The online brokers building up new operations in Asia have little doubt about the heady prospects for their business in the region.
“We think Asia has the potential to outstrip the US,” says Christina Hui, regional general manager, Asia, for Charles Schwab. The view she gets from her Exchange Square office window of Hong Kong’s thriving Central below will do little to dissuade her of this optimistic-sounding claim.
At TD Waterhouse, Karen Buck, managing director of its Hong Kong operation, reinforces the view. “Hong Kong will be a very important market,” says Buck. “We’re certainly committed to Asia and to growing the online business here.” TD Waterhouse has also opened offices in Japan and Australia and is looking at a venture in India. At some point after the new business has become more established, Hong Kong may become the regional centre. But at the moment each country is being treated as a separate market.
According to research by Schwab, the vast overseas Chinese population, not just in greater China, but worldwide, offers a huge business opportunity. Schwab estimates it controls more than $1 trillion in investable assets.
It is numbers like these that are bringing into Asia the leaders in internet-based share trading, such as Schwab and TD Waterhouse, along with other big online broking names including E*trade and DLJ.
An encouraging sign for the new entrants is an increasing desire among individuals in the region to look beyond their own markets for investment opportunities, with the internet offering the easiest route.
“At the moment people here are more interested in domestic markets and only 1% of the total investable population are investing in US stocks,” says Schwab’s Hui. “However they are building up investment experience and we are finding that if you give people more information, they are very open to considering new concepts and new initiatives.”
Above all, information is the key to developing the market, says Hui. “People really want more information,” she says, adding that there is another good business reason for encouraging investment in international markets. “Asian customers trade more,” she says. “Their average trades per year are much higher than those of US contemporaries.”
To date, Schwab has found that Hong Kong is leading the way in Asia in embracing new concepts and new technology, in comparison with Taipei and Singapore. Now the faith that the firm showed in the market when if first arrived in 1997 is beginning to pay off. “In 1997 it was a testing period for us to find out what customers really wanted but since then, in both 1999 and 2000, growth has increased tremendously,” says Hui.
Beyond Hong Kong, financial services businesses are looking into China and waiting for the opportunity to set up businesses there.
| Hui: Asian customers trade more than contemporaries in the US | ||||||
As Mark Duff, managing director of Hong Kong-based Boom.com, points out: “There are 40 million individual investors in China that are interested in gaining access to global markets. Being able to solicit that customer base would be extraordinary.”
Obviously, he says, there are certain provisos and hurdles to clear, the first and main one being the need for China to enter the World Trade Organization. “If China enters successfully and steps are taken that will protect our customer base when they trade in that market then we would be very excited about the opportunity,” he says. “We get requests for that all the time to buy or sell Shanghai or Shenzen because we’re right here on the doorstep.”
Making ready for China
Schwab is also keeping a close eye on developments. “There is a lot of potential in China,” says Hui. “We are monitoring the situation and though we cannot make a move at the moment, we want to make sure that when the markets open up we are in there. At the moment there is nothing that we can do in terms of setting up an operation.”
Although Hui says it is impossible to predict accurately when any signiWcant progress might be made on allowing foreign securities firms to do business in China, the situation is fluid. “Things in China are changing very fast so we are very positive about the future,” says Hui. “Hopefully we will see something soon because it is a great market.”
At this stage, Schwab’s activities are limited to fact finding on research trips. “We are getting to grips with the regulations and you have to travel to China because you cannot just sit here in Hong Kong and understand them,” she says, adding that China is a fertile ground for internet business. “People welcome technology, they like to listen to new concepts and new opportunities,” she says.
At HSBC, Richard Kimber, head of personal e-business, Asia Pacific, says the bank is using its Hong Kong power base as a springboard to launch its online broking product across Asia. “At the moment it is just focused on Hong Kong but we will look to develop elsewhere in due course,” he says.
Boom.com’s Duff is highly optimistic about the positive effect the internet will have on the region, particularly in giving individuals access to markets they may not previously have been able to invest in. “When you think of the impact the internet could have on the Asia/Pacific community, it gets much more exciting,” he says. “Things are going to change quickly but it will be the private sector which will lead those initiatives. That will succeed where public sector sentiment won’t.”
| Hong Kong: needs regionalized securities markets for a full take-off | ||||||
Above all, says Duff, by giving investors access to global markets, the internet will be able to cut through the regulatory hurdles that currently restrict market integration. “Probably the most exciting time for the financial markets in Asia is right now,” he says.
