With overseas markets lagging behind American investors in the online trading arena, the top U.S. online brokerage firms are crossing the Atlantic to invade Europe while positioning their Web-sites for the Big Bang in Japan and the expected surge in Internet usage. Among the U.S. brokers that have moved offshore are E*Trade Group, DLJdirect, and Charles Schwab Corp. In June, DLJdirect, the online brokerage owned by Donaldson, Lufkin & Jenrette, launched an online electronic dealing service in the U.K., which will clear through Pershing, which is the back office clearing firm owned by the DLJ Group.
Banking on a potential online audience of 110 million online users in Europe by 2003, according to Fletcher Research, online brokers say now is the time to move outside the U.S. where European investors are just beginning to be exposed to the Internet. An estimated 37% of the adult European population will be online by 2003-a four-fold increase from the 38 million who were online at the end of 1998.
While Europe has been the first stop for Internet brokers venturing abroad, all the major American online brokers are also jockeying for position in Japan which is scheduled to implement the second phase of deregulation in the so-called Big Bang. About a year ago, Japan deregulated fees on large stock trades, but the government is loosening the reigns on smaller trades now. All three online brokerage players have formed joint ventures with Asian counterparts in time for the fall deadline when the anticipated boom in Internet trading is expected to slash commission rates on smaller stock trades. Back in June, Schwab & Co. hooked up with the Tokio Marine & Fire Insurance Co. of Tokyo to establish a full-service brokerage firm serving Japanese individual investors starting this fall. Meanwhile, DLJdirect has set up a joint venture with Sumitomo Bank Ltd. and E*Trade has a presence through a joint venture with Softbank Corp.
E*Trade: Global Brand, Local Language
The leader in terms of opening the most offices overseas so far is E*Trade. Through a separate series of alliances with local brokerage firms, E*Trade is now operating five online operations headquartered in the United Kingdom, Sweden, France, Australia-New Zealand and Canada. The company's plan so far has been to provide its global brand under license, as well as its front-end trading software and related technologies, international market information services and links with its global network.
E*Trade U.K. is the fifth E*Trade-branded Web site to be launched outside the United States, and the third to debut this year. The goal of the new site is part of the company's stated plan "to build the first all-electronic global online investing network in the top 20 financial markets worldwide." Each affiliated operation has its Web site tied into E*Trade's home page, but each localized site is also highly customized and in the local language. The Australian site, for instance, offers a subscription to a local financial magazine and pushes local investments and funds. E*Trade Sweden also said it plans to offer its customers the ability to trade U.S. equities. This move is part of E*Trade's stated goal "to facilitate cross-border trading through all E*Trade-branded international web sites."
Demand for U.S. Stocks
With the Internet, major U.S. brokerage firms are finding that global branding works. Schwab was surprised how popular it is among their non-US clients to trade U.S. securities. "The interest in trading U.S. securities was tremendous," says a spokeswoman for Charles Schwab. "Companies like Dell and Cisco are global brands. And we found the opportunity for Asian customers to trade in U.S. securities when their brokers were asleep was amazing.
"Even during the October 1998 slump," she recalls, "there was a slowdown in U.S. trading volume and trading was even slower in Asia, and a lot of local securities dried up. But the demand for U.S. stocks was still strong in Asia. People were interested in fixed income and Treasuries became very popular since investors could buy them on the Internet. And because the trading in Hong Kong is dollar-denominated, it remains very attractive to us."
In its most recent deal, E*Trade U.K., a registered member of the London Stock Exchange, was named the first Internet-only broker to receive regulatory approval in the U.K. The new online firm also upset the commission structure for U.K. market stock trades by U.K. investors by introducing flat rate pricing as low as 14.95 pounds sterling-or the equivalent of $24 per trade-with no percentage-based commission charges.
