The past year has seen an arms race in the Israeli market, in which the main players are the banks, with secondary roles for Tel Aviv Stock Exchange member brokers and investors from outside the local capital market (E-Trade Israel, for example).
The first to come out with e-trade systems have been the stock exchange member brokers, who are not subject to the Bank of Israel’s strict supervision. Koor Capital Markets, Analyst, and Ilanot Batucha have announced that they will inaugurate such systems in the very near future. Koor Capital Markets plans to compete through reducing commissions on Internet securities transactions, and the other two brokers are offering a wide variety of financial information, meant to attract investors to their sites, and spur them on to stock exchange dealings.
The banks, which, for the time being, are perforce making do with non-Internet online systems (Poalim Golden Band, Mizrahi-Minibank), will presumably press the Bank of Israel in the coming year to let them operate trading systems on the Internet.
The investors: The vast majority of the turnover on Israel’s stock and bond markets is generated by large institutional investors - provident and mutual fund managers, insurance companies, and overseas investors. These are not a relevant target market for the systems we are talking about, as they already enjoy secure, fast computerized systems for conveying instructions online in a non-Internet environment.
If the reality in Israel is that private customers make practically no stock exchange investments and do not open accounts with TASE member brokers, it is doubtful whether a significant number of investors will do so with the transition to the Internet. Israeli trading sites may fuel the share market later on, but they need a significant private investor base.
The state of the market: Average daily turnover in Israel over the past year ranged between NIS 150 million and NIS 250 million. All agree this is a very low volume of activity, reflecting the fact that private investors shun the TASE. Given this marked lack of interest, it is doubtful whether the public will start to send e-mails packed with buy and sell orders to 54 Ahad Ha’am Street.
Problems with continuous trading method: The trading method in Israel makes trading activity via the Internet difficult. With the continuous trading method, every second’s delay in transmitting a buy or sell order may be significance. This mainly applies to the relevant pre-opening stage, for private investors dealing in sums lower than NIS 18,000 per share.
The time that elapses between pressing the Enter button in bank dial-up trading programs and the appearance of the buy or sell order on the TASE screens is generally 2-3 seconds. The bottleneck still afflicting the Internet cannot cope with such data transfer rates.
Commissions: In the US, transaction commissions have fallen by tens of percentage points in the past couple of years, to around $5. Sounds low? This is approximately what an Israeli customer pays on the average transaction of NIS 15,000-20,000. The interesting thing is that already, before the start of competition over commissions on the Internet, large customers in Israel pay laughable commissions. If a local broker’s commission on a million shekel order amounts, at times, to just NIS 750, it’s hard to see how those brokers’ profits will look when they go onto the Internet. The big losers will be the banks, as they currently enjoy commissions of 0.25-0.5%. The undoubted gainer from this competition is the customer.
Information security: This aspect should worry the banks and brokers no less than the investors. One such failure could severely damage a system’s credibility.
From the technological point of view, systems of the E-Trade type have a huge advantage over the local experiments by brokers and some of the banks. This advantage is manifest in advanced technologies for back-office management, voice identification, and so forth.
Conclusion - High tuition fees: To sum up, this competition will cost the banks and, particularly, the brokers, a very high tuition fee, but will serve the interests of the Israeli investor, who will benefit from low commissions, free access to financial information, and the convenience of being able to send instructions even when the bank is shut.
The banks, which already enjoy a very high share of capital market business, will continue to do so in the Internet environment as well. Brand positioning that will demand an investment of millions of shekels, plus the high day to day investment required in technology and trading systems maintenance, will leave most brokers behind.
Published by Israel's Business Arena on January 28, 1999