After three years of incubation and an estimated NIS 20 million investment, E*Trade Israel, controlled by Kardan Technologies (51%) is today launching an e-commerce venture offering trading services for Wall Street-listed securities. It must be said that the launching is not taking place at the ideal time, in view of the reduced trading in Nasdaq securities.
Perhaps that is what made E*Trade Asia-Pacific operations general manager Paul Menzies ask us, only partly in jest, if we thought E*Trade is “crazy”, to use his term. It is easy to understand Menzies, since E*Trade has invested quite a lot in the venture (“We invested a lot – several million.”).
E*Trade Israel was founded in 1998 by Baruch Halpert, Zvi Rabin, and Israel Halpert. The company operates under a license granted by the E*Trade Group worldwide brokerage, which holds a 20% stake in E*Trade Israel. Investment bank Jerusalem Global is another investor. E*Trade Israel has cooperation agreements with Bank Leumi and the Central Securities Company. Anyone wishing to trade through E*Trade Israel’s site must open a bank account with Central Securities.
E*Trade US, the world’s second largest online brokerage, one month ago reported it had broken even from an operational standpoint in the first quarter of 2001, while its sales declined 21%. The results matched the analysts’ expectations. The company posted a $870,000 quarterly profit, compared with a $670,000 loss in the corresponding quarter last year. While the Nasdaq’s trade volume dropped, E*Trade US’s daily average number of transactions fell to 136,000 in the first quarter, compared with 232,000 in the corresponding quarter of 2000. The company’s revenue dropped from $417 million to $330 million.
”It cannot be doubted that we were the pioneers in electronic brokering and trading, “Menzies says.
”Globes”: You’ve invested a lot of money, but the market for shares has weakened.
Menzies: ”The brutality of US stock exchanges shook the day traders. Our activity fell from 300,000 transactions per day last year to 130,000-150,000 now, which definitely affected our revenue. Fortunately, however, we were able to adjust in time and enter other fields, particularly e-banking.”
”Two years ago, we acquired TeleBank, and we now provide e-banking services. While online trading and brokerage services were by far the most significant component of our revenue until 15 months ago, revenue is now divided equally between brokerage and banking services, with a slight advantage in favor of banking.”
So the e-commerce party is over?
”No, of course not. The product basket, however, has to be expanded. We moved laterally and plan to offer comprehensive online financial services. We began with trade, added banking, and our goal is to go on to sell insurance, mortgages, loans, and tax consultant services.”
Will we see services like these in E*Trade Israel also?
”For now, we’re developing the new services in the US. We will bring them to Israel only later, if at all.”
E*Trade Israel general manager Arnon Zehavi currently exudes optimism about operations in Israel: “E*Trade International is deployed in 12 countries, with 3.7 million accounts, customer assets worth $48 billion, 136,000 transactions per day, and huge investments in technology, security, and marketing. The world is E*Trade’s oyster. We lead the world in financial services for the independent investor. We put the investor in charge by creating a platform for real-time trading on all of the world’s leading stock exchanges.”
”Why wait on the line? Why wait more than a few seconds to make a transaction? Why pay more? We offer speed, reduced commissions, online credit, and unlimited trade.”
Indeed, Zehavi is right, but E*Trade Israel is not the first in the field. The online brokerage in Israel today includes systems for trading on the Tel Aviv Stock Exchange and for trading on overseas stock exchanges, especially New York, of course. In general, there are two kinds of systems in Israel. The first is an introductory system, in which the marketing infrastructure is in Israel. The Israeli customer opens an overseas account and receives the same tools as a US investor. The other kind is an integrative system like that of E*Trade Israel, in which an account is opened in Israel, and the local broker opens an account with the foreign broker, through which he manages his customers’ trades.
A number of e-trade systems currently exist in Israel, including Ilanot Batucha’s Smart Trade, Salomon Capital Market’s system, and Investec’s system. Actually, every large bank has one. Only a few weeks ago, the First International Bank launched a system designed for trading through ECN, which does not have to be routed through a broker on the floor. Some regard this system as superior to those of E*Trade and Charles Schwab. Zvi Rabin says, “Our system is better than ECN. We get better stock quotations and we trade directly with the floor, not through ECN, which is an external marketplace.”
The recent closing of Insider, a joint venture of investment house Nessuah Zannex, Internet Gold, TrendLine, and US company AB Watley, provides evidence of the dire straits this new industry has entered. Other ventures have also not been successful.
One advantage of e-trading through a foreign broker for the Israeli investor is the avoidance of taxation. As of now, Israeli investors opening accounts with e-brokers like E*Trade International, Charles Schwab, and so forth can trade shares at will, without the income tax authorities having any real idea what is happening or who is trading with whom. A US e-broker like Charles Schwab does not have to report to Israel’s Income Tax Commission.
E*Trade Israel obviously does not share this advantage. “Since the account is managed by Central Securities,” Zehavi says, “reporting and normal collection take place. It’s the same as if the customer made his securities transactions with his Central Securities account. In this respect, E*Trade is transparent.”
E*Trade Israel is linked with Central Securities because it is jointly owned by Kardan and Central Securities. Ostensibly, a problem could arise, since customers are not eager to transfer their bank accounts to a brokerage like Central Securities. Zehavi: “We’re not aware of any problem. If the customer lives in Kiryat Shemona, we’ll send him a messenger with forms to sign. In any case, I hope we’ll come to an agreement with other banks and begin cooperating with them.”
Who really needs E*Trade Israel, if you can trade through E*Trade US?
”Our survey shows Israeli investors prefer a Hebrew-language site. Our site is convenient and user-friendly, full of explanations for each field. Furthermore, Israelis don’t like spending money abroad; they like keeping their money close to home. Concerning the comparison with other sites, our commissions are lower and we aspire to be the leaders.”
Perhaps Zehavi is right, but the desire to attract attention through lower commissions is liable to leave E*Trade Israel on the fence in the battle for customer accounts when the large banks come up with their own systems and lower their commissions. The market in Israel is fairly limited. Even Rabin admits, “Israel does not have room for too many online brokers.”
Published by Israel's Business Arena on May 9, 2001