Analysis of the E-brokerage Industry

Analysis of the E- securities planetary house devoted industryexecutive SummaryThe fiscal securities firm firm house house house house patience has belowgone dramatic changes worldwide in the last decade, receiv fitted to the rise of the profit. E- securities firm firm brought huge prospect to the industry as it introduces enormous amount of online slynessrs but at the same m posted serious threat as it coarse up the commercialize to impudently competitors. In this thesis, we investigate past and current ch exclusively(a)enges the brokerage firm firm house industry face. From our literature review, we canvas the fix of online occupation to the brokerage industry and the online traders, and proposed solutions pin exciteed to the positions we arrange. We studied the take exception the brokerage industry faced from the perspectives of strategy, merchandiseing and technology and carried show up strategic analysis utilise take to be chain and put inwork o f quintuplet forces by Michael E. Porter. A small scale survey was conducted to collect local people attitude towards online/mobile affair and we used the data calm to justify the friendship we found during our literature review. Finally, we proposed a basket of suggestions for the brokerage industry in various aspects including product enhancement, guest education, partnership, divergentiation, guest breakdown and genuinely much. An in-depth interview with a local broker firm was organized to nurse our suggestions, their feedback be positive.IntroductionThe tough challenge among e-brokerage industry is still spill on and in fact, it is getting even much than furious. The situation was much rigorous during bearish commercialize after the burst of IT foams, SAR outbreak and the late financial tsunami. The strategy the brokerage firms drawed to handle the challenges they faced arrange who ordain survive the competition and stay in the securities industry. L osers will in short be squeezed out of the grocery store. This is especially true for small to median size local brokerage firms who atomic number 18 straight off facing brand- saucy competitors ilk direct banks and everyplacesea online trade supplier equal E-Trade. Confronted with ricking competition, old-guard brokers be being forced to re organize and re- counselling their market spinings. Various strategies were adopted, round brokerage firms seek to primary(prenominal)tain their lead in mensurate-added operate through a focus on k at presentlight-emitting diodege/advise more than than financial supplying and investment advice rather than transactions -processing trades. Other firms attempted to comprehend how to cover online(a) emoluments without alienating their brokers, to asperse shift conflict.The purpose of this phrase is to analysis the current e-brokerage practices and device vernalborn- do assistance directions and enhancement to chop-c hop products to development competence of our local brokerage industry. We will prime(prenominal) take the evolution of security transaction in Hong Kong and typical of different types of brokerage firms and customers. From our literature review, we found that online handicraft exerted great impact on twain brokerage industry and online traders. For brokerage firms, they faced vigorous competition callable to new competitors, reduced customer devotion and market fragmentation overdue to low entry barrier. While illusion of know directge and control, wish of ad hominem advice and overwhelmed by breeding were the hurdle online traders faced. We use up presented the strategic challenge faced by the brokerage industry and analysis their strategy using prize chain and framework of five forces algorithm. We ache devised a basket of suggestions and discussed with a brokerage firm the feasibility to comprehend our research.Financial Broker Industry In Hong KongEvolution of security avocation in Hong KongThe ultimate tendency of a well-functioning nisus market is to bring together all doable buyers and conducters, so that the market cost reflects the combined preferences of all participants. The history of securities occupation in Hong Kong can be traced back to 1866. The present Sock metamorphose of Hong Kong (HKEx) was established as a result of the unification of four telephone exchanges during the spacious market crucify in 1986, while the first stock exchange began its carrying into action in 1891.Exchange System ArchitectureComputerized trading administration was first introduced on 2 April 1986 and in 1993 the exchange launched the Automatic allege Matching and Execution System (AMS), which was replaced by the third generation ashes (AMS/3) in October 2000. AMS/3 is the core system used to serve securities trading which has significant enhancements in cen sentenceral market functions, propagate connectivity and system force as compared with AMS/2. AMS/3 supports multiple trading facilities for market access. most of the participants actual their own Broker Supplied System (BSS) which interfacing with AMS/3 via the Open Gateway (OG) ease for greater control to the front-end solutions alternatively of the Multi-workstation System (MWS) by HKEx. The open connectivity of OG has contact possible the elephantine-scale automation of Participants operations, enabling Participants to offer new investor portions and experience efficiency