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Online trading where investors directly place orders via electronic channels was first introduced in Hong Kong in 1998. Given unfavourable market conditions, the development has been slow and the current level of online trading is not high. Nonetheless, it is believed that online trading can improve market liquidity and market quality; actions by all parties would be desirable to achieve such result.

WHAT IS ONLINE TRADING?

In the context of the securities market, “online trading” refers to securities trading activities where investors directly place orders via electronic communications channels such as the Internet. In a relatively advanced mode of trading, the process is completely automated – straight-through automatic order routing to the central marketplace (e.g. the exchange’s trading system) for execution. In a less ideal model, manual re-input of investors’ online orders by the broker is required. For example, in Hong Kong, although the current trading system for the securities market supports a straight-through online trading process, some small brokers which offer online trading service still have to manually re-input orders received online from their clients.

Before online media like the Internet became popular among the mass population, electronic order placing was available to professional institutional investors via broker- or vendor-supplied proprietary systems. Moreover, due to security and performance concerns, institutional investors usually do not choose to use online media available to the general public. Therefore, online trading in the current focus mainly refers to a retail market service. The success of online trading mainly refers to its popularity among retail investors.

Online trading is more than just a change in the physical mode of trading, a transition from manual order routing to automatic order routing. It involves a change in the behaviour of investors in their investment decision process. Under the manual mode an investor would call up his account executive (AE), make one or two enquiries about the market, and then place his order; he is thus rather dependent on the AE. However, in an online environment, an investor is generally provided with information about his portfolio, current share prices and tools to support his investment decision; he has greater wealth of information and operates rather independently. The quality of his investment decision process may be higher.

IS ONLINE TRADING BENEFICIAL?

Local and overseas experience has suggested that online trading is beneficial to the market. The reasons are:

Boost to market quality. Online traders tend to establish relative independence in information searching and analysis, and in making investment decisions. To support this trading practice, in addition to trade execution, online brokers will have to provide electronically auxiliary services such as portfolio valuation, research, real-time market data and information, analytical tools, etc. This will help to improve the overall level of service quality and efficiency.

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Higher trading volumes. The experience of overseas markets suggests that online broking boosts trading volumes. It not only diverts existing business from traditional channels, but also provides incremental business by winning new customers and stimulating existing customers to trade more. An HKEx survey found that online investors in Hong Kong were more active in stock trading and more aggressive in taking risks for returns, and held stocks for a shorter duration than non-online investors.1 Internet investors in the US tend to be more aggressive and are heavier traders than non-Internet investors2. The average deal size of online transactions surpassed that of all transactions in Taiwan.3

Platform for more efficient market process. Online trading enables functions to be integrated, ultimately reducing cost per trade. According to the HKEx survey, 77 per cent of online stock investors traded online because of its convenience and 21 per cent for its timely execution. Without mass acceptance of online trading, it may be difficult to move beyond paper-based information support to the market, for example communicating announcements via newspapers and printing prospectuses.

Improved international distribution. Online trading enables investors to more readily access overseas markets, and investors in overseas markets, including Mainland China, to access Hong Kong. In fact, many online brokers in Hong Kong are eyeing the potential of the Mainland China market.

CURRENT STATUS OF ONLINE TRADING IN HONG KONG AND OVERSEAS

In Hong Kong, online trading was introduced in 1998, initiated by local brokers4 before the implementation of the third generation of HKEx’s Automatic Order Matching and Execution System (AMS/3) which offers an open gateway for connection with brokers’ systems and allows direct order routing. Because of system limitations, manual order re-input by the broker was required at that time for client orders received online. Since the launch of AMS/3, such manual process has been reduced and retained only in online brokers who have not yet adopted the technology for direct order routing.

From October 2001 to September 2002, online trading contributed 11 per cent of total retail trading value, or 4 per cent of total market trading value in HKEx’s stock market5. Correspondingly, it contributed 5 per cent of total retail turnover or 2 per cent of total market turnover in HKEx’s derivatives market from July 2001 to June 2002. These figures are low compared with a market share of over 50 per cent in South Korea. The stock market figure is comparable to the market share in Mainland China’s stocks and funds market and the Taiwan Stock Exchange’s market. (See Table 1 for the statistics.)

