Retail brokers in the doldrums

There seems to be no end in sight to the harsh market conditions for private client stockbrokers, particularly online brokers. Despite the upbeat comments from market players, the boast that online broking would alter the face of financial services in SA has never rung less true.

For instance, in its results to September, Tradek reported a loss of R2.34m. More important, though, was the directorsÆ statement that Tradek ôrealised at an early stage that revenues from online stockbroking needed to be supplemented from a wider range of financial productsö.

This is clearly an admission that itÆs almost impossible to generate profits from a pure online package. However, one cannot blame this failure on any shortsightedness by the mediumÆs developers. If anything, they were beaten by the market, as demonstrated by the performance of listed financial services group Barnard Jacobs Mellet (BJM), which relies largely on brokerage income for its bread and butter.

In the six months to September, BJM saw revenues slip 7% to R122m as the stock market slipped into a bear phase. The reasoning behind this lacklustre performance is fairly simple: while private client investors are happy to play the market in a bull phase, theyÆre among the first to abandon the market in a bear phase.

This fact is borne out by the decline in trading levels last year. Whereas the market saw shares worth R3bn/day change hands at the start of the year, the average had fallen to between R1bn-R2bn/day by year-end.

This turn in performance is hardly unique or unfamiliar, with online brokers in the US, Britain and Europe experiencing similar difficulties. Whereas the online broking sector in the US showed staggering growth in a relatively short time, it occurred during one of the biggest raging bull markets the country has seen.

Simply, every man and his dog wanted to get in on the action. Now, with the Nasdaq all but collapsing and fears that the US economy may after all be in for a hard landing, retail investors are trading less - thus cutting into online brokersÆ profits.

In SA, not only has trading activity tailed off, but the number of clients signing up with online brokers has also begun to tail off. PSG Online director Diedrich Schutte confirms this. However, he adds that ôitÆs not deadö. The rate of people signing up is compensating for the lower volume of trading.

David Rothschild, MD of E*Trade SA, which launched with much fanfare in October last year, is not unhappy with the response the company has received from the investing public. Though the company has not brokered ôthat many transactions,ö Rothschild says that thereÆs been plenty of interest in its Web site.

ThereÆs no doubt that thereÆs plenty of interest in the stock market. PSG OnlineÆs Schutte says that the company had had a phenomenal response to the launch of its margin trading facilities. Margin trading allows investors to borrow money from their broker to invest in the market. However, he also says that thereÆs been very little activity in margin accounts. ôIt seems that clients are happy to have the facility in place and wait for the market to turn,ö he says.

ItÆs also clear that investors are demanding more information. Whereas anyone can look like a genius in a bull market, making money when the market is pulling back is a lot more difficult. ItÆs at this point that a ôbare bones, no adviceö brokerage service will experience a big fall off in client growth and trading volumes.

Rob Lewis, former MD of online broker U-Trade (sold to asset management group Appleton), says that all online brokers will have to offer a phone support service to their clients. ôExperience shows that private clients want a combination of online broking and the back-up of the traditional broker support.ö

Meanwhile, donÆt expect conditions for retail brokerages, including online brokers, to change in a hurry. If market prospects remain weak, investors will remain skittish.

Finance Week

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