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Japan's Online Stock Trading Becomes Gold Rush

It has been said that in a gold rush, fortunes are made not by the miners, but by those who sell them tools and supplies.

With this in mind, firms who anticipate that the combination of the Internet and discounted fees will create an online trading gold rush among Japanese investors are themselves rushing to offer Internet-based brokerage services.

Full deregulation of brokerage commission rates is set to take effect in Japan on October 1.

Lured by a largely untapped market of potential investors reachable for a relatively small initial investment and at low operating costs, Japan's established securities houses as well as a host of aggressive start-ups -- foreign and domestic, financial and non-financial -- are scrambling to stake their claim in the Internet trading industry.

A recent Nihon Keizai newspaper survey of 114 Japanese brokerages and related firms found that 20 plan to offer online trading services while 33 others are considering taking such a step.

These would join the 31 that already have Internet trading sites, and a growing field of cross-border joint ventures.

The latest to join Japan's online brokerage scramble is leading French financial services group Paribas, which reportedly will form an online brokerage this month with three as-yet-unnamed Japanese financial firms.

This online brokerage, which will be a unit of Paribas' Cortal subsidiary, Europe's largest online trader, will by early next year offer Japanese-language trading services for companies listed on 10 Asian, European, and North American exchanges.

As an official in Paribas' Japanese branch put it, since the firm's online brokerage business "will be fully established in Europe by the end of this year, it's now time to enter the world's other big markets: Japan and the United States."

Paribas is only the latest in a string of recently announced Internet trading joint ventures.

March saw the formation of DLJdirect SFG Securities, a joint venture of US-based DIJdirect Inc., several Sumitomo Group companies, and others, followed in April by the establishment of Monex, a joint venture between Sony Corp. and a Goldman Sachs & Co. adviser.

In June, US-based Charles Schwab Corp. said it will set up a Japanese online brokerage with Tokio Marine & Fire Insurance Co. and other Japanese financial institutions.

And three online trading ventures were announced in July: Internet Trading Securities, a join venture between Fujitsu Ltd. and Nikko Securities Co.; Japan Online Securities, a joint venture of Itochu Corp., Dai-Ichi Kangyo Bank and others; and Wit Capital Japan, a 60:30:10 venture between US-based Wit Capital Corp., Mitsubishi, and Trans Cosmos.

Announced last year, but not yet online, is E*Trade Japan, a joint venture of Softbank Corp. and US-based E*Trade Group.

In the face of increasingly intense competition, some online brokerages intend to institute masssive online trading discounts after the October 1 fee deregulation in an effort to capturemarket share.

The biggest announced discounts have been by DLJdirect SFG Securities, which has said it will slash its commissions by up to 97 percent, charging just 1, 900 yen (US$16.40) on market orders and 2,500 yen (US$21.55) on limit orders of up to 10 million yen (US$86,200).

The current regulated commission on such transactions is 82,500 yen (US$711).

Online broker Matsui Securities has announced fees cuts of up to 74 percent, while Internet Trading Securities has said it will reduce fees by more than 50%.

Japan's big securities firms will not attempt to match such fee reductions. Nomura Securities, for example, has said it will cut its online trading commissions by an average just 20 percent, seeking instead to attract customers by offering better investment advice and up-to-the-minute stock information.

Indeed, some analysts see such information services as key to inducing Japanese investors to try online trading, since the vast majority have typically relied on advice from their brokers and other financial advisers rather than taking personal responsibility for investment decisions and risks.

Although the Japanese online trading market is expected to grow rapidly from October, there is no agreement on the actual number of active online traders in Japan today. While one estimate puts the figure at about 80,000, the two largest online brokerages, Daiwa and Matsui, each claim to have over 30,000 active online accounts.

Whatever the number, Takuo Tsurushima, deputy president of the Tokyo Stock Exchange, noted in a recent press interview that "with the rapid spread of trading via the Internet, people who haven't invested in stocks before are getting into the market."

Most projections see the number of online traders rising to at least 1.2 million within four to five years.

While this is less than 5 percent of Japan's estimated 28.3 million individual investors, Nikko Securities president Masashi Kaneko predicts that online traders will be active and "could account for 10 to 20 percent of Japan's total securities transactions" within that same time frame.