Among Hong Kong retail stock investors, about 27 per cent are online traders6. Though much smaller than the 55 per cent in South Korea, this figure is comparable to the 22 per cent in the US. It is also higher than the 15 per cent in Mainland China and the 16 per cent in Taiwan.

1

Source: HKEx Retail Investor Survey 2001 (RIS 2001). 2

“2001 Annual SIA Investor Survey: Investors’ Attitudes Toward the Securities Industry”, November 2001, US Securities Industry Association. 3

Source: Taiwan Stock Exchange Monthly Statistics. 4

Celestial Securities was reportedly the first local broker to launch online trading, in October 1998. 5

Preliminary finding of HKEx Cash Market Transaction Survey 2001/02. 6

Preliminary finding of HKEx Omnibus Retail Investor Survey 2002. Online stock investors are investors having all or part of their stock transaction done online.

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Preliminary finding of HKEx Cash Market Transaction Survey 2001/02. The figure is based only on the percentage of survey respondents. 8

Typical examples are the recent failure of two online businesses. The one-year-old pure online broker 2cube – a joint venture between JP Morgan Chase and Pacific Century CyberWorks – announced the cessation of its operations on 14 January 2002 because of adverse market conditions. Its subscriber base was sold to rival E*Trade Hong Kong. In addition, Charles Schwab Hong Kong ceased its Hong Kong trading services in January 2002 and reallocated resources to focus on US dollar investing services in Hong Kong.

9

Source: HKEx Cash Market Transaction Survey 2000/01. “Bank-related brokers” are defined as brokers of which the associated bank owns at least 50 per cent, such bank having local retail business.

Close to 20 per cent of brokers in Hong Kong offer online trading service7. Online trading in Hong Kong is offered as an alternative trading channel to traditional channels run by the same broker – as a separate business unit run by a specialised team or a subsidiary of the broker firm, or as the only service by pure online brokers, supplemented with the necessary offline service support. In practice, the pure online trading mode appears to have encountered difficulties.8 The more popular business model is to provide investors with an alternative electronic trading channel, either in a single investor account for multiple trading channels or a separate account. Online trading service is commonly provided by banks which are exempt-dealers under the current regulations. From October 2000 to September 2001, bank-related brokers had only 15 per cent of total trading but contributed 43 per cent of online trading.9 At major banks offering online trading service, the major proportion of their securities agency trading is usually done online.

The current status of online trading and market characteristics in Hong Kong and some overseas markets are summarised in Table 1.

Table 1. Attributes of online trading and related market characteristics in Hong Kong and selected overseas markets

Hong Kong Mainland China Taiwan South Korea The United States The United Kingdom Launch time October 1998 March 1997 1997 1997 1995 1998

Main users Retail investors Retail investors Retail investors Retail investors Retail investors, start Retail investors to target institutional

investors

Market HKEx Shanghai Stock Exchange, Taiwan Stock Exchange, Korea Stock Exchange, NYSE, NASDAQ, AMEX London Stock Exchange, Shenzhen Stock Exchange Gretai Securities Market, KOSDAQ, Korea’s Third and 16 regional exchanges Alternative Investment

(formerly ROSE), Taiwan Market, Korea Futures Market Futures Exchange Exchange

Number of 26.6% of retail 14.8% (5.08 million) of 16% of total 55% (4.6 million) of 19.3 million online 374,000 online investor

online stock investors total investor accounts investor accounts total investor accounts investor accounts accounts, <3% of

investors (Dec 2002) (Oct 2002) (Dec 2001) (Dec 2001) (Dec 2000) retail investors 22% of investors (2001) (Jun 2002)

Market share of 11% of local retail 11.5% of market total 10.1% of TSE market total 55.2% of market total Not available 20% of total

online trading value trading or 4% of (Oct 2002) (Jul 2002) (Oct 2002) execution-only

total market turnover trading volume

in cash market (Sep 2001)

(Oct 2001-Sep2002) 5% of total retail turnover or 2% of total market turnover in derivatives market (Jul 2001-Jun 2002)

