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Thursday, Sept. 30, 1999

Cut in broker commissions to bring unheralded competition


Staff writer

With today's deregulation of commission rates for securities transactions, the nation's brokerage industry is facing a new level of competition the likes of which it has never witnessed before.

The deregulation measure, part of Japan's "Big Bang" reforms, will affect transactions less than 50 million yen. Fees for larger transactions were deregulated in April 1998.

The latest step -- with which brokerages hope to spark a stock trading boom -- has triggered a price-cutting frenzy.

The competition is especially stiff in Internet trading, where nonfinancial industries and foreign firms have suddenly appeared. Some firms have gone as far as to slash rates by 90 percent of the previous fixed rate.

But analysts predict that brokerages will inevitably suffer losses in revenues from commissions, although to varying degrees.

"It will be tough for securities companies, although it is certainly good news for investors," said Sadakazu Osaki, head of Nomura Research Institute's capital market research unit.

With deregulation, most conventional brokerages now have two sets of fee scales: one for people who want to consult with salespeople before placing orders, and the other for those who want to trade stocks directly over the Internet. They are able to offer larger discounts for online customers by doing away with the frills, such as face-to-face consultation services.

Small and midsize securities firms have been particularly aggressive in offering discounts in comparison with the three largest securities houses -- Nomura, Daiwa and Nikko -- because they tend to rely heavily on income from commissions and cannot afford to lose customers.

Nomura, Daiwa and Nikko have cut fees for customers who trade large amounts, but have either increased or kept unchanged the fee level for those who make small transactions of up to 1 million yen.

Leading the ongoing price war are specialized online brokers, many of which have only recently announced plans to enter the market.

Such brokers include Monex, set up by Sony Corp. and a former Goldman Sachs partner, and DLJdirect SFB Securities, a joint venture between DLJdirect and firms in the Sumitomo Bank group. U.S. online broker Charles Schwab has also established a venture with Tokyo Marine & Fire Insurance Co, while E*Trade has tied up with Softbank Corp.

Monex, for example, charges only 1,000 yen for transactions of up to 1 million yen, in comparison with the previously fixed rate of 11,500 yen.

With such a sizable gap in prices, conventional securities firms will not be able to prevent new customers -- who have never traded stocks before -- from choosing discount brokers, said Shogo Noguchi, an analyst at Daiwa Institute of Research.

Nomura, the nation's biggest brokerage, says it is fighting back by competing not in price but in its brand value and market research reports.

"What these companies are doing is just reducing the cost of trading itself," said Atsuko Toda, a Nomura spokeswoman. "That's fine for customers who know a lot about stocks, but I don't think many people are at that stage yet."

Price competition in Japan is more fierce than the U.S. experienced with the introduction of deregulatory steps in the 1970s, experts say.

In the U.S., it was not until 1994 -- about 20 years later -- before the first Internet broker appeared, Osaki said.

Full-fledged price competition was set off two years later, in February 1996, when E*Trade cut its minimum commission to $14.95 -- between a third and a quarter of the rate offered by most discount brokers at the time, he said.

"In Japan, although we are at the beginning of the Internet trading age, prices are already at rock bottom," Osaki said. "I think new entrants here are experiencing a harsher start than U.S. startups did."

Noguchi estimated that of the approximately 50 securities firms that have already entered or plan to enter the online trading business in Japan, only five or six will survive as major players in the market.

"I think the transition will take place pretty soon, within the next year to 18 months," Noguchi said.

The key for securities firms to ensure their survival is how much additional value they can offer customers, he said.

"Right now the attention is only on how cheap commissions could become," Noguchi said. "But in the future, brokerages will be urged to provide unique details in their analytical reports and give advice on how to invest assets properly."

For online brokers, their imminent task is to increase personnel at call centers to give users enough technical support, he said, adding that of 30 online brokerages surveyed, 10 replied that they have less than five people operating their call centers.



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