund managers who lock away

their clients’ money in mutuals and unit trusts.”

Schwab’s Knight takes a different view. ”Private investors are voting with

their keyboards and the momentum behind this process is unstoppable,” he

comments. ”The internet is placing information, access and control into

the hands of the private investor and demand is growing so fast that

online broking will become the dominant trading system for the private

investor within the next two years.” Neither does he believe that online

trading is implicitly risky, which is an important point because many

potential investors in the UK still believe that trading is too dangerous

for the private investor.

It is useful to distinguish between investing and trading here, because

they’re different sides of the same coin. In the US, online investors tend

to be more long-term and traders more short-term. Short-term traders - so

called daytraders - have attracted a lot of negative publicity for their

risk taking. Frantic to avoid this image, Schwab jumps to endorse the raft

of safety features built into its site. These include: confirming how much

cash is available for investing and not allowing any more to be invested;

requiring confirmation of instructions upon receipt of a purchase order;

and contacting clients whenever duplicate instructions are received. What

Schwab has yet to introduce in the UK is a system, familiar to US traders,

which notifies the dealer when stock has reached set limits. This

indicates when the trader should buy or sell - providing a fail-safe which

makes trading one step safer.

Schwab is against introducing this facility in the UK for now because,

according to Knight, ”it encourages people towards more and more


We don’t want people to move towards daytrading. We’re about investing,

not gambling”. Such a pitch is vital if Schwab is to persuade traditional

investors to bite the bullet and have a go. Having confidence in the

system and understanding risk makes all the difference to attracting new


One in four new clients are coming in through referral, attracted

principally by the cost. Free web trading by Schwab during July attracted

around 8,500 new clients, of whom 6,000 still trade through Schwab. For

this reason, in September Schwab went on to offer new investors free

trading during their first 30 days - an inducement that’s likely to


The issues for online brokers are what kind of service to supply; how much

they should charge; and how much information investors will pay for.

In a recent survey of more than 50 traditional brokers by the industry

analyst APCIMS, 30 per cent of respondents said they would be offering

online broking in order to remain competitive and then attract more


This suggests that brokers are now reacting to market demand rather than

staying ahead of it. Such a delay could be costly. Supplying good

information as fast as possible is the key to supporting private

investors. Beyond the provision of comprehensive analysis on trends,

company reports and features, Schwab also provides investors with an

option to access the Reuters information service. Rates start at #120 a

year. The speed of the internet also means that online traders can receive

real-time prices in much the same way as traditional brokers. Access to

this through Schwab costs #60 per year. However, before online trading can

take place, traditional share certificates need to be transferred into

nominee accounts which can be traded directly. Typically, this takes up to

five days. Certificates, though, are rock solid and the brokers which back

them up deal in real time. By contrast, working with computers brings the

chance of systems failure which could cost a trader dear. This is borne

out through research by APCIMS. Chief executive Angela Knight says, ”most

investors are using online services for their smaller trades, but seek

expert research and advice when it comes to their larger investments”.

The single biggest reason for dealing online is cost and costs are being

driven down as new brokers come into the market. Schwab might have the

dominant market position for now but it’s under attack from companies with

huge resources and impressive records. For example, DLJ direct has client

assets valued at over $13 billion in the US and knows that if it’s to

continue growing, it must expand into new markets. Increasing competition

also means that the market is changing - a point made by Guy Knight. ”The

first priority has been to make the system work,” he says, ”now we’re

thinking about push technology. Pull is what’s available now: if you want

a price, you have to ask for it. But push is about tailormaking your own

system. For example, if you’re on the look-out for any news about a

certain stock, you can tell the system to alert you to a story by throwing

up a dialogue box. If you’re not online, the message could be sent to your

mobile phone.” Knight won’t say when Schwab plans to bring in such

services, but he knows that if Schwab doesn’t move fast, one of its

competitors will. ”The market is beginning to move very rapidly,” he says,

”and investors are demanding these services, so we must provide them.”

However, despite this growth, Knight doesn’t believe that the UK will

develop in the same way as the US because so few people in the UK trade


Such reservations are swept aside by independent financial analysts.

Motley Fool is a rapidly growing company meeting the information needs of

confused investors. Its chief European fool, David Berger, says: ”The

increasing availability of the internet will fuel online trading across

all groups, and not just within the 25- to 45-year-old bracket: the

elderly are just as keen and sharp and have a lot more time on their

hands.” Berger doesn’t believe that online trading will lead to increasing

demand for independent financial advice, because the internet ”is all

about independence and investors are recognising that commission-based

advice groups aren’t independent”. More likely, he predicts, is that the

arrival of new online brokers - such as stockbrokers Killik and Co, former

building societies like The Halifax and giant traditional brokers like

Merrill Lynch - will force prices down simply because there’s little

difference between their products. Brand name and values will then make a

difference as investors prefer to maintain relationships which have been

built up over many years.

Indeed, much of the motivation to provide online services by companies

like Barclays and Killik and Co came from their clients telling them to,

or else they’d be forced to leave. Schwab knows it has the recognised and

established brand, but it also knows that customers put value before

loyalty. Its own figures show that 34 per cent of its clients use it

exclusively, but even so the market is wide open.