Number of online 59/309 (survey 73 / 270+ 92/190+ 38 / 63 200+ / about 7,900 35/about 240

brokers/total number respondents only) (98 pending approval) (Jan 2002) (Sep 2001) registered broker-dealer APCIMS members

of brokers (Sep 2002) (Dec 2002) firms (Dec 2002)

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Table 1. Attributes of online trading and related market characteristics in Hong Kong and selected overseas markets (Con’t)

Hong Kong Mainland China Taiwan South Korea The United States The United Kingdom Major online channel The Internet The Internet The Internet Home Trading System via The Internet The Internet

the Internet or other commercial networks

Online trading Straight-through order Online orders are collected Straight-through Fully automated: Orders automatically Straight-through,

mechanism routing or manual by the broker’s in-house order routing or straight-through process routed to the exchanges, or manual re-input re-input for brokers computer system together manual re-input for ECNs or market makers requried for orders without order with orders received brokers without order and specialists, according channelled via e-mail routing system through other means routing system to the broker’s system

before routing to the Exchanges

Traditional trading Telephone calls and • Electronic media via Telephone calls and Written document, Telephone calls and Telephone calls and by post

method branch visits, orders terminals at branches branch visits, orders phone calls, telegram and fax branch visits, orders placed through or touch-tone telephone placed through placed through account executives • Face-to-face order account executives investment representatives

placing at branches

Commission ≥ 0.25% ≤ 0.3% (including Exchange Freely negotiable Freely negotiable Freely negotiable Freely negotiable

on equities fees and regulatory fees)

Internet penetration 43% of individuals 5.8% of urban population 34% of total population 50% of total population 62% of total population Not available aged 10 or over (June 2001) (2001) (Sep 2001) (Oct 2001)

(2001)

Retail participation 34% of cash market 99.5% of total 87% of market 70-80% of total stock 42.6% of market value 8.2% of total trading rate turnover investor accounts turnover value trading value in KSE of US corporate equities value by private client

(Oct 2001-Sep 2002) (Dec 2001) (Dec 2001) held by household sector (2000) (2000)

Sources of statistics

Hong Kong : Preliminary findings of HKEx’s Omnibus Retail Investor Survey 2002, Cash Market Transaction

Survey 2001/02, HKEx Derivatives Market Transaction Survey 2001/02

“Household Survey on Information Technology Usage and Penetration”, HKSAR Government, 2001

Mainland China : China Securities Regulatory Commission (CSRC) website

Shenzhen Stock Exchange and Shanghai Stock Exchange Monthly Statistics Internet Development Statistics Reports in China by CNNIC

CEIC (on population statistics)

Taiwan : Taiwan Stock Exchange

Directorate General of Telecommunications, Ministry of Transportation and Communications, Taiwan

South Korea : Online Securities Trading in Korea (Monthly Statistics), KSDA Korea Network Information Centre

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US : JP Morgan Securities (on online investors statistics)

“2001 Annual SIA Investor Survey: Investors’ Attitudes Toward the Securities Industry, November 2001, Securities Industry Association

The US Securities and Exchange Commission Nielsen/NetRatings (on Internet penetration statistics)

“Flow of Funds Accounts of the United States - Annual Flows and Outstandings, 1995-2000”, Board of Governors of the Federal Reserve System

UK : Association of Private Client Investment Managers and Stockbrokers (APCIMS)

“Survey of London Stock Exchange transactions 2000”, London Stock Exchange

OVERSEAS MARKET EXPERIENCE

Among the five overseas markets examined – Mainland China, Taiwan, South Korea, the US and the UK – South Korea and the US by far have the most active online trading. South Korea has been the most successful among the Asian markets. Online trading contributed 55 per cent of total market trading value in South Korea in October 2002 and online trading accounts as a percentage of investor accounts reached 55 per cent by the end of 2001. Online trading in other Asian markets has not reached much beyond 10 per cent of total market trading. The US has the longest history of online trading and could be said to have the world’s most developed online market. Web-based online trading was introduced in the US back in 1995 but only in 1997 or 1998 in other markets.

Each of these markets has their own success factors and/or difficulties in developing online trading. Reference is made to this overseas experience in the following section discussing Hong Kong’s development of online trading.

(See the Appendix for a summary of online trading in these markets.)