This development will be crucial for Asia, which is today hamstrung in being able to compete with the US and Europe by being a region of fragmented markets. The preponderance of different regulatory structures leaves a considerable barrier to market integration, Duff argues. “Without regionalization of the securities markets, with fragmented markets, Asia does not make an attractive proposition for investors,” he says. “Against that you have the US and you have the EU rapidly organizing to draw international investor dollars into its resources, its high-quality companies.”
Online appetite
So Hong Kong is setting an example for other Asian countries and yet the market has still to take off completely. The international online brokers are still cagey about revealing the size of their Hong Kong business. “We don’t release figures for regions,” says Buck. Hui echoes this: “We don’t disclose each particular business unit,” she says.
Certainly it has yet to reach the levels of internet activity in Korea which has seen an explosion in online investing. Duff says there is a clear reason for the difference. “In Korea there was an enormous ground swell towards internet trading because of the hot momentum stocks,” he says. “The results speak for themselves: 67% of the Korean stock market is now retail trading which is a massive statistic but in Hong Kong we don’t have the hot stocks to drive investor interest. The flames will only be fanned by discounting access to those stocks.”
TD Waterhouse’s Buck says there are other factors. “The market is trying to evolve, to move into internet trading,” she says. “However a couple of things are slowing the migration: one is the move to straight-through processing and the other is fixed commission.”
However at Schwab, Hui says internet business is increasing. “When we first came to Hong Kong in 1997 only about 50% of our business was online. Now around 90% of our total transactions are online,” she says, although she adds that the phone calls to the call centre are not consequently being reduced but rather are increasing as the business grows.
| Kimber: straight-through processing is crucial to cost savings for online customers | ||||||
The market has surprised Schwab to an extent as it tried to build a profile of potential clients before launching the business. Its research has not proved wholly accurate. “When we launched we didn’t have a clear idea about the market because a lot of people in the industry were telling us that only young people would be the up and coming online investors, being familiar with online trading and the internet,” says Hui. “We thought that professional investors may not be the growing market. We tried to figure out who would be the real investors and so far our experience is very different from what we were being told. We actually have a lot of sophisticated, professional investors who used to use the traditional channel of investing of phoning their broker and asking for information.”
The growth of this new breed of investor means the market is having to move to meet customer demands. “Now clients are becoming more mature and smarter and so the market is having to develop to look after these more self-sufficient investors who want to use different channels at different stages and different times,” says Hui. “When people first start out they just use the basic system. They just want to trade so they key in and they want a fast, efficient and reliable system. When they develop further they can use bookmarks and analysts to make a personalized and customized website.”
Straight-through benefits
Other developments will prove equally crucial to the rise of internet trading. The Hong Kong Stock Exchange has launched AMS3 – an automatic order-matching and execution system. This will enable online brokers to plug orders directly into the exchange, speeding up order execution.
Getting rid of the need for brokers to enter orders manually will allow them to reduce trading costs and hand the savings to customers and encourage the new market.
“The exchange is launching phase two of AMS3,” says TD Waterhouse’s Buck. “It’s very exciting. It will be the first moment when customers start to see and realize the true benefits of internet trading.”
HSBC’s Kimber also points to the arrival of AMS3. “Being able to offer straight-through processing is crucial if people are going to see any cost savings by trading online,” he says.
With this new development set to kick-start the market, brokers are also looking to provide services to match the latest advances in technology. Investors are already using wireless application protocol (Wap) phones to access their brokers’ sites and this area is likely to grow particularly rapidly given the desire and willingness of the Asian consumer to embrace the latest electronic gadgetry. “The technology is very appealing and growing very fast,” says Hui. “There is a real appetite to have the latest gadgets. In Asia, whenever there is new technology, they grab it.”
She adds that Wap technology is taking off fast in Hong Kong. This in a community which already has a 50% penetration rate for mobile phones and where people upgrade their handsets every six to nine months on average.
At Boom.com, Duff says its Wap-based information portal is proving very popular, already gaining almost the same number of page views as the main website. There is a cultural factor at play here, he says. “In general, in other regions of the world, people are usually space rich. If they are buying a computer they don’t have to think about where they are going to put it at home. The great appetite for Wap that the Asian community has is based around restrictions on space that they experience on a daily basis.”
