Australia | Jun 07 2006
By Greg Peel
It’s been a bumpy road for the online stockbroking industry. Back in the mid-nineties the concept burst out of the blocks and sent the odd wave of panic around the staid, established broking fraternity. By slicing the average retail brokerage charge by a half to two-thirds, online was threatening the very existence of an industry that had existed for eons, and that had relied on a stable of advisors providing "human" interface with clients.
When the ASX provided direct electronic interface with its evolving computerised trading system, the door was open. The internet provided the rest. There was a scramble as new players appeared overnight, and established houses rushed to provide the same service alternatives.
Apart from the usual teething-problem rationalisations that one would expect in a fledgling business, the tech market crash hit hard. Smaller players vanished and established players abandoned their online developments. But as has been the case with all internet-based services, real value-adding emerged from the ashes in the new millennium to finally ratify the belief that the internet would change our lives.
During this period the Commonwealth Bank (CBA), a business with possibly the largest retail customer base in Australia, crept into stockbroking with the establishment of CommSec. CommSec introduced a "middle" stage alternative between full-service broking and non-service internet access by effectively setting up a call centre for retail stock market trading where punters could ring to place an order but get no advice in return. While this was going on, CommSec was also developing its pure online service.
A combination of client base, rational approach, and a burgeoning interest in share ownership from the mums and dads of Australia saw CommSec establish itself as the number one online broker without ever having previously provided a full-service brokerage.
At the same time the pioneering internet broking business from the US, E*Trade, had established itself in Australia and without any prior client base began proving it could ride out early market problems and tech crashes by being good at what it did. And by offering attractive brokerage rates. The company is partly owned by ANZ (ANZ).
E*Trade has this week announced it has acquired HSBC Stockbroking. HSBC provides online broking to 40,000 retail banking customers and a further service to St George Bank (SGB) customers under the operating name of directshares.
By adding this new client base to its existing 230,000 client base, E*Trade now becomes Australia’s second biggest online broker with 26% of online market share. CommSec remains in top spot with 50%.
E*Trade CEO Brett Spork is no stranger to Australian stockbroking, having cut his teeth as an institutional broker with Macquarie Bank (MBL) before moving to head up Macquarie’s exploding retail business in the nineties.
Spork offers that at 40,000 clients, HSBC Stockbroking simply did not have the scale to be an effective service. And it was costing too much to run. E*Trade, on the other hand, operates on a much more efficient cost base. The acquisition thus provides E*Trade with a quality client base edition of HSBC and St George banking customers while increasing core profitability.
Under the deal HSBC Bank will refer new customers to E*Trade for at least another five years. E*Trade also has the opportunity to renegotiate the wholesale deal with St George in March 2007. It has cost E*Trade $51.3m which will be funded half through debt and half through cash reserves. At the end of the deal E*Trade will retain only a modest $16m of debt on its balance sheet, and $2m of synergies are expected through consolidation and the removal of overlap.
E*Trade has been filling its cash box regularly over the past two to three years as the Australian market has soared. At the end of the day, E*Trade’s profitability is directly linked to stock market turnover, and the re-rating of its share price over the past few months implies that downside risk will always exist in a market slump.
Nevertheless, research house Aspect Huntley describes the acquisition as a sensible one and it maintains a view that E*Trade is a "high quality" small cap stock. Aspect retains a Hold recommendation on E*Trade as it believes the stock to be fully priced, and susceptible to downside. However, Aspect acknowledges that value must be attached to this consolidation in denying competitors the opportunity to strengthen their own online businesses.
Spork laughs at the suggestion that the next goal is to usurp CommSec. "Yeah, and then Macquarie Bank", he jokes. He is however keen to point out that E*Trade does provide clients access to independent research which is not the case for competitors with proprietary research services. E*Trade provides a streamlined alternative to traditional stockbroking.