SUPPORTING FACTORS FOR ONLINE TRADING

Since online trading is considered beneficial to the market, it would appear desirable to further promote its development in Hong Kong. Drawing on overseas market experience and HKEx study findings, a number of significant factors have been identified to facilitate the growth of online trading in Hong Kong.

Low transaction cost. Experience in the US and South Korea shows that cost is a crucial factor to attract investors to switch to online trading, especially during the initial launch period. Investors who are receptive to online trading tend to be relatively independent in their trading decision, i.e. self-directing their trades. They have a higher price-elasticity – reacting more favourably to a cut in transaction cost – than investors relying on direct contact with brokers for their advice. Survey findings showed that apart from convenience and efficiency of the online system, low commission rate was the third major reason for trading online.10

10

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Regulatory support. From the perspective of ensuring adequate investor protection, the regulatory principles adopted for online trading should not be different from those for other modes of trading. This is the philosophy of the US and the UK regulatory approach: there are no specific rules governing online trading, but there are guidance materials on how compliance with the existing rules can be achieved in an online environment. Appropriate regulatory measures, however, facilitate the growth of online trading, as exemplified by South Korea’s constructive government policies and measures.

Technology support and its public acceptance. Efficient and secure networks and broker systems, a high Internet penetration rate, the popular usage of broadband and high Internet literacy among the public are crucial factors. In respect of networks and systems, investors’ major concerns are convenience (apart from the easy access to Internet, the user interface is a major element), efficiency, security and reliability.11 In Hong Kong (as at March 2001), 43 per cent of all persons aged 10 and over had used Internet service12, not far behind the penetration rate of 50 per cent of the population in South Korea13 and among the top few in Asia14. However, only 34 per cent of the Internet households in Hong Kong claimed to be using broadband connections, compared with 95 per cent of the Internet households in South Korea.15 In addition, survey findings revealed that illiteracy in computer/Internet/online trading is the most significant reason for not trading online.16

Favourable market sentiment and a large retail investor base. A good online trading system involves huge capital investment. Significant economies of scale are required for a profitable operation. Since online trading is basically a retail phenomenon, a large retail investor base and active retail trading are necessary to support it. Experience in South Korea shows that bullish market sentiment is a catalyst for online trading. However, these factors are least controllable by market regulators, operators and practitioners. Nevertheless, a cross-boundary extension of service to tap potential overseas markets would be a possible development strategy.

Some of the above factors are partly under the control of the market regulator or operator, for example, the cost and regulatory regime. Some are market or social factors that are outside their control. Online trading is generally regarded as a key competitive differentiator among members of the brokerage industry. However, the success of online trading depends not only on commercial factors but also on support from the hardware and software infrastructure, which is the result of the coordinated efforts of all interest parties. To the brokers, online trading offers high business potential (possibly greater still through cross-border extension of service) and profits. To the stock exchange, it provides opportunities for market volume expansion and therefore, bigger profits and market size. To the market regulator and the government, it helps increase market quality and efficiency and boost the status of Hong Kong as an international financial centre, which ultimately benefits the brokers and the stock exchange. The success factors are therefore worth consideration by all parties and they are achievable by their joint efforts.

11

From RIS 2001: 77 per cent of online traders traded online for convenience, 21 per cent for timely execution; 25 per cent of non-online traders did not trade online due to lack of confidence in online trading/online brokers.

12

Source: “Household Survey on Information Technology Usage and Penetration”, HKSAR Government, Nov 2001. 13

Source: Korea Network Information Centre (http://stat.nic.or.kr/). 14

The other Asian economies with high Internet penetration rates include Singapore and Taiwan (28.5 per cent and 26 per cent respectively in 2000). Source: Merrill Lynch, Oct 2000, from SFC Chairman’s speech on “e-Stock Trading in the New Millennium” on 27 April 2001.

15

Source: “Household Survey on Information Technology Usage and Penetration”, HKSAR Government, Nov 2001; Korea Network Information Centre (http://stat.nic.or.kr/).