Motley Fool’s Berger backs this up. ”First-mover advantage can make all

the difference, but a company with an accepted brand, deep pockets and the

courage to innovate can always catch up,” he says. The likelihood then is

that the dominant market position by Schwab will be eroded by trusted

brands, but no one’s about to predict how long this will take. More clear

is what this might mean for the private investor. Limited product

differentiation and rising competition can only lead to reduced prices and

according to Motley Fool’s Berger, this means - at least for now - that

companies will be forced to carry on cutting transaction charges.

CASE STUDY - The Schwab site

Picture new internet users signing up for the Schwab service. Imagine

their deep uncertainty about the internet and then consider what kind of

design Schwab needs to devise to instill confidence in its service.

Its success speaks for itself, but opening a Schwab account does demand a

little paperwork. Real signatures are needed to join the service and then

for the application of your tax-free Individual Savings Account (ISA).

Entry into the Schwab site requires a user ID and password. This takes you

into the account, most likely containing details of at least an ISA and

MarketMaster holdings. Click on either of these and you move onto a new

page with full details of that particular holding broken into account

overview and portfolio. The account view provides a current cash balance,

cash available to invest, current stock value, and amount you can


This last section is made particularly obvious. Beneath this you’ll find

your portfolio containing a full description of each stock. These are

broken down by quantity, description, book cost, mid-price, market value,

and percentage change, followed by a link option to trade. A click on

’trade’ takes you through to the order entry page, where you can decide to

buy or sell either by value, by number, at best price or at your set

price. Click ’place order’ and subject to various checks, your transaction

will go through at the best value selected by Schwab’s price improver - a

service which finds the best price of a commodity at any given time.

The simplicity, structure and navigation of Schwab’s site make it

extremely easy to use and unthreatening. Only the information needed by

the trader is presented on the relevant page and by locating different

functions on new pages, it’s soon very clear how far through the process

of trading you are.

Important information is given prominence and put where it can be clearly

seen. For example, revisions to the minimum pricing for stamp duties,

which take effect from November, is located in a prominent area of the

account view page. Apart from this one news item, the entire site is

driven by clarity and function - so much so it seems almost minimalist.

Also, nowhere does the site take on any resemblance to a broker’s trading

system, so it’s clear that Schwab means to, and is succeeding in,

generating an impression of removed, controlled investment: no moving

prices, no flashing banners, no interactivity, no eye-catching


Structure is further improved by supporting navigation through a left-hand

page frame. This starts with home, help and log out, links to Reuters data

or news service, and then to real time prices.

There’s also trading information for both equities and order status, which

also gives the option to cancel. The last heading gives details on

accounts - including balance, portfolio, transaction history and account


CASE STUDY - Compare the differences

Online share trading in the UK is booming. Established big names like

Merrill Lynch, NatWest and Goldman Sachs will shortly launch their own

services, while the big three US firms already established in the UK will

soon be joined by TD Waterhouse.

Schwab, E*Trade and DLJ have the bulk of the UK market and something very

important in common. All three are specialised businesses with one focus -

online trading.

Such a difference has major implications for how these giants can compete

and how the market develops. While the battle for customers might be all

about pricing for now, it’ll soon move onto information supply and

customer support.

Costs for online broking are measured by transaction charge or commission

or both. As the market develops, brokers have moved to simplify the

structure of charging to avoid putting people off. Killik and Co charges

1.25 per cent for sums traded up to #15,000. A broker then advises on sums

over #15,000 for an extra 0.4 per cent commission, taking total commission

to 1.65 per cent. Edinburgh-based StockTrade charges 0.2 per cent on

trades over #12,500 and set its minimum transaction charge at #25.

Both Xest, a division of Charles Stanley and Co and ICON, a division of

James Brearly and Sons, charge a flat rate of #20 per transaction and a

registration fee of #25 and #20 respectively. RedMayne-Bentley, or RedM,

charges a minimum of #12.95 up to #25.90, when it introduces a 0.5 per

cent commission up to #7,990, and over this, it imposes a flat rate of


Such figures provide a context within which the bigger players are

bidding: DLJ’s minimum of #15 and one per cent up to #2,500, 0.5 percent

on the next #2,500 and 0.1 per cent thereafter; E*Trades’s #14.95 minimum

up to #1,500 to a maximum of #24.95, with a fixed quarterly fee of #12.50

and a minimum #1,000 deposit; and Barclays’ minimum of #11.99, a maximum

of #39.99 and a one per cent commission, can then be seen to be cheaper

than their smaller rivals.

It’s clear that Schwab’s rate of #19.50 per transaction on the frequent

trader account, up to a maximum of #75 and with an annual fee of #60,

isn’t the most expensive option, but does represent one of the


Price brokers then fall into two groups. Companies such as E*Trade, which

are execution and research-led, charge the investor for information and

then leave them to it. Companies like DLJ, Killik and Co, ICON and

StockTrade claim telephone support services are their unique selling

point. They claim that investors want to be able to talk to a broker at

any time.

Growth in call centres would seem to confirm this. Schwab now employs 700

people at its centre in Birmingham and is spending #50 million on a new

centre in Milton Keynes.

By contrast, E*Trade supports its customers by email, but can fall back on

a call centre in Cambridge staffed by 50 people.

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