gains. In 2002, a new generation of the system, CCASS/3, was launched for clarification and settlement. MDS (Market Data Feed System) is the key system used for speech of securities price data to about 60 local and international reading vendors. HKATS (Hong Kong Futures automated Trading System) is the electronic order matching system operated for the derivatives market.Advancement in information technology, especially the profit, is revolutionizing conventional commerce. Obviously the securities industry, and in particular the on-line brokerage, is at the forefront of this revolution. Here in Hong Kong, retail online trading as a proportion of total retail investor trading continued to grow in 2008/09, reaching 43 per cent from 39 per cent in 2007/08. Its contribution to total market turnover was 10 per cent, up from 7 per cent in 2007/08. For stock options, retail online trading contributed 23 per cent of total retail investor trading (up significantly from 15 per cent in 2007/08) and 2 per cent of product turnover (1 per cent in 2007/08). For differentwise derivatives, retail online trading contributed 49 per cent of total retail investor trading and 18 per cent of total product turnover (up from 44 per cent and 15 per cent respectively in 2007/08).Types of Brokerage FirmThe basic function of a brokerage firm is to bleed buy and sell orders for clients. Traditionally these firms see offered the investigation of the quality and the possibilit ies of investing in a variety of investment products. It is still accustomed for brokerage firms to offer information about possible investments free of confide. This activity of bringing free of accusation stock investment announces is one of the main tools that are utilized by brokerage houses to compete against a nonher(prenominal) firms. To investors, it continues to be an outstanding service. However, with the bloom of talk technology, especially the profits, more and more investors rated that investment reports as less important service. Instead, those investors preferred other types of serve that charged less instruction and service fee, by forfeiting those investment reports. In order to capture this vast different clientele, the brokerage industry segmented itself. After the restrictions in commissions were eliminated, several brokerages began to open up their doors as send away brokerage firms. At that quantify, brokerage firms were categorise into two types f ull service brokers and discount brokers. Full service brokerage firms continued to offer informative stock reports and a level of service much higher than other brokerage houses. They looked for purchasing and selling opportunities for clients and whirl more customer and portfolio advisory service than was ready(prenominal) from discount brokers. snub brokerage houses, on the other hand, entirely dedicated themselves to execute orders for clients with minimum services. These differences in services and philosophies led to great differences in commission be. It was bare that these differences were an important factor in the return of an investment.Type of customers in brokerage industryIn Hong Kong customers of brokerage firm can be split up into three typical categoriesl Prestige Group These are customers with large amount of capital put in to the brokerage firm for investment. They have granted total authority to the brokerage firm to execute trading decision on behalf of them. Although they are minority in terms of the customer flooring of brokerage firm, they contribute a great portion of gross to the brokerage firm.l Middle Group Customer of this assort commonly trade through account instrument of the brokerage firm. They utilities financial information, report and analyzing tools set upd by the brokerage firm to buzz off trading decision. Account agent will besides actively contact these customers whenever they see an investment fortune fit for them.l Basic Group Customer well-nighly uses service of brokerage firm to maintain account balance and execute trading order on the own. Although multiple channels are supplied to them, they just aboutly adopt on-line trading as their first choice of trading media.Although the first two groups of customers contribute quite a large portion of the tax income of brokerage firm, we will concentrate our research on the third group for two reasons. First, on that point is a clear trend that this grou p of customer is increasing in a fast pace. Second, by investing and up(a) the on-line system, the other group will also be profited. literary works ReviewOnline-BrokerageSimply put, On-line brokerage can be be as selling of securities which encompasses equity like stocks and warrants and derivatives like bonds, mutual money etc, on the Internet. Although conventional banks and brokers also provided online trading after year 2000, new entrants like direct banks and new brokers offered a genuine e-commerce business model. show banks are internet-only banks or virtual banks. These banks were designed without a traditional banking stem with physical branches. This cost-saving wages enabled umpteen of them to offer savings accounts with higher interest group rates, loans with lower interest rates and minimal management fee and commissions than most traditional banks. More and more customer joined in as online trade and a peak was hit on year 2000. At the same time, new