16

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CONCLUSION

The successful development of online trading requires joint efforts from all market parties, including the regulator, the operator, practitioners and even the government to provide a favourable supporting environment. In Hong Kong, more could be done in investor education, development and application of technology, appropriate policy and regulatory support and the provision of a low-cost-trading environment. The successful development of online trading benefits brokers, the stock exchange, the market regulator and Hong Kong as a whole by helping to increase market volume, quality and efficiency. It also provides the capability to tap overseas investor markets – Mainland China offers the greatest potential and perhaps Taiwanese investors as well, which, together with Hong Kong, constitute the Greater China investment circle. Given that the Hong Kong population (and therefore the potential retail investor population) is relatively small compared with other markets, such capability would appear to be of strategic importance to Hong Kong’s overall market development.

APPENDIX

– ONLINE TRADING EXPERIENCE OF SELECTED OVERSEAS MARKETS

The online trading experience of the following overseas markets is summarised for reference below: South Korea, Taiwan, Mainland China, the UK and the US. Among them, Taiwan and Mainland China have had similar experience to that of Hong Kong in terms of the slow building up of investor acceptance, possibly in part owing to the common investment behaviour and habits of these Chinese investing communities.

South Korea

Online trading in the South Korea refers to securities trading whereby orders placed by investors via electronic media to the in-house system of the broker firms are routed to the trading system of the exchanges automatically on a straight-through basis. It was legally permitted in 1997 when the revised Securities and Exchange Act (SEA) authorised securities companies to receive client orders by electronic communications such as computer communication devices, Personal Digital Assistants, Automatic Response Systems and mobile phones. The first online order-placement channel introduced was the Home Trading System (HTS)17 developed by securities firms. Through the HTS, investors could trade online on their PCs using the securities firms’ self-developed software.

Online trading was not well received initially due to the lack of familiarity with the e-commerce concept among the South Koreans and the economic downturn after the Asian financial crisis in 1997/8. However, along with the economic recovery in 1999, online trading flourished rapidly. The market share of online trading in total securities trading value jumped from 2 per cent in 1998 to 19 per cent in 1999, 47 per cent in 2000 and to over 50 per cent in 2001 and 2002 (58.9 per cent in stocks for the Korea Stock Exchange and 79.1 per cent for the KOSDAQ market in October 2002). South Koreans adopted online trading in both stocks and derivatives. By the end of 2001, 55 per cent of total investor accounts were online trading accounts.

17

Home Trading System (HTS) is a software system developed by brokers through which individual investors can place orders, receive trading data, and confirm transactions. To trade via HTS, the investor has to install this broker-developed program at his personal computer. Then he can log in and start trading. Placing online orders via this channel offer investors a higher degree of security and reliability.

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Several factors have contributed to the success of online trading in South Korea. Apart from the economic pick-up in 1999, appropriate regulatory measures, rapid advancement in information technology and the high penetration of personal computers as well as the initiatives of securities firms in developing online business are all contributing factors.

Appropriate regulatory measures were introduced by the South Korean government at just the right time to provide a nursery for the development of online trading. These measures included amendments to the SEA to allow electronic order placing and cyber branches of securities firms, liberalisation of brokerage commission and the “good faith” deposit by investors with their brokers before executing securities transactions, enhancement of measures to protect investors in an online trading environment (e.g. an electronic signature act), and associated law changes to encourage Internet public offerings to provide for a broader application of online technology. In addition, the Korea Stock Exchange enhanced the real-time disclosure of quotation information on market depth, which also acted as a facilitator.

Furthermore, the South Korean government has been keen in building up a knowledge-based society. It has promoted the usage of personal computers and the Internet by donation programmes, offering mass training to the population and lowering tariffs for Internet access. As a result, South Korea has witnessed rapid growth of Internet usage penetration in the last decade. By September 2001, the number of Internet users exceeded 24 million and reached a penetration rate of 50 per cent of the population in South Korea18. Further to this, 95 per cent of the households with access to the Internet use broadband networks which provide higher efficiency in connectivity and data transmission.

Under the favourable regulatory and social environment, South Korean securities firms have been proactive in offering online trading services to investors. In contrast with pure online securities firms in the United States, most of the online securities firms in South Korea are the online trading arm of traditional full-service firms. Competition has been vigorous, in commission fees, services such as real-time data and information, the variety of order placement methods, email alerts, chat-room facilities and online investment consultancy.