TD Waterhouse is still only seeing a small volume of Wap-based business, says Buck. However they expect to see an explosion imminently. “We predict that in three years, 50% of our business will be done through mobile internet,” she says. “At the moment customers are using the mobile product to complement the PC internet product,” says Buck. “They’re using it to check quotes, to check the status of orders if they don’t have access to a PC. We don’t have a group of customers just using their mobiles.”
Hong Kong has taken easily to the mobile phone, adds Buck. “There is a very active community and people do not always want to go to their PCs to check their accounts. The mobile internet gives them that ease of access.”
Taking investors beyond Asia
Embracing the technology is the first step but brokers also point to a growing desire among investors to step outside their local markets.“They are starting to get an appetite for overseas or international investing,” says Buck. “The most exciting thing for us as a broker is giving customers access to a multi-market, multi-currency environment.”
At Boom.com, Duff says they are actively encouraging cross-border investment. “We’re not just targeting US stocks. US brokers sell US stocks in Asia. Local brokers sell local stocks in local markets. We are increasing inventory and no-one has come close to managing the volume which we do.” He says the original concept behind the company was to produce information, at a similar level to that which Bloomberg provides to institutions, for the retail investor which they can immediately trade on.
“We deliver an increased opportunity for financial gain,” he says. “There is a revolution going on in terms of distribution of precious information. Distribution of real-time quotes used to be the protected Weld of the professional investor holding the individual at arm’s length from the market. Now that has gone.”
This is proving to be a very powerful tool in developing the business. “Arbitrage is what has made big institutions a lot of money for a long time and we’re just giving the same access, very inexpensively, to the retail investor,” says Duff.
Ultimately Duff sees putting this power into the hands of the individual as having a profound effect on the region. “The Asian markets are still extremely fragmented in terms of regulatory legislation,” he says. “There does not seem to be any successfully co-ordinated programme to bring them all under one umbrella.”
Without a unifying stance on the business of securities dealing, it is very difficult for Asia to compete with the effectively borderless European or US markets, he contends. “It is actually hindering the success of the international financial institutions or the local financial institutions to build internationally. There are enormous barriers and legislation here is suffocating.”
| Source: Charles Schwab Internal Estimates | ||||||
However HSBC’s Kimber cautions against over-enthusiasm on the issue of closer integration across Asia. “There are a lot of regulatory hurdles to be cleared before that can happen. It is a much bigger task than pulling together European exchanges,” he says, although he does predict closer ties between Australia and New Zealand on the one hand and Hong Kong and Singapore on the other.
Hong Kong does not lack for established brokers: it has more than 500. For all of them the internet issue raises a big problem. For now, most investors in Hong Kong are still happy to use the traditional method of phoning their broker to do business, online trading is almost inevitably going to dominate in due course.
Recognizing this, Chu Chung-tin, Hong Kong’s oldest broker, is pulling out of the business because he says he cannot make the necessary investment to keep up with the new world order. Too costly to upgrade Chu is quitting after 40 years as a broker. His firm has 1,000 clients but Chu says he cannot compete with the global players in the e-trading era. “Even if I am willing to pay HK$10 million ($1.3 million) to upgrade my system to introduce internet trading services, how can I compete with the big players such as HSBC and Charles Schwab?” he asks.
“It is not just difficult but impossible for small brokers to compete with the largest players in the new era of internet trading.”
Chu says it is not just a question of computer systems upgrading but also hiring IT staff. Brokers could expect to have to invest up to HK$100 million to offer competitive internet trading services.
Despite the arrival of AMS3, fewer than half of Hong Kong’s brokers are planning to introduce online trading. The remainder plan to continue to operate traditionally, taking investor orders exclusively by phone.
The online specialists moving in have a mixed message for these local players. On the one hand they say they are not looking to compete with them, on the other they acknowledge that the market will inevitably consolidate.
“The market is going to continue to get more competitive,” says Buck at TD Waterhouse. “A market as big as the US is dominated by just a few firms so it’s not unreasonable to assume the same thing will happen here. Large firms will continue to enter the market and customers are going to be the ones who win because they will have expanded products and services.”
Schwab’s Hui echoes this point. “We welcome competition and at the end of the day customers will win because they will get better and better service,” she says.
Kimber at HSBC estimates that the market will only eventually support about 75 players, with about five big names dominating. “What has happened in other markets will happen here,” he says, citing research by E*Trade. This estimates that brokers need to spend on average $350 to acquire each new customer. Only those organizations with deep pockets will compete.