competi tors like traditional brokers and virtual banks joined in proactively by acquiring existing brokerage firm or using their own business model. At that time, then customer base and intimacy of the traditional institutions was still advantages for online trading enhancement.The strategy online brokers adopted was customers segmentation and place their offer to the most preferred customer group, the active private investors, which allowed them to fleetly catch up the market. Compared with banks, absence of physical branches so low command processing overhead time costs gave these internet brokers an advantageous in cost structure. They competed with each other rigorously to achieve the biggest market share in the shortest time frame to reach the break even point. The strategy to conquer and develop committal of new customers was invested massively in marketing. They also adopted a cut-throat commission rate to attract private privates who were more sensitive to this cost of inve stment. The impersonate of banks and traditional brokers in the brokerage business was reconditely undermined by the gouge caused by these new entrants.Bloom of on-line tradingFor the first time ever, investors could, from the comfort of their own homes, accessed a wealth of financial information including pause news developments and market data on the same terms as market professionals did. In addition, on-line brokerage provided investors with tools to analyze this information, such as research reports, calculators, and portfolio analyzers. Finally, on-line brokerage enables investors to act quickly on this information. The scientific and regulatory barriers that gave traditional brokerage and securities companies edges were rapidly becoming extinct. First, new provider quickly gained access to the market by leveraged on the use of Internet technology. Without expensive branch networks and labor-intensive advisory services, new competitor like direct banks and new online brok erage firms were able to process retail clients orders in relatively low cost. Second, the bull markets in year 2000 attracted large minute of new online customers. For example, lot of local residents became online investors and started to hold security when ghost and immense scale IPO activity were taking place during 2006. These new customers welcomed the new internet investment style that encompassed vast amount of free of charge real time information, enhanced market transparency, convenience and low commission. together with the rising share prices in bull market atmosphere, these new customer, in particular, heavy traders quickly got accustomed to doing online trade.The Internet also made other comparisons easier. For example, it increased price competition for products for which price comparison was previously more exhausting. New information applications enabled investors to compare the quality of trade execution provided by different brokerages and thus extend the trad ing costs that investors consider beyond commissions.Companies scrambled to create viable strategies that balance more preliminaryities. Typical considerations includeShould they defend their existing customer base or enter into new customer segments?Grow their existing business or expand into new products?Acquire, partner or go alone?Basically, companies were competing not only to offer different and purify products and services, but to design robust, lucrative business models that took advantage of emerging forms of electronic commerce. Electronic commerce the facilitation of exchange of value over computer networks fundamentally changed the brokerage business in part by increasing the velocity of financial services 1. Impact of on-line brokerageHurdle on brokerage firmRigorous competitionWith the travel Internet technology, investors had became less reliant on stockbrokers for trade execution or obtaining research information as such services were readily available on the Internet. In addition, the Internet was a convenient and efficient channel for doing stock trade transactions and for providing information support to investors. Indeed, the trend of self-investing led to the proliferation of Internet brokerages around 2000, offering trading services on the Internet at very low commission rates compared to using traditional brokerages.Reduced customer loyaltyLower transaction costs online led many investors to e-brokerages and away from traditional brokers to place their trades Another concern was that since investors sense that they can distinguish surrounded by the good and bad advice that they find on the Internet, they therefore were not be willing to continue to soften a financial planner solely for their expert opinion. This was in part due to the information illusion discussed in next section illusion of knowledge and control, where investors feel that since they have access to so much information that they had no need to pay for such serv ice and can do it get out on their own.Reduced customer-broker cohesivenessBefore on-line trading is prevalent, a single stock trade typically involves multiple telephone conversations between a customer and a broker. The broker may take the opportunity to reinforce the personal relationship with the customer by discussing pros and cons of the trade or offer tailor-made investment package. On the contrary, on-line traders are more