Taiwan

Online trading in Taiwan started in 1997. As in Hong Kong, investor orders received online may be routed directly to the stock exchange’s trading system or may require manual re-input by the brokers into the exchange’s trading system.

The initial online trading value was low. Subsequent to the rapid development of the Internet and e-commerce after 1997, online trading also grew steadily. Online trading as a percentage of total market trading value increased from 0.03 per cent in December 1997 to 8.7 per cent in December 2001 and 10.1 per cent in July 2002. At the end of 2001, 16 per cent of the total 13 million investor accounts in Taiwan were online trading accounts.

18

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To accommodate the development of online trading, the rules and regulations have been amended since 1997. In October 1997, the Taiwan Stock Exchange (TSE) Operation Rules were revised to allow investors to place orders through electronic channels. In 1999, the TSE issued three sets of guidelines on online trading services offered by brokers to facilitate online trading while enhancing system security and the reporting mechanism.

In Taiwan, the share of online trading in total market turnover and the proportion of investors who are online investors remain relatively low. The major obstacles to the development of online trading in Taiwan include an insufficient acceptance by investors who still prefer branch visits in the presence of extensive broker branch networks, low fees for traditional offline trading rendering little room for online trading to compete in cost, the inertia of Taiwan brokers who are inclined to retain a strong presence in traditional business rather than switch to online business and the security concern of investors in the light of incidents of online fraud.

Mainland China

The Mainland China stock market has a relatively short history since its revival in the 1990s. Because of this, the Shanghai and Shenzhen stock markets were established on an automated basis from the start; the computer systems of the securities firms are connected to the trading systems of the exchanges and trading is fully automated. Electronic order placing by investors by telephone, without the help of the broker, was introduced in December 1992. Orders are routed directly to the exchanges’ trading systems. Other electronic devices including designated terminals at brokers’ branches with keyboard entry or touch-screen technology were also introduced around that time. A nationwide electronic trading network was established on the introduction of a satellite communication system in 1993.

As a result, the concept of “online trading”, if used to refer to order placing through electronic means, is not new to the Mainland market. In respect of the latest online technology, “online trading” in Mainland China is normally used to refer to Internet trading only.

The earliest Internet securities trading service in Mainland China was launched in March 1997. By July 2000, there were over 200 securities business establishments in Mainland China offering such services. It was reported that Internet trading accounts then amounted to 250,000, and Internet trading value contributed one per cent of total market trading. The volume of Internet trading grew gradually over time. By the end of 2001, Internet trading contributed 6.6 per cent of total trading value in stocks and funds. The percentage share climbed to about 11 per cent in the third quarter of 2002. In October 2002, the percentage share reached a peak of 11.5 per cent and the number of Internet investor accounts reached 5 million or about 14.8 per cent of total number of investors.

The China Securities Regulatory Commission (CSRC) issued the first set (and the basic set) of regulations on Internet trading in March 2000. The regulations were meant to formalise the Internet trading services offered by the securities companies and provide for their development in a regulated and scrutinised manner. Securities companies have to be authorised by the CSRC to provide such services. However, in the transition period when application for authorisation is in progress, the services already being offered prior to the implementation of the regulations by securities companies is not required to be suspended. Additional measures were subsequently issued on the qualifications of brokers offering Internet trading service, information disclosure and marketing of initial public offers on the Internet. The rules and regulations supported the steady growth of Internet trading in Mainland China.

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Nevertheless, the market share of Internet trading in Mainland China remains relatively low, as in Taiwan. The major obstacles include a low Internet usage rate (6 per cent of the urban population19 compared with 50 per cent of the total population in South Korea), the high cost of Internet trading (although liberalisation of the fixed commission rate regime in May 2002 has alleviated the factor, the high Internet connection charges remain significant), investor concerns over technical issues such as system stability, speed and security (according to a national survey) and lack of regulatory support to facilitate online administrative procedures. In addition, investors prefer to use traditional channels, e.g. brokers’ trading halls, which are convenient enough and ideal for many retail investors who prefer to gather together to share market news, information, gossip, and the trading atmosphere.

