Russia
What was the leading Russian stock market broker in volume last year – Troika Dialog, Renaissance Capital, UBS? No, it was Alor-Invest, a brokerage little known among foreign investors, yet capable of commanding about an 11% market share of the RTS and Micex combined.
Anatoly Gavrilenkov, chairman of Alor-Invest, explains: “We are a very modest and small company. It's more of a family business than anything else. Yet despite this, we won first place for volume.”
Gavrilenkov knows he can't compete with such houses as UBS or Troika in some aspects of investment banking. “They have a lot more money than we do,” he says. “They have a lot of foreign clients, while we have only Russian clients. But in order to survive, we had to be aggressive. And now, they are obliged to take us seriously.”
There are two reasons for Alor-Invest's success. First, the brokerage took pains to reach the parts of the Russian market that bigger brokers couldn't reach. In particular, it has targeted the regions, via 15 offices. Secondly, it has used the internet to reach out to these provincial investors.
This has given Alor-Invest an edge over such larger, Moscow-based rivals as UFG or Renaissance Capital. As Oleg Jelezko, managing director of equity and structured products at Renaissance, says: “People like ourselves don't market to the provinces much. The regional banks and corporates there aren't covered by large brokers, so they use the internet instead.”
Roman Gorunov, head of the Forts system, which is the RTS exchange's derivatives platform, says: “The development of internet trading systems has resulted in easy access to the market from any region of Russia, as well as from abroad. Trading costs have diminished significantly.”
It's not just Alor-Invest that is exploiting the opportunity for internet brokers. Others, such as VEO-Otkrytie, BKS and Vika, are all commanding respectable market shares by reaching out to the provinces.
BKS, for example, is based in Novosibirsk, in Siberia. The city is also the location of the IT company that developed Quick, the trading system used by many internet brokers. In 2002, BKS set a record for monthly trading volume on Micex, when it traded $76 million in a month. It attributes its success to its 40 branches in cities throughout Russia.
All in all, internet brokers command about 55% of all equity volume, and even more than that in equity derivatives. Last year, around 42% of all equity derivatives trades on Forts were done on the internet. That figure has risen to 96% this year. That is in part because larger brokers have woken up to the competition posed by internet brokers and have rolled out their own internet trading systems.
Renaissance Capital's Jelezko says: “We looked at the internet trading market a few years ago and decided not to be in it. But we had another look this year, and now we plan to roll out a major internet trading project in the next three months.”
Jelezko thinks such brokerages as Renaissance can compete on the internet because of the strength of their brand and because existing trading websites have rudimentary analytics and risk management capabilities. This is where more established brokers will try to distinguish themselves.
Different model
Most believe the market for internet trading will grow. Mikhail Suhobok, managing director of VEO-Otkrytie, says: “At the moment, just 100,000 clients trade on the internet. But we think it will grow to 900,000 by 2010. This will be in line with the number of people using the internet in general in Russia. At the moment, it's around 15 million people, but we think it will grow to 30 million in 2010.”
However, the Russian model of internet finance is different to that in the west. In the US or UK, for example, internet trading attracts millions of retail users; in Russia, 20,000 users – mainly informal hedge funds and active day traders, according to Jelezko – account for 80% of all volume.
And despite online brokers' impressive volume figures, Jelezko says they are not making money hand over fist. He says a leading internet broker such as BKS might make $10 million in revenues but have $7 million in costs. Nonetheless, it is still considered a sufficiently important market for the larger brokers to scramble to get involved.
Others have even suggested that some internet brokers' volume figures could be inflated. One leading internet broker had its licence suspended by the former financial regulator for several months after such an accusation was made. However, the charges, like all of those made by the former financial regulator, were not upheld.