on their own. Together with the convenience to switch broker, the loyalty of the customer to the brokerage firm is largely let oned. Although transactions are the bread and butter of brokerage companies, brokerage firms were also strived to developing client relationships in order to provide total solution to their customers. The income by providing strategic planning, advisory services, financial advices, perimeter loan and other client services are also rattling to brokerage companies..Market fragmentationMarket fragmentation occurs when too many co mpetitive suppliers enter an active or new market. It happened starting from 1998 and peaked around 2001, when online trading started to take off and attracted many different competitors. They all aimed attract on-line investors and to achieve the largest possible market shares by all means, for example, by giving them some extra bonuses. However, the choppy downturn of the market quickly glum a lot of these new investors to passive customers, if not entirely retired, due to lack of knowledge and experience. This phenomenon was even more clear after market started to plunge beginning at 2001.As a matter of fact, it is too risky for e-brokers to over-rely on commission as the main source of revenue. After all, the demand for brokerage services highly depends on investment atmosphere of stock market. The number of on-line executed orders during bullish and bearish market varies significantly. These large variation experts high risk for those who base their income on commission. In order to safeguard possession of active traders during both(prenominal) bullish and bearish market, it is very important to educate them and foster a correct investment culture.Lower entry barrierThe Internet changed how information is delivered to investors and the ways in which investors can act on that information. On-line brokerage provide a effective and convenient access media between customers and the brokerage firm, the unit cost of operations is much reduced. It had lowered both the doctor and marginal costs of producing financial services, thus enabling newer, smaller companies to challenge established providers of these services. On-line brokerage firms, such as E*Trade, are among the most vivid and successful financial service firms to provide on-line financial advice, research tools, and financial information that emerged in the last decade. These e-commerce firms transform the way traditional services were delivered and offered a vast assortment of new services.Hurdl e on customerInvestors in general and on-line investors in particular now make decisions in a very different environment than investors in the past. They have access to far more data. They much act without personal intermediaries. They can conduct extensive searches and comparisons on a wide variety of criteria. Although the quantity they can produce may be large, it is the quality that matter. As a consequence, they trade more actively, more speculatively but less profitably than before. On-line trader stress heavy on commission and management cost when choosing broker firm to use. However, there are other unobservable costs that are unaware by them information-processing costs, information illusion, illusion of control, frequent trading behavior, and the lack of personal advice.Information-processing costsInformation-processing costs are the costs that online investors sustain before they real make a transaction and it is defined by the time and energy that the investor expands assay to reach an investment decision. Because of the huge volume of information found on the Internet that it can take investors a lot of extra time to find, sort, and analyze all of the relevant information. This in turn can out-weigh the benefits of online trading for some investors because they might not be able to afford the opportunity. In fact, the overwhelmingly huge amount of information available on the Internet scales many investors away, let alone their validity or intentional hoax. misrepresentation of knowledgeThe proposition that more information leads to better decision-making is intuitively appealing. and the truth of the proposition depends on the relevance of the information to the decision and on how well-equipped the decision maker is to use the information .The vast amount of on-line investment data available will enable investors to confirm their prior beliefs and may lead them to become overconfident in their ability to alternative stocks and other securi ties. Faster feedback may focus investors attention on young performance. Psychology shows that when people who initially disagree on a upshot are given arguments on all side of the issue, they become pull ahead polarized in their beliefs. They are move by the arguments with which they already agree and they discount opposing views. Not only are people more impressed by arguments they favor, but they actively seek out confirming evidence. For this reason, investors are more likely to visit chatrooms or forum of like-minded investors. If controversies ensue, they are likely to be convinced by those with whom they already agree. Investors who believe that additive information makes them better investors are unlikely to seek out or attend to evidence that indicates otherwise. Thus, on-line investors are likely to become overconfident. They may believe that they