United Kingdom

In the UK, online trading is an automatic straight-through process, i.e. the orders are routed automatically to the exchange’s trading system or the dealing systems of the market makers. However, placing orders via email to the broker who then re-inputs the order manually to the trading system is also known as “online trading”. At present, the Internet is the most popular online channel.

Online trading is mainly offered in execution-only broking services, i.e. normally not applicable in the other kinds of broking services in the UK – advisory dealing services and discretionary broking services – which involve investment advice and portfolio management for the clients. Such practice follows the trading behaviour of online investors, i.e. all investment decisions are left to the investor without broker advice.

The first online broker in the UK was set up by a US firm (Charles Schwab) which launched the service in June 1998.20 According to the Association of Private Client Investment Managers and Stockbrokers (APCIMS), online investor accounts have grown from 31,000 in March 1999 to 327,000 in September 2001. As of September 2001, online trades conducted by these investors accounted for 20 per cent of total execution-only trading volume. Although online trading services are available for both equities and derivatives21, online brokers in the UK focus mainly on equity trading since retail participation in derivative trading is limited.

The main regulation governing online trading in the UK is the Financial Services and Markets Act 2000, which applies to the Internet and other online media22 as it does to other order-placing media. Practitioners are required to obtain authorisation from the Financial Services Authority (FSA) to carry out online investment business, for which services or advertisements are made available in the UK via the Internet. The FSA is responsible for monitoring these online investment service providers to ensure that they have robust systems and controls to minimise the business risks to customers.

19

Deduced from data obtained from Internet Development Statistics Report in China by CNNIC and the population statistics obtained from CEIC. 20

Based on information obtained from the website of Charles Schwab Europe. 21

Derivatives here largely refers to those traded on the London International Financial Futures and Options Exchange. 22

In the UK, the Internet itself as a medium for activities and communications is unregulated. Anyone, from anywhere, can offer investors anything for sale.

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However, online trading in the UK is still at its initial stage of development. According to a study conducted by JP Morgan23, Germany had the largest online client base, accounting for 51 per cent of online investors in Europe in 2000. The UK had only 8 per cent of total European online accounts. Among some 240 members of APCIMS offering stockbroking services, only around 35 offer online trading services to investors.24 UK brokers have focused their efforts on cost cutting to attract online investors rather than enhancing their services.

United States

The US has the world’s most developed online market (although the proportion of online trading in South Korea may be higher on a relative basis). Its securities market has the longest history of online trading, going back to the mid-1980s when electronic order placing was enabled by direct dial-up access to the broker-dealers’ in-house computer networks. In 1995, the first web-based system was introduced by broker-dealers for client order submission. Buttressed by the booming development of the Internet, online brokerage has experienced burgeoning growth since then. Many discount brokers, which offer order execution services only at low handling fees, rushed into the online brokerage industry. Traditional full-service brokers (which offer a wide range of financial services to investors) were subsequently pressured to introduce online trading services in order to compete.

As of December 2000, there were 19.3 million online investor accounts making 894,700 online equity trades per day25. According to the US Securities and Exchange Commission (SEC), there were over 200 online brokers in the US in early 2001, out of approximately 7,900 registered broker-dealer firms. According to the latest survey, 22 per cent of retail investors have used the Internet to make investment trades, including stocks, bonds, mutual funds or other investments.26

There are no specific regulations in the US applying to online trading. However, due to the special business practices of online trading, the SEC has provided non-binding guidance to online brokers to help them to comply with the rules and regulations on securities trading, especially in the areas of information disclosure, business conduct, network security and brokers’ internal controls.

Online trading service has become a means of competition, for both discount brokers and traditional full-service brokers. US online brokers continuously introduce new and advanced online trading services. These services include professional advice, one-stop financial services, and tailored and personalised services.

23

Source: “Europe’s online brokerage industry 2001", JP Morgan. 24

This is based on the member list posted on the APCIMS website. Also it should be noted that some of the members do not offer execution-only trade service which means online trading service will not even be considered by them.

25

Source: JP Morgan Securities. 26

Figure

Table 1. Attributes of online trading and related market characteristics in Hong Kong and selected overseas markets
Table 1. Attributes of online trading and related market characteristics in Hong Kong and selected overseas markets (Con’t)

References

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