So local players will either go under or be forced to the sidelines as niche players while the international operations Wght for the middle ground. These brokers, for their part, are each marking out their territory and claiming that they have unique selling points.
Boom.com, for example is aiming at the emerging affluent investor who is earning in the region of $50,000 to $150,000. “We’re very different from a local broker where the mass of competition is coming from,” Duff says. “We’re targeting a more techno-savvy user – meaning one who has internet access at home. So we’re very sharply targeting the emerging affluent while local brokers are targeting the local customer.”
Maybe so, but the market is set to witness a fierce scrap for business. Buck says there are clear qualities required to compete.
“There are some high-quality local firms here but they will need to be up to the mark in several areas,” she says. “You need a brand, technology and good management. If you have those then you have the core infrastructure to be successful.”
A global reach
Beyond that brokers need to provide access to all the major global markets. “We have the technology infrastructure which allows people to get into the markets faster and more cost effectively,” she says, adding that TD Waterhouse also offers a full-service element for investors who do not want to trade online. Schwab’s Hui says local brokers will have to have clear strategies and a realistic view of their positions in the market. “The smaller brokers have to consider how they can attract customers,” she says. “Is it through technology or services, or the information they are providing? If they are not thinking of making any changes to their business they will not last.” Duff says Boom.com is not planning to offer full service. “We are trying to deliver a different message. We are very different from one of the premier brokers. If you go to a full-service firm, you’re going to expect things that we simply don’t want to deliver.” Above all, its strategy of targeting the emerging aZuent customer is well worked out, he claims. “In Asia, the emerging affluent class is exploding. So it’s a very promising situation. We don’t try to slug it out with 800 pound gorillas like Merrill Lynch. That’s just not our business. If you look at the US online brokers coming to Asia you’ll see that they want to slug it out with Merrill Lynch which is fine by us.”
As a minimum requirement, brokers are setting up round-the-clock call centres to service clients. “It’s very important to offer this, particularly if the customers are looking to diversify their portfolios and invest outside the local market,” says Buck.
Duff adds that 1% of Boom.com’s clients are full-time traders, a high figure, he says. More and more, brokers are being called on 24 hours a day. “Stock picking is something that people prepare for in the morning, study at night and participate in during the day,” he says.
A moonlighting nightwatchman
As an illustration Duff points to one father and son team who use Boom.com. “The son researches stocks all day and his father, a nightwatchman, trades in the US market at night.” Between them they have been getting some good performance. In a recent trading game among Boom.com’s clients, the pair’s virtual portfolio outperformed the market by 30%.
However, staffing these call centres brings its own headaches to the brokers. “It’s a big question whenever we enter a new market,” says Schwab’s Hui. “It is one of the major factors, finding experienced people we can employ to service customers. We have found that clients today expect a much higher standard of information and they want answers right away.”
However, she adds that it is vital to strike a balance in the business. “Technology by itself doesn’t work,” says Hui. “It’s really the people who bring in the relationships and help the clients to use the system in an efficient way, so our business model is very much what you would call clicks and mortar. Technology enhances the relationship.”
Duff agrees with this philosophy. “It’s understood that hi-tech business need bricks and clicks,” he says. “Generating the click side of the business is easy. The challenge is finding and keeping the IT talent but on the brick side it is very expensive to have retail space. It drains funds.”
Providing these resources is more and more part of the business for online brokers. Schwab has found that although internet trading is more popular than ever, it does not reduce the number of phone calls that clients make.
“We find as more and more of our clients start to trade, we need to open more and more branches,” says Hui. “Our whole business model has had to change and we have to do a lot of staff training. It’s not people substituting the system, it’s the system substituting the people on the simple elements such as getting quotes or research. Now instead clients don’t call up asking about interest rates, they want advice on options strategy.”
Having had experience of this change in its other businesses, Schwab is using this knowledge to introduce a more complicated model. It is this model that it is looking to introduce to Asia.
Now as the likes of Schwab, TD Waterhouse and Boom establish ever-stronger positions in the Hong Kong market, and with Asian investors getting ever-hungrier for access to international markets, the prospect of the wider Asian markets opening up, with China as the holy grail, gets closer.
The internet, according to the major market players, will be the tool that enables the power of market forces to drive this process forward.
