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Friday, 2 March, 2001, 17:09 GMT
Hard times for online share dealers

By BBC News Online's Orla Ryan

More people than ever are buying shares on the web in the UK, but it is still proving difficult for online brokers to make money.

There are an estimated 30 brokers, catering for nearly 300,000 online share traders.

But with share prices tumbling, many of these traders are opting not to log on, wary of losing more money.

Some pundits say the problem is that the UK doesn't enjoy a share buying culture, and until this changes, the outlook for online share brokers remains grim.

Slice of the action

Online share brokers typically make money through taking a commision on each transaction.

With share prices falling, fewer people are buying shares offline or online, thus reducing brokers' potential revenue stream.

"Obviously what happened was in the first quarter of 2000, we had a roaring bull market and the day traders really exploited the situation and made a lot of money," Richard Bethell, a director at research company Compeer, said.

He added: "These people don't like markets moving sideways, as they were for most of 2000, or a real bear market, like we have been in for the last month."

Some people had their fingers burnt after last Spring's crash, but still stepped back into the market.

"I withdrew completely for a couple of months and am now dabbling again on the basis that this time it really is rock bottom," Paul Newton, an occasional online trader, said.

But many traders have been deterred out of fear of making their losses worse.

"It is an overcrowded marketplace, and there are too many brokers for the market. Those who are considered to be traders are not trading at the moment," Iain Willis, business development manager at Stocktrade, an online brokerage, said.

On top of market nerves, many brokers are competing on price, offering low or non-existent commissions.

Average commissions have dropped by over 33% and Forrester Research's Benjamin Ensor said:"Many firms aren't making any money."

But for many punters, the attraction of buying shares online is the relative cheapness.

"As an execution service, it is madness going to a bank or broker because they are very expensive," Paul Newton added.

Share aware

Making money in the UK from selling shares was never going to be easy.

People in the UK are less likely than their counterparts in Europe or the US to buy shares offline or online.

The US - the traditional home of the entrepreneur - enjoys a strong share buying culture.

The success of online share dealing there encouraged many brokers to set up in the UK and Europe.

But so far only 4% of UK online consumers have bought shares online, compared with 21% in Germany.

Trading here is more expensive - thanks to stamp duty - and many people are still swamped in paper.

"Even the Bombay Stock Exchange has now gone paperless, the British continue to be overwhelmed by paper," a JP Morgan report on online trading said.

Telephone banking - and dealing - has been a huge success in the UK, encouraging people to switch from branch banking - but meaning that they may be less likely to make a further leap to the online world.

But Stocktrade's Iain Willis said:"The average person is getting more share aware."

The statistics do back up his opinion. Online trading accounts grew 12% to 280,000 in the UK, the second fastest growth rate in Europe.

But still a drop in the ocean of the estimated 3.74 million European online brokerage market.

In contrast to the UK, in France and Germany, people moved from branches to the web, bypassing telephone banking. Web dealing arrived in these countries amid a wave of privatisations, which heightened demand for shares there.

UK battle

What this means is that the battle for the hearts, minds and wallets of UK retail traders is likely to be fierce.

Some of the smaller brokers could go under or be taken over.

The market leaders in the UK are the US giant Charles Schwab, Barclays and TD Waterhouse, while across Europe, the strongest players are those with a German presence: Comdirect, ConSors and DAB/Self Trade

The time is now ripe for larger bricks and mortar financial institutions to buy online share dealers, argues Compeer's Richard Bethell.

"This is a golden opportunity to pick up a going concern, to get into the share trading business...It is a good way for old fashioned financial move into the new economy," he said.

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See also:

11 Aug 00 | Business
UK 'behind in online share dealing'
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