Power Brokers Race to Trade On International Markets

Promise of global stock trading on the Net spurs technical efforts, competition

The Internet has brought the world many things, and soon direct stock trading on foreign markets will be among them.

Yet what's behind that split-second ability to buy a stock listed almost anywhere in the world is a lot more than the modem and ETrade account a customer may see. It's a lot more than global adoption of IP, fiber-optic lines and common schema for XML, too.

It's a battle being waged on Wall Street, as the giant U.S.-based stock brokerages and their newer online competitors jostle for alliances to open their services to customers in new global markets. It's about regulatory bodies and the different broker standards used to try to curb fraud. And it's about language - of finance, technology and tongues besides English. And oh, yes - it's also about money.

DLJdirect Inc. in Jersey City, N.J., was among the first U.S. brokerages to offer online services in Europe last summer, according to New York-based Jupiter Communications Inc. Like other nimble ventures such as Palo Alto, Calif.-based ETrade Securities Inc. and New York-based TD Waterhouse Group Inc., the online unit of New York-based Donaldson, Lufkin & Jenrette Inc. beat its larger rivals to the punch. Those companies have had customers and offices all over the world for years but were slower to move online abroad for the same reasons as in the U.S. - channel conflicts, legacy systems and a commitment to high-net-worth and high-touch customers.

The first traditional brokerage that was able to cross over - paralleling its successful strategy in the U.S. - was San Francisco-based The Charles Schwab Corp., which had operated off-line in Europe for many years, said Jupiter analyst Nick Jones. In fact, he said, Schwab pioneered online trading in the European market when it launched Charles Schwab Europe in April 1998.

"Traditional institutions [like Schwab] that are able to successfully launch an Internet strategy as part of their standard operation, rather than relegating it to the sideline of business, will do the best," said Dana Stiffler, an analyst at Newton, Mass.-based Meridien Research Inc.. Schwab officials declined to be interviewed.

Paths to the Web

But in Internet time, Schwab's early success is almost history, as its competitors race to catch up.

There are several paths. One is trod by global giants like Merrill Lynch & Co., which plans to leverage customers, overseas experience and brand recognition by Web-enabling existing brokerage services - though no online trading is yet available to customers overseas. Another is that of an affiliate of The Timber Hill Group LLC, which is leveraging existing technologies - namely, a proprietary trading platform that is being opened up to retail customers (see related article, next page). And then there's the most common path: finding partners and establishing alliances overseas.

"In the United States, the markets have become mature," said Rosemary McFadden, director of global business development at DLJdirect, explaining why expansion is now so key. "It's gone through the initial phases, it's somewhat crowded, and it's facing different challenges. But if you go to other markets, it's almost like going back to where the U.S. markets were three to five years ago."

For its part, DLJdirect has gone the joint venture route in Asia with a year-old partnership with Tokyo-based Sumitomo Bank Ltd. Other joint ventures cover 14 countries in the Middle East. A Hong Kong service will be launched this fall - again, with local partners.

Why? Language and cultural differences, McFadden said. Plus, finding partners with strong brands and existing client bases doesn't hurt. Nor does knowledge of local trading regulations and systems.

"With the partners we have selected, we have achieved one of our primary goals - speed to market," she said. "We were the first online brokerage firm in Japan and the first major U.S. brokerage company to set up operations in Japan."

Online broker Ameritrade Inc. has also gone the partnership route, with Deutsche Bank AG in Frankfurt, to provide access to U.S. securities for the European market.

"They have a good understanding of their customers, regulations and the different institutions and the technologies required to hook into them," said Jim Ditmore, CIO at Omaha-based Ameritrade.

ETrade has found partners in Australia, Canada, Denmark, France, Japan, Korea, Sweden and the U.K. over the past two years. As the company gained experience, it bought branches from licensees. And its recent purchase of Toronto-based Versus Technologies Inc. brings technology that will let ETrade consolidate orders and route them to the correct execution point.

This technology will form the basis for ETrade Global, said ETrade's Steven Ferrando, managing director of institutional and international deployments. "We have in fact launched the first wave, which starts out with Swedish customers trading U.S. equities," he said. "We'll be offering the ability for ETrade France and ETrade Australia to be trading U.S. stocks by the end of the calendar year."

Technology Glitches

But even the partner approach doesn't mean the technical side is always a breeze.

Ameritrade picks partners based on their positioning in the market and the territory they cover, not necessarily their strengths in technology, Ditmore said. As a result, he added, Ameritrade is often called on to supplement the technology of the local partner - to set up dedicated communication lines, for example.

"The requested services range pretty widely," Ditmore said. But the process moves quickly. "We can actually get the entire link up with our foreign partners in under a month and have it working, typically, in two to three weeks," he added.

The technological hurdles are getting easier to overcome because of the Internet, said John McKinley, chief technology officer at Merrill Lynch.

"It starts with some things as simple as everyone converging on IP networks in communicating with one another," he said. "You're supporting a single solution, so there's a lower cost to connect market participants, from a hardware and systems software perspective."

In addition, he said, the evolution of data standards and, in particular, the transition to XML-based standards, is making life easier for everyone in the financial services industry.

Tying into new clearing systems - where trades are officially confirmed - can still pose a challenge, said McFadden. Each country has its own computer systems for finalizing trades, but the integration isn't much of a hardship when local partners know the systems. Ditmore said he agrees local partners are key. "Each of the foreign exchanges has very complex regulations - and interfaces."

McFadden said she hasn't found that U.S. employees have many difficulties coordinating with foreign staffers, either. "The technology people all speak the same language around the world," she said.

But the differences in language and culture do create a need for dedicated Web sites.

McFadden said DLJ employs multilingual usability experts who travel to joint ventures overseas to work with local staff who understand the local market and culture.

Chicago-based Timber Hill was a longtime holdout against having Web sites in multiple languages but now has several foreign language sites, including ones in French and Chinese, in the works.

Most brokerages won't comment on the cost of all this expansion or early returns they may be seeing. But some are clearly big-dollar deals.

ETrade spent $122 million in stock, for example, to buy TRI Holdings Ltd., a Dublin-based company that offers global stock trading in multiple currencies to institutional clients and is active in 35 nations.

Yet not everyone has those resources to spend.

"Globalization overall will hurt the smaller players who can't afford to cover the various marketplaces," said Larry Tabb, an analyst at Needham, Mass.-based TowerGroup.

Some 65% of the membership of the National Association of Securities Dealers (NASD) is made up of firms with fewer than 10 employees. These firms may face the choice of either adding more employees to handle customers who decide to trade after hours - which may not be cost effective - or losing those customers to larger firms or online brokers.

Alan Davidson, a former member of the NASD board of directors and current president of the Independent Broker-Dealer Association, said he wants New York-based Nasdaq Stock Market Inc. to invest in technology to give its smaller members more access to after-hours and overseas trading.

"The technological barriers are not formidable, but they're not being addressed," he said.

Nasdaq declined to comment.

The largest firms face the opposite problem - they have too much staff, too many legacy systems and too much invested in satisfying existing customers - although some claim that those high-end clients want brokers, not computers, to make their trades.

"The high-net-worth clients want to speak with someone," said Veronique Weill, chief technology officer at J. P. Morgan & Co. in New York, which won't roll out its online service in Europe until at least the end of this year. "They're not looking for execution on the Web."

Time may tell.

Copyright © 2000 IDG Communications, Inc.

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