It’s an exchange, it’s a broker, no it’s a Jiway

Online Equity Trading

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The decision of OM Group and Morgan Stanley Dean Witter (MSDW) together to invest ?100 million in a screen-based, electronic, cross-border stock market called Jiway is yet another indication of the huge potential growth of online retail stock trading in Europe.
Private client stockbrokers in Europe have seen huge growth in volumes of retail orders through the internet in recent months. So far, much of this has been in domestic markets. Yet there is no logical reason why retail investors in the UK should not invest with equal enthusiasm in German shares, or even American shares. The obstacles are fragmented national stock market structures and all the associated costs. Private client stockbrokers which may be very active in one European market, are often fearful of the expensive infrastructure required to set up membership in eight more exchanges, each with different clearing and settlement systems.
"On the retail side, the per trade cost is really important. High costs are a real inhibitor of retail volume. In the institutional equity business, we and every other broker might complain about the costs of dealing on many European exchanges," says Jerker Johansson, chief operating officer of MSDW's institutional equities division, "but it's not as if volumes would double if trading costs halved." It remains to be seen if the opposite is true for cross-border retail trading. Halving costs is Jiway's aim.
The eventual success of Jiway will depend not so much on the absolute volume it attracts, but the new share dealing volume it encourages. MSDW estimates that online trading in Europe will triple by 2003 with cross-border trading being the fastest growing component. Retail trading could quickly rise to 25-30% of total equity flows.

Jiway's customers will not be these retail investors directly, rather the private client stockbrokers which serve them. Within days of its announcement, Jiway had been welcomed by executives at Barclays Stockbrokers and E*TRADE Europe. Jiway's potential customer list may also include many European private banks and even conventional retail banks. For example, MeritaNordbanken has 800,000 online customers. It may wish to offer them a stock-dealing service. It has ready access to Nordic stock markets. It may relish the chance to plug in and trade on many other exchanges at low cost, rather than joining them directly.
Jiway will also allow trading in American stocks. "All the retail brokers in Europe would love to be able to offer trading in Amazon.com," says Johansson.
Per Larsson, president and chief executive officer of OM Group says: "Because market infrastructure is so extremely fragmented in Europe compared to the US, where access for online trading is much less complicated, you can't really take the exiting infrastructure and modernize it. We decided we had to do this on a new platform."
OM Group is a leading supplier of exchange technology. Larsson was one of the European exchange heads invited to a summit meeting in Paris in November 1998 to discuss prospective alliances. He famously walked out half way through the meeting declaring that the idea of taking a number of existing monopolies and trying to create a new one was not the best way forward. "We closed that door and had to open another one and Jiway is one response," says Larsson, "but it's not in conflict with what other exchanges are doing."
Jiway is often called an exchange, but that only partly describes the venture. It is not as pointedly a competitor to the established national European stock exchanges as say, Tradepoint, in which Morgan Stanley is one of several consortia investors. A better description of Jiway is that it is a comprehensive out-sourcing service for stockbrokers, through which they can do most of their, well, stockbroking.
When a trade is entered on Jiway, the order can be filled either through an order book or by a designated market maker in each of the 6,000 odd shares it intends to cover. Either way, the broker gets execution which at least matches the best price on the local stock exchange for the share. Jiway acts as counterparty to the trade and deals with local market clearing and settlement. The opportunity to lower costs comes through volume. If Jiway acts as buyer for 100 million shares of Alcatel and seller of 80 million, it only has to deal in the net 20 million shares with the local clearer. That efficiency will be past on to the broker which brought the order. Jiway has not yet finalized its fee structure to stockbrokers, but it will be competitive, especially for the most liquid stocks.
The broker should in turn pass the benefit on to the retail client which brought the trade. In a highly competitive market, it's unlikely that retail brokers will keep much of the lower cost benefit to boost their own margins. Jiway will also earn revenue from market makers in each of the 6,000 stocks that will be traded on the system. Auctions will be held in which firms can bid to be sole designated market maker in each specific share. Their reward will, in theory, be the order flow for which all major securities firms are desperate to permit internal crossing of trades among clients.
Jiway will also offer custody services; a complete stock-broking back-office for hire, based on existing OM technology; and even a web- trading for hire system including software to allow end customers to trade via the internet and risk management for the broker.
Is there anything it doesn't do? "We won't do customer acquisition. We won't interfere with branding or ownership of end investors," says Larsson. That should leave small brokers free to focus on their strengths - in specialist research, say.
OM's investors certainly like Jiway. Shares of the 60% owner in the new venture shot up from Skr300 to Skr520 on the day of its announcement, later falling back to Skr440.

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It’s an exchange, it’s a broker, no it’s a Jiway

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