Web challenges Indian stock brokers’ old order

Nine months after Internet trading arrived in India, only 18 brokers offer clients Web-based access to the stock market, but their marketing strategies have rattled an offline broker community of more than 8,000. Most online traders have cut brokerage costs, some to as low as five basis points per trade, in order to grab market share. They are also talking up valuable add-ons like real-time stock quotes and news, updated research, technical analysis facilities and customised portfolio tracking. At a time when offline broking charges are low anyway, at 75-100 basis points, many brokers wonder how long they will stay in business at these rates. They are troubled by the cost of setting up the Internet trading software and hardware infrastructure, having to deal with day traders, and the uncertainty of when it will pay off. CJ George, managing director of Geojit Securities, India’s first broker to launch online trading, says it costs a minimum of Rs 10000000 ($220,000) to set up the hardware and software for online trading. and more if the volumes pick up. "Internet broking houses are competing for a very small pie of the people who can trade on the Net. I don’t know if the huge cost of advertising they are incurring to publicise the low brokerage costs justifies the clientele they can get," he said. But the rival Bombay and National Stock Exchanges are each in the process of setting up exchange-level Internet trading facility for their members, which they expect to be up and running in a few months time. Internet trading in India today is just a mechanism for an investor himself to route his orders to the exchange mainframe via the broker’s filter. But it makes a big difference in the geographically vast country, where even basic access to a stock exchange is limited. The biggest grouse of small investors in far-flung locations has been the lack of proper access to a stock broker and hence the market, and poor service even when contact is made. The faceless Internet can change that. The speed of the transaction, confidence about the price and ease of settlement in the paperless mode should be reason enough for retail investors to jump at the chance of trading on the Net. All they need is a connection, a bank account and a depository account. Internet trades constitute less than one% of daily offline trading volumes, however, the Bombay and National Exchanges post a combined average daily turnover of Rs 90 billion ($2.0 billion) in the offline market. The major offline business is transacted in the three main exchanges — the Bombay, National and Calcutta Stock Exchanges which together account for nearly 2,500 brokers. Of India’s one billion population, only around 19 million are estimated to be equity investors, and a vast majority of these are passive investors. The country’s first depository was set up in November 1996, but figures show only a little over three million depository account holders, many holding multiple accounts. Since most active stocks in India can be traded only in dematerialised or paperless form, with accounts maintained electronically in a depository, this roughly constitutes the number of really active investors. The key reasons for the slow pace of Internet trading are a lack of awareness of the system, and discomfort over how it works and poor connectivity in places which lack infrastructure. JR Varma, a member of the board of market regulator the Securities and Exchange Board of India, feels the country has the potential to rival Korea in the popularity of Internet trading. Nearly 60% of Korea’s stock trading has shifted to the Internet. "The broking costs in Korea have dropped to one-third to one-tenth the levels of fifty basis points that prevailed in offline broking and that is a reasonable thin to expect in India when Internet trading picks up," he told Reuters. He expects mobile phones, the use of which is beginning to explode, will propel Web trading in India, rather than personal computers, as has been the case elsewhere.