have more ability to perform tasks such as stock-picking than they actually do. In theoretical models, overconfident se veral(prenominal) investors trade more actively and more speculatively than they otherwise would, hold under modify portfolios, have lower expected utilities, and contribute to increased market volatility. In an empirical study of investors at a large discount brokerage who switched from phone-based to personal computer-based trading by Barber and Odean, they find that after going on-line, investors tend to trade both more actively and more speculatively. put-on of controlThis illusion results when investors think that because they have access to so much information via the Internet that they have an advantage over the entire market and this can lead them to make bad investment decisions. These investors then have an exaggerated sense of control over the outcomes of their investments. Frequent trading is some other cost associated with online investing. Low transaction costs can encourage frequent trading and day-trade strategy according to Konana, Menon and Balasubramanian. As an example, in Singapore, 71.1 per cent of online investors say that they trade more frequently than they did prior to online trading (Teo, Tan, Peck, 2004). Researches show that most of the on-line traders adopt short term trading strategy a risky strategy rather than the believed buy and hold strategy. The Internet also seems likely to change what information investors focus on, because it reduces the cost of some kinds of information more than others. For instance, the Internet especially facilitates comparisons of real time data, and thus has changed investors focus by emphasizing the importance of speed and immediacy. While the serious individual investor of a decade ago may have checked stock positions once a day in the morning paper, casual investors now may check theirs several times an hour. Many more investors pay attention to short term-even intraday- return trends than ever before. Worse still, many firms boost their ability to deliver real time data or to execute invest ors orders rapidly, making the situation even worse.Lack of personal adviceThe downside of investing online is the lack of personal advice from those in the financial field (Vakil Lu, 2005). According to Phelan (2001), the Web will never be able to substitute for the judgment and expertise of financial planners, nor will it be able to protect investors from all of the scams that are long on the Internet. In reality, the news and new information people found on the internet might not be as new as they think. Moreover, many online traders only focus on the here and now and do not look at the whole picture or at the future as financial advisors are trained to do, thus jeopardizing their investment.ChallengeOur research examines the pressures for change over the past decade that was overcoming the inertia in the brokerage industry. We viewed the challenge from the perspectives of traditional brokerage firm and electronic brokerage firm.Traditional brokerage firmTo provide online trad ing, traditional brokerage firms were forced to decide on which of the two come upes to go, either establishes new secondary with a new brand name or provide under its own name. For the first case, brokerage firm suffer from overlapped company structure and considerable marketing expenditure to build the new name, which prolonged the stop consonant to reach break even point. The later case, though easier to setup, brokerage firm is putting their reputation at stake when the service do not meet customers expectation.The strategy adopted was to have differentiated brands serve the younger, more tech-savvy investors that gravitated to on-line trading without nibbling full-commission business. With the advent of the World Wide Web, discount brokerage firms face a comparable disintermediation dilemma. Commissions were suddenly under pressure, customers wanted to trade directly, and competition is coming from non-traditional sources like direct banks. To address the competitive threat, some entrenched firms adopted the supermarket approach by providing other supplementary services like providing financial information and news. However, such approach was in fact a typical re-intermediation highroad that directly competed with full service brokerage firm which offered a wider portfolio of products and services. Nevertheless, creating a financial services supermarket was a mislead strategic choice for three reasons First, many successful 1990s businesses have rediscovered the virtues of adhering to their core competencies and the power of strategic outsourcing in order to gain agility. Most of the conglomerates which attempted to enter the financial services arena learned the tight way that adding unfamiliar lines of business can dilute their ability to compete, weaken shareholder and customer loyalty and multiply management complexity. The reason for trial was economic. Risk and cost sharing in the production or delivery process can enable better time to marke t and make providing a product/service bundle more efficient than consolidation everything in-house. Second, offering additional products to an existing customer base does not thwart customers from leaving. Also, the decision to add new products to an existing portfolio is complicated by an equivocal environment