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The on-line broker is driven by directors aged 27-28 who expect to achieve a taxed profit of R7,4m in the first year. Barnard Jacobs Mellet is a major established broker with years of experience. The firm earned an attributable profit of R63,2m in the financial year to March and expects good profit growth.
Are investors so bemused by the lure of the Internet that they have lost all perspective, or will Internet trading be the wave of the future, wiping traditional dealers off the floors of stock exchanges (if they still exist)? And what will happen to stock exchanges themselves?
Global Change director Patrick Dixon had the following to say about the future of stockbroking and stock exchanges in the 5 April issue of Time magazine: ``For individual investors, trading on-line should enable anyone to buy and sell directly. But members insist that trades be done by members, who make a profit for just transmitting electronic pulses. Any stock market could create its own Web link, replicating processes in bank computers.
But their hands are tied. Allowing Net access would place them in direct competition with their own members.
``The industry is in for a huge shake-up. With commission rates falling to zero, brokers won't make a living except as financial advisers. But most personal investors will object to handing back every penny they just saved in commissions. The result will be more job losses, made worse by the improving quality of free investor advice on the Web, and scepticism about analysts' ability to outguess the market.''
It should be relatively easy for Barnard Jacobs Mellet to start an Internet broking service and compete successfully with U-trade and other Internet brokers.
Where technological changes will take market participants no one can say, but one thing is certain. Regulation by yesterday's rules will become progressively more difficult. The current proliferation of Internet or on-line traders still holds special advantages for investors and speculators -- in the short term at least.
The most important of these must be the shift towards the client becoming a trader. ``Authorised clients'' will be able to do share transactions from their own computers, gaining direct access to the heart of the system of buying and selling, which was previously the preserve of the privileged members of the stock exchange.
There are other benefits:
* Transparency -- the client can see stock market activity on his computer screen. Bid and offer prices and volumes are displayed, as well as trades in a particular security that day. He can also see the name of the broker doing a particular trade. Gone will be the old excuse of ``sorry, we missed it'' -- especially if there was a smooth rise in the counter's price. The system makes the entire process of trading in shares transparent;
* Easy access to enormous amounts of information. Brokers' Web pages offer clients a large amount of relatively cheap, accessible information. A speculator in Groblersdal now has easy access to a five-year library of news releases by every company listed on the JSE. Graphs of share prices, new highs and lows, derivatives and volumes are also available.
Some on-line brokers such as PSG analyse practically every share and have highly sophisticated investment tools. From the brokers' Internet pages, browsers can move on to the Web pages of the SA Reserve Bank, Statistics SA and related institutions. In other words, the Internet has made dealing on the JSE transparent and information much more accessible. Discrimination against smaller clients is a thing of the past;
* The significant reduction in brokers' commissions on transactions by individuals and small investors is probably one of the most important benefits of on-line trading. U-Trade's basic charge of R50 per transaction and a commission of only 0,35% compare well with the industry standard of R80 per transaction and 1,4% for smaller individual deals of R10 000-R25 000.
For a speculator or regular trader, this is a significant reduction, and indications are that these commissions will shrink even further.
Big institutional investors were previously the only ones to enjoy the privilege of paying only 0,2% in commission. But this rate may become the norm. In the US, the standard tends to be US$10-$15 (about R60-R95), irrespective of size of deal.
On-line trading has undoubtedly come to SA. It will reshape the face of trading and stimulate a whole new approach to investment.
What will it mean to be an ``authorised client''? SA does not yet have a fully on-line broking service. The JSE's applied programming interface (API) level is not yet operational. Broking offices will still have authorised traders transfer on-line orders to the JSE's JET system. They have to check clients' standing before transferring orders -- like a bank manager who says ``I know this person and the deal can go through''.
But remember, should you use your credit card at an automatic teller machine and your account is not in order, the ATM will retain it or reject the transaction, even if the manager knows you well. The same will happen when a broker has a fully on-line Internet service.
The client will have to make sure that:
* The account details the broker holds are complete and accurate -- and satisfy the requirements of the system;
* There is sufficient cash in his JSE trust account before a transaction can take place, or the computer will reject it. Brokers, in association with banks and other financial institutions, will make finance available to clients. Their clients will have to ensure that appropriate arrangements are made with brokers to enable on-line trading.
The broker has the advantage of his computer barring clients who previously freely bought shares without the requisite funds, taking advantage of the seven-day rule;
* Shares which have been sold are kept in safe custody by the broker. If the computer cannot ``read'' them, the order to sell will not be accepted. ``Oversights'', such as selling short and buying back later when prices are favourable, with the ``excuse'' that the share certificate was mislaid will no longer hold water.
Bear sales will nevertheless be easier if the necessary profile has been set up in the broker's computer. All new on-line brokers will in future facilitate bear sales by way of scrip lending.
The message is therefore: Get yourself ``authorised'' to use these services. But this is just the start. On-line trading and empowering the client will also open other doors. Consider the possibilities:
* Will collective saving and investment still be appropriate for you? When you can do business and invest on your computer at work or home, participation in your employer's pension fund becomes less attractive -- especially if you have the drive and application to do real research;
* Do asset managers who advertise so freely really earn their initial 5% and subsequent 2% a year commissions for what are sometimes dubious investment results? You will now have access to much the same information and research. In an advertisement last week, Tradek.com, the other listed Internet broker, asked: ``Why are you still leaving investment decisions to someone else?''
* Women investors and speculators at home -- don't you have more time and more of a ``feel for the market'' than your husband? Is baking for that home industry still the best way to earn pocket money or would on-line share dealing be a better proposition?
In the US, thousands of ``day traders'' make a full-time job of share dealing. After a loss or two, their profits reportedly average about $3 000 a day. The days of families having one son study medicine and another law may be numbered -- in future one may be expected to become a day trader.
The electronic age will clearly ensure similarly low commissions for all on-line brokers.
The prospective ``authorised client'' will have to look out for other qualities in his broker such as:
* Does the broker provide live share prices?
* Does he have a good news service?
* How good are his share graphs?
* Does his Web page download quickly?
* Does he have an alert system if prices change quickly?
* Can clients follow their portfolio movements easily on the Web page?
* Is it easy to learn how to use the Web site?
* Does the broker have comprehensive information on unit trusts?
* How good is his fundamental research?
* How user-friendly is the feel and appearance of the Web pages?
* What do his notice boards look like?
Since the JSE broke away from the old open outcry system and moved to electronic trading, share liquidity has improved markedly. Annual turnover as a percentage of the market value of all shares listed has changed as follows:
This liquidity is still low by international standards. On-line brokers and their authorised clients will make a major contribution to boosting turnover. An exciting era has dawned for investors in shares.
