Uncertain markets and the resultant withdrawal of many investors has driven intense competition in online broking, with pricing coming down for lower-value trades as brokers scramble to attract and encourage more clients back to the sector. But as with any service, price should not be the only consideration for prospective users of online broking services.
There are 615,000 online share traders in Australia that have traded at least once in the past 12 months, according to investment research firm Investment Trends. It also estimates that there are 49,000 frequent traders, with “frequent” being those who trade at least four times a month.
CommSec is the dominant online broker, accounting for 49 per cent of the market. Next comes the ANZ-owned E*TRADE, with about 18 per cent of the market, then by Westpac Online, with 9 per cent, followed by Bell Direct, nabtrade and CMC Markets.
Mitchell Watson, financial analyst at Canstar, says lower-value trades – those with a value of up to $10,000 – is the scene of most brokerage changes this year, as brokers scramble to attract and encourage more clients back to the sector. Platforms have begun to offer sliding scales of payment, where the more you trade the less you pay.
The online broking business has been a tough one in recent years, in the wake of the GFC. Investment Trends estimates that the number of ‘frequent traders’ – the segment that generate most of the brokers’ profits – has fallen by 22 per cent from the end of 2010.
Arnie Selvarajah, chief executive of Bell Direct, says online broking is a “difficult market” – he estimates that trading activity is down 30 per cent on 2011, which was down 10-15 per cent on 2010.
Price is an important aspect of online broking, but “not the number one determinant” for most people, says Selvarajah. “Clients are more discerning these days, and functionality and ease of use are very important. Independent research has also been going up the ladder of client demands.”
While headline brokerage rates differ, “you’ll find there is much less variance at the large trade level,” says Selvarajah. “The market that all of us are really targeting is the SMSF (self-managed super fund) sector, and they will usually be transacting over $10,000.
“When there is a price move in the market segment below that – such as nabtrade’s $14.95 – it is a bit of an attention-grabber, but it’s really aimed at picking up the infrequent trader or someone trading in the ‘penny-dreadful’ stocks,” says Selvarajah. “Given that we’re not seeing customers significantly changing their behaviour based on price, I don’t think that we are going to see a price war.”
Joshua Zenas, financial analyst at Canstar, says traders who are motivated by price alone will simply go to CMC, as it is the clear market leader on pricing. “But most people are driven by features, and they understand that you pay extra for that,” he says. “For example, we find it’s pretty important that the platform provides instant inter-bank funds transfer into the trading account, which the bank platforms, CommSec, E*TRADE, Westpac Online and nab, do.”
Nathan Walsh, general manager at nabtrade, says the broker’s new “price point” is “part of a broader view around value. “We saw the value of offering the lowest online broking rate of the major banks, but we’re also conscious of the need to deliver value on a number of other dimensions that clients identified as important.
“For instance, we offer a cash rate of 4.5 per cent on our high-interest account for balances up to $1 million, which is the best rate of our major bank competitors. That’s really important for clients, there are a lot of people sitting on significant portions of their portfolio in cash, and they want to have the flexibility to move their money into the market in real time, but to know that there’s a good home for it and a great rate for it.”
But beyond pricing, says Walsh, there are a lot of ways that providers are seeking to differentiate themselves. “Trade activity has certainly dropped off since the GFC in terms of volumes, but the backdrop to this market is the underlying growth of self-directed investors, which is most clearly seen in the growth in self-managed superannuation.
“Clients really want to manage their own financial affairs, and to get access to great-quality insights to help make those choices. Trade volumes will vary with the state of the market, but under the hood there is an ongoing shift to self-directed channels and all of us are trying to serve that market the best we can.”
Walsh says research is a key battleground. “Clients wanted more breadth in research, so we have research recommendations on more than 1,500 ASX-listed stocks, we have about six times as many stocks under coverage as competitors…But it’s not just providing the research, it’s demonstrating the timeliness of that research. An interesting comment that came out of our market research was, ‘Brokers seem to think that insight ages like wine, but clients think it ages like fish’.”
Walsh notes that clients have reacted positively to the ‘smart consensus’ tool, where investors can see how the various recommendations combine into an overall recommendation. “What clients find particularly powerful about that is that you can go and see just how is the quality of that research recommendation tracked over time. We’re holding ourselves accountable to say ‘here’s where this stock has been strong, or weak,’ and really allowing the client to make an informed choice,” he says.
Stealing a march on your competitors is difficult, but it can be done. Just two years back, E*TRADE launched a service that helps investors combine trading records to calculate capital gains and losses – which can then be used to complete a tax return. Other providers have since had to follow suit, offering a tax monitoring and reporting capability of their own.
Stephen Karpin, general manager at CommSec, says the mobile channels -smartphones and tablets – have “revolutionised” the online broking field, particularly the iPad. “We had the first iPhone app and we now have an iPad app and an Android app. We get 60,000-70,000 different log-ins per week from mobile, which includes iPad and Android. It is about 20-25 per cent of active customers and we’re generating about 8 per cent of trades through that channel.”
Karpin says more than 100,000 customers have downloaded the iPad, iPhone or Android apps. “We’re finding 1500 accounts a week are downloading an app,” he says.
Social media is also emerging as a big consideration, says Karpin. “For example, we are leveraging our Twitter presence so that whenever a CommSec appears on TV, we Tweet that out and it is re-tweeted and networked out at the rate of one million tweets a month.” In addtion to this CommSec has launched a YouTube channel, which offers market updates and insights from leading economists and analysts.
But fundamentally, he says, it is the trading proposition. “We’re always working on that. From December, customers can log-in to CommSec and NetBank with one log-in. It is a constant process of making it easier for the customer to transact in real-time, with everything they will need linked together seamlessly.”
Selvarajah says functionality, ease of use and “provision of insight” are the critical aspects for an online broking platform. “More than anything else, be it price or technology, clients need help to make decisions on which stocks to buy or sell. We see our main job as creating ways to take all of the information that clients receive, filtering it and actually creating ‘usable insights’ for them,” says Selvarajah.
“The mobile/tablet channel now accounts for 5-7 per cent of our log-ins per day, and 2-3 per cent of our trades, which is up significantly in the last 12 months. Back then, many clients were more than comfortable getting information over the mobile/tablet network, but they did not trust the speed of the network enough to entrust trades to it. Now they do,” says Selvarajah.