Brokerages see gold in 24-hour global trading
A long-term dream of offering worldwide 24-hour trading has brokerages rushing to plant their flags across Europe and Asia.
This week, for example, Fortrend, a division of U.S.-based broker Fortrend Securities, launched a service that will allow Australian investors to trade U.S. securities. The move comes months after E*Trade, Charles Schwab, Ameritrade, and others took strong measures to position themselves overseas.
While some online brokerages are reaping small rewards by offering their services abroad, most industry experts don't expect a true windfall for several years to come. To succeed, brokerages must jump several hurdles--including changing cultural attitudes toward trading equities and surmounting technological barriers.
But the payoff could be big and the prospect of clients trading at any given moment from any point around the globe is simply too enticing to ignore. Most analysts point to the Far East, including Japan and Hong Kong, as the regions with the greatest potential for growth in online trading.
"Our view of most foreign markets is that they are just in their infancy, and this would be a really good time to participate in the development of those markets," said Ameritrade vice president Michael Anderson.
Ameritrade cut a deal with France's Cortal that will allow its U.S. customers to trade French equities while allowing Cortal's clients to trade U.S. stocks. The company has also partnered with Deutsche Banc to provide services to German investors. Still, the company does not expect to see its overseas business bloom for another three to five years.
Online trading firms venturing overseas, nearly across the board, cite the same barriers to success. These include an Internet infrastructure that needs much improvement before it can support greater numbers of consumers online, local regulatory hurdles, and populations that are far from primed to trade equities.
"Technological problems can be overcome, but cultural mindset is always a factor," said Dan Burke, a senior brokerage analyst at Gomez Advisors. "The domestic Internet brokerage market has been so strong because of the American disposition toward equities and a very warm stock market over the past eight years," Burke said.
To cite an example of cultural barriers, Burke said that most Japanese investors were so badly battered when the Nikkei exchange tumbled during the Asian economic crisis last year that they are now stashing their assets in low-interest saving accounts.
"That is something facing all brokerage houses as they move into Japan," said Burke. "How do they educate investors to realize the long-term potential of being in an equities investor?"
In some countries, there are already clear indications of how powerful online trading could become. As E*Trade and Schwab continue to battle it out in the United Kingdom, a recent survey showed that the number of online trades in the United Kingdom surged 73 percent in the second quarter. DLJ Direct, a unit of Donaldson, Lufkin & Jenrette, started its U.K. service last week.
While other countries are not as far along as the United Kingdom, analysts agree the move overseas is a necessary strategic plan for brokerages "to diversify their revenue stream, instead of relying solely on the U.S. market," Burke said.
Grab yourself a partner
While local competition abroad may not pose much of a threat for U.S.-based companies, they will need to form partnerships with regional firms to navigate regulatory rules.
"A local partner will be especially important in the more underdeveloped countries," said Ray Dirks, an analyst at investment firm Security Capital Trading.
Like Ameritrade, E*Trade has also signed several international alliances to bring its branded services to about 20 markets worldwide.
"We intend to rely primarily on local third parties for regulatory compliance in international jurisdiction," the company said in its latest quarterly Securities and Exchange filing.
E*Trade said it would generate revenue through licensing fees and royalties based on each partner's transaction revenues. According to the company's SEC filing for the third quarter, international revenues actually dipped compared with year-ago figures. The company generated $1.9 million for the quarter this year compared with $3.1 million for the same period last year.