The U.K. system relies on straight-through, real-time electronic settlement and processing of buy-and-sell orders based on the CREST electronic settlement system. The system clears trades of securities in the United Kingdom, Ireland and Isle of Man. All communications over the Internet via the system are coded to the highest 128-bit encryption standard. Access to the CREST system is carried on one of the two accredited CREST network providers: S.W.I.F.T., the international network owned by banks, and Syntegra, a division of British Telecommunications. Users are free to choose which network provider they will use and negotiate their own commercial terms.
According to Judy Balint, president and COO of E*Trade International, E*Trade U.K. will offer the more than 12 million private investors in the U.K. market online access just at the time residential Internet usage is growing. She cited one study from Fletcher Internet Research Group that showed that more than 4.2 million homes in the U.K. were connected to the Internet in 1999. That base is projected to increase to 7 million by the year 2000.
Web-Only vs. Click and Mortar Strategy
Like other industries, Internet brokers also are grappling with the click-and-mortar dilemma. In the case of Charles Schwab & Co., the broker is pursuing a branch expansion plan into Canada, the U.K., Hong Kong and Japan. The plan for each country dictates its own marketing program. Take the case of developing the Asian market. Due to its strong presence among San Francisco's Asian community, Schwab has also reached out to Canada's Asian investors, primarily living in Vancouver and Toronto.
In the U.K., Schwab has grown its business very quickly by buying Sharelink four years ago so it now transacts about 100 million daily, or about 2.5 billion transactions a day. For its Hong Kong operation, which started in 1997, the company "hasn't done anything new there other than expand the functionality of our Web site," according to the Schwab spokeswoman.
This fall, Schwab formed a new company with the Tokio Marine & Fire Insurance Co., Ltd. to establish a full-service brokerage firm in Japan. The new company will allow Japanese investors to trade U.S. stocks and bonds and Japanese and offshore investment trusts. Japanese stock will be offered in the year 2000. To cover all the bases, the new company allows investors to trade via a Web site, a 24-hour telephone service center and a branch office in Tokyo. For back office processing, Schwab often leverages its data center in Phoenix, Arizona to support some of its overseas operations. Due to space limitations in its Hong Kong operation, that site receives Internet and trade processing support from the U.S. In Schwab's U.K. and Canadian operations, trade processing is primarily done locally. "As the business grows and the data and the capacity needs becomes much larger, one of the questions is where you put the support. The great thing about technology is that you're not limited," Schwab's spokeswoman said. Other firms are using local acquisitions to handle back office functions. In July, E*Trade announced it had signed an agreement to acquire TIR Holdings Ltd., an international financial services company for $120 million, offering global multi-currency securities execution, settlement services, and institutional research for its new U.K. Internet operation. TIR also provides trade executions in over 35 countries. But in Japan where online brokers are striking strategic alliances with local entities, acquisitions are less popular.
Joint Ventures in Japan
DLJdirect had formed a joint venture approach in March 1999 to work with its Japanese shareholders, including companies from Sumitomo Group, Daiwa Securities Group Inc. and Internet Initiative. The online Japanese brokerage service began trading June 11, 1999. The new Schwab and Tokio Marine & Fire Insurance Co. plans to offer trading in U.S. stocks and bonds and Japanese and offshore investment trusts, via a Web site, a 24-hour telephone service center and a branch office in Tokyo. Trading in Japanese stocks is expected to be offered in early 2000. Under the proposed agreement, the new entity would be 50% owned by Schwab and 30% owned by Tokio Marine, which has asked its three allied financial institutions in the Mitsubishi Group-The Bank of Tokyo-Mitsubishi, Ltd.,the Mitsubishi Trust and Banking Corporation and the Meiji Life Insurance Company-to participate in the joint venture.
While the move towards establishing an overseas presence is clearly in its early stages, brokerage officials say the best is yet to come. The protracted U.S. bull market, a move toward 24 hour trading and processing combined with an expanding Internet-base in Europe and an emerging Internet investor community in Japan, translates into fertile deal-making terrain.