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Online brokers
Will traders win from online broking showdown?
Jill Fraser - February 18, 2008
 The past few months has seen the face of online broking change dramatically. A rash of consolidations and the emergence of new players has indisputably revamped the playing field. But is consolidation good news for traders and investors?
Over the past year, Australia’s biggest online broker CommSec’s picked up rival online broker IWL; ANZ gobbled up E*Trade; CFD provider CMC Markets puchased online broker Andrew West; and private client stockbroker Bell Potter launched into the online space with Bell Direct.
Bell Direct’s Chief Operating Officer, Lee Muco, asserts that the consolidations, which resulted in two main online players, CommSec - whose recent takeover of IWL brought Sanford, Avcol, NAB, Westpac and BankWest into the fold - and E*Trade, which incorporates St George and HSBC, left consumers with fewer options.
Muco argues that while the platforms to clients of the abovementioned brokers may come with a different logo “they’re pretty much the same offering”.
Bell Direct, whose Executive Chairman and principal architect, Steven Goh, established Australia’s first online stockbroker, Sanford Securities in 1997, entered the market with $15 trades, which is at least $5 a trade less than the banks’ lowest and around half the average $29 per trade for the normal rate.
Challenged on Bell Direct’s ability to offer such a low cost structure Muco says it is directly related to the company’s decision to build its own technology.
“We’re the only team to build a platform to trade Australian shares online in the last 10 years, which means we don’t have expensive licensing fees to pay to a third party and we’ve been able to build in efficiencies in the way we process information,” he says.
“The team at Bell Direct set up Sanford Securities and built the platform because there weren’t any platforms that we could buy off the shelf. So we have expertise in this area.”
CMC Markets’ Managing Director, David Trew says that not only will its acquisition, Andrew West Stockbrokers match Bell Direct’s record $15 trade it will better it. Details of the trade will be announced soon says Trew.
Trew believes that banks and institutions dealing with their competitor (as is the case with CommSec and its IWL wholesale clients) is an unworkable situation and one from which CMC Markets will gain.
“The banks that currently outsource to IWL will start looking for other outsource providers and we’re now in that space,” he says.
The downside to the consolidations, claims Trew, is that “everyone is now aligned to banks that make most of their money out of their own banking products rather than stockbroking”.
“Your average Mum and Dad trader want to access a stockbroking system that is 100% stockbroking,” he says pointing out that their one online platform will provide Andrew West’s margin lending and options trading along with CMC’s trading in CFDs, foreign exchange, treasuries, commodities and indices.
NAB Online Trading Operations Manager, Wesley Roach disagrees with Trew’s assertion that the bank’s forced association with the CBA is on shaky ground.
Disputing the notion that the CBA will put its own interests ahead of IWL’s clients Roach says “as a participant of the ASX the CBA has an obligation to address this issue”.
Roach maintains that the benefit to NAB consumers from the IWL takeover will come from the increased financial muscle that the CBA will bring to product development and services.
While acknowledging that economics state that industry consolidation creates less pricing power for the consumer, Roach is of the opinion that new players will create competition, which in turn will keep the price down.
Commsec’s General Manager, Matt Comyn refutes that the bank’s $373 million takeover of IWL last November has taken competition out of the market, stating that “ample competition still exists even among the large brokers, which is good for consumers and I can’t see that changing”.
Comyn contends that the spate of consolidation that has occurred over the last few years has been driven largely by the huge increase in volume of online trading and the realisation of the size of the investment that is required to maintain a competitive market share in the online retail broking business.
“The cost of technology needed to handle increasing market volatility is escalating,” says Comyn noting that pure trading volumes have increased three or four fold over the last few years.
“If you’re a small broker it’s difficult to continue to find that level of investment,” he says.
Comyn says that he has no intention of matching Bell Direct’s $15 a trade price.
“We’re very competitive,” he says. “But whether it’s Bell Direct or someone else there will always be someone who is slightly cheaper.
“The smaller players need to find some way to compete because they can’t match us in terms of presence, breadth of services and products that we offer.”
Commsec today holds over 50 percent of the online broking market but Comyn says he wants to “reassure traders that it’s still a highly competitive market and if anything there will be greater focus and pressure on existing players, like ourselves, to continue to innovate and provide better products and services and fantastic value to our clients”.
More articles from this edition of CompareShares:
Online brokers: Will traders win from online broker showdown?
Investing: Things you need to know about a company
Stocks: Stock of the week - Metallica Minerals
Sectors: Healthcare stocks offer no cure for market jitters
Fundamentals: Steps to valuing a company - spotlight on mining services
Resident Trader: Book review - Charting for Dummies
Commodities: Bullish outlook for crude oil
CFDs: Top ten CFD stocks
Expert Panel: Advantages of investing in instalment warrants
Property: House repossessions on the rise
Companies: Centro wins refinancing extension
Stocks: Stock to watch - AMP Limited
Whatever your views, you can discuss this article - or any of Jill's articles - on our message board Your 2 Cents.
Jill Fraser has 25 years' experience in the media as a radio producer on 2UE and journalist for News Ltd, Australian Consolidated Press and Key Media.
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