such as the Internet. In an uncertain techno-marketplace, a firm is often making an informed guess about what it thinks is best for a customer without fully knowing what that customers preferences and goals are. Third, technology-enabled firms like ETrade were taking the re- intermediation path in a new way by providing customers with interactive and personalise services at little or no cost. This branding and trust-building approach enables the service providers to learn directly and accurately from each customer whats actually important to him or her. Armed with this intimate customer knowledge, these companies are better positioned to build loyalty and increase profit s for the long term. Clearly, re-intermediation was a difficult strategy as sustainable competitive advantage was becoming rare in the on-line environment. High performers today look for a series of short-term advantages over a long period of time instead of attempting to plot a far-sighted course in an environment with too many unpredictable variables. Innovative Internet-based intermediaries were the real threat to the entrenched musicians. These firms were adopting dramatically more effective means of forging interactive relationships with customers added value, which was essentially the incremental benefit that the new in the middle firm brings to the customer. They were looking to exploit synergism across different product lines. They innovated more frequently and organized to claim opportunities much faster than their competitors. The reason was concentrated focus on traditional sources of competitive advantage such as cost, technology, and differentiation was inadequat e because competitors were quick to replicate advantages. They seek to identify and rapidly responded to subtle changes to the finest ingredient the individual customer. To sustain competitive advantage, it was important to embrace business practices that encourage deep customer insight and thinking about how to materially improved the customers value proposition.Electronic brokerage firmOnline brokers rushed to pour money to increase their capacity to absorb the fast growing demand during dot.com boom in 2000. The only way considered effective to increase market share at that time was advantageous offers and promotions, combined with enormous marketing expenses exposing them to a very high costs. The development of the online brokerage market was highly dominated by such marketing approach. Absence of physical branches and thus reduced operation cost entitle internet brokers the advantageous cost structure. Instead, they allocated this saving and invested on massive marketing campa ign in order to achieve the biggest market share as soon as possible. By attracting and developing the loyalty of new customers, these brokerage firms were expecting soon to reach the break-even point.The bull market during the dot.com boom had dusted the eye of these online brokers. They failed to anticipated adverse situation when significant downturn in capital investments occurred and stroke their over investment. The stock markets had proved its volatility in a year time, when the dot.com boom burst in 2001. The serious lapse caused by global slump of economy and the later SAR outbreak during 2003 had made the situation even steeper for the industry. The depression lasted for a couple of years before reaching a rising track started on 2007. rootage market transaction was drastically dropped from hundreds of billion down to tens of billions and last for years. Investors were either scared away or suffered from great lost by the sudden market plunge and prolonged recession. Th e once admirable capacity had turned into the biggest burden for brokerage firm. Naturally, all of them suffered from great investment lost, if not bankrupted altogether. solely the internet brokerage firms had paid a huge price for this dearly-won experience. The lesson they learnt made them re-evaluated the challenges ahead and the goals to attain. They have learnt that low commission rates or excessive marketing expenses would not give them competitive advantages and made the break-even point harder to reach. Instead, they had to revise the services they offered and discover alternative source of revenue. Suffered from the great impact of market volatility, they were looking for a flexible enough business models that is able to cope with the huge capacity demand during a bull market while enable them to safely transit bearish market. We can associate the challenges facing online brokerage firms into three categories strategy, marketing and technology.Strategic challengeThe char acteristic of online brokerage had fundamentally changed the brokerage industry. New competitors like insurance companies, banks and financial portal had entered the arena. With the competitive advantage in possessing technology, a large customer bases and knowledge of their customers, they posted great threat to traditional brokerage player who want to participant in online brokerage. The large customer bases not only significantly reduced marketing cost but also helped to minimize development and operation cost due to economy of scale. Coupled with the open standard characteristics, traditional brokerage players had an up hill battle to fight.The value chain of the brokerage was invaded by these new competitors, forcing traditional p