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Russia's Internet Penetration Rate Expected to Boost Stock-trading Sector

The growth of Russia's Internet penetration rate could give a boost to the fledgling Web-based stock-trading sector, according to several industry officials. But insiders say it will be a long time before the Internet can attract much of the $40 billion to $50 billion of hidden individual savings in the country.

Currently, Moscow Stock Exchange's (MSE) Internet-based operations account for 5 percent (or $300,000 a day) of all transactions in terms of turnover, an MSE representative said. Some 39 percent (up to $77 million a day) of turnover from the stocks section of the Moscow Interbank Currency Exchange (MICEX) is through the Internet, officials said, and MICEX works with 120 Internet brokers.

One of the major psychological roadblocks to increased equity trading, experts say, is the memory of the August 1998 financial crisis, which cost billions of dollars in savings and investments and just about destroyed any confidence individuals might have in financial markets.

But some Internet brokers are nevertheless preparing for the arrival of individual investors hoping to establish a presence in the fledgling sector. New technologies now allow for reduced commissions, a move essential for individual investors who will be playing with small sums. The Internet systems will also give them the possibility of managing their accounts online, monitoring trends and using adopted analytical programs, experts say.

Igor Moryakov, executive vice president of Troika-Dialog who is coordinating the company's e-troika Internet trading system, which is set for launch in the next few weeks said it requires at least $5,000-$10,000 to play on spec if expecting profits. Because e-troika is targeting individuals, it does not collect monthly fees and does not set a minimum requirement on a client's account. Clients pay a certain percentage generally about 0.25 percent of their monthly turnover in broker fees.

If a company does not want to work with smaller individual customers, who are usually less profitable than larger clients, it usually demands a minimum sum in the account and sets a monthly fee, which can be too costly for individuals.

Anton Karlov, head of equity sales at Metropol Investment Corp., said his company works with clients, both private and corporate, if their portfolio is worth at least $10,000. "We are now trying to reduce our costs to be able to attract clients with smaller sums as well." He said that Metropol had been targeting mainly corporate clients, but the minimum requirement was reduced from $50,000 a few months ago.

Another important factor for clients is the possibility of margin buying, either with money or securities, and the cost of such operations. Troika's system does not offer any. With other brokers, terms and costs vary depending on the volume, period and the type of investment vehicle, such as put and call options, and futures.

Karlov said different types of investors need different services. "If the client wants to play on spec," he said, "he will first look at the commission rate and find out about the possibilities for margin buying. For a long-term investor, analytical support and competent management are more essential."

Analysts say that 80 percent of individual speculators on the market lose their money during the first two to three months. But that, they say, isn't the main reason holding off other investors from joining the trading world. Technical and legislative problems hampering Internet trading in Russia also prevent them from joining the fray.

Analysts and insiders cited the poor quality of telephone cables, via which most Internet connections are provided, which means calls and transactions can be disrupted at any time. For people playing the markets, that can be a matter of profit or loss.

If the Internet trader's own connection doesn't get cut, action can come to a halt if a broker or the provider experience technical difficulties. That can cut off a transaction or deprive a trader of crucial research or analytical data on a specific equity, also costing big bucks.

Legislative problems come from the fact that there is no definition of Internet trading in any law or regulation, industry insiders complain. No law validates the use of a digital signature, which is the basis of all Internet transactions. Troika-Dialog's Moryakov said amendments to existing regulations of the Federal Committee on Securities must be introduced to allow brokers to produce an electronic version of their reports to clients without printed copy. "Also, the exact procedures of receiving the bid from the client and fixing the time of it must be defined in some regulatory act," he said.

Apart from these problems, brokers and their clients have to deal with information-protection and customer-privacy issues. As for protection against false information and fake press releases and company reports, which are being distributed in the Internet to misinform inexperienced individual investors, the Russian Internet has seen no such attacks yet. Observers say they will come, however, when the number of individual investors increases.

As for now, brokers are not sure it is time to speak of a coming boom. "There is still a low percentage of the population that has access to the Internet, and these are not necessarily the ones with the highest income or savings," Karlov said. Moryakov from Troika said he did not expect a major increase in the number of clients, invested sums and stock turnover in the near term, but he added that Troika nevertheless wants to begin its operations now and get a jump on any competition.

Experts say Internet trading will not replace traditional stock-market institutions. "For many clients, face-to-face communication with their brokers is essential. Usually they do not have access to the whole information and need to talk with their brokers," Karlov said.

"The Internet is simply another media for the brokers and their clients. Its up to the client to decide if he prefers the broker's service through cables and wires. I think, however, that 'live' discussion with clients will remain an important part of a broker's business," Moryakov said.

(Sites featuring online trading include alor.ru, aton-line.ru, bfc.ru, onlinebroker.ru, interspread.ru, lanta.ru, mfc.ru, open.ru and finam.ru.)