By Bruce Einhorn These are dark days for companies trying to promote online stock trading in Hong Kong. Some big-name players have scaled back dramatically, while others are getting out of the business for good.
Boom.com, a Hong Kong-based company offering trading in equities, bonds, and other securities in 12 Asian markets, announced major but unspecified layoffs on Jan. 3. In December, Pacific Century CyberWorks and JPMorgan Chase exited the business when they sold their joint venture, 2Cube Securities, to E*Trade for an undisclosed sum. Adding to the gloom, Charles Schwab also announced in December that it is stopping its Hong Kong trading service.
While investors in places like the U.S. and South Korea have embraced online trading, Hong Kongers' interest has been half-hearted at best. Only 10% of all trades are done online in Hong Kong, compared with about 25% in the U.S. "We hear a lot that online trading is over," says John Lord, vice-president of Asia Pacific for E*Trade in Hong Kong. "All you read is: It's the end." Jarrett Lilien, E*Trade's chief brokerage officer and managing director for Asia-Pacific and Latin American, observes: "Here in Hong Kong, people are saying, 'Does this model work?'"
PRICE COMPETITION. But that's only half the story. Behind the scenes, both E*Trade and Boom seem to be betting that they can still develop an online trading model that does indeed work. They're both plotting strategies to get through the tough times in the expectation that as the industry consolidation continues in 2002, survivors will emerge -- among them E*Trade and Boom.
There are reasons to believe that online trading could still take hold in Hong Kong. Many equities strategists expect that the Hang Seng index will rebound in 2002 after suffering one of its worst years ever in 2001. And the local stock exchange is doing its part by finally opening the market to full-fledged price competition. That would be good for online traders.
Right now, the bourse requires that all members charge a commission of at least 0.25% per trade. By putting a floor on commissions, the exchange protects small local players -- at the expense of local consumers, since it's nearly impossible for discount brokerages to thrive in such an environment. But in April, 2002, those mandatory minimums will disappear, giving companies like E*Trade the chance to compete on price for the first time.
REBOUND AHEAD? What's more, these market changes should bring about consolidation, says Lilien. Hong Kong has 500 brokers, of which 100 offer online trading. Lilien expects that total number to shrink quickly once the commission floor is gone. "There's going to be massive consolidation here," he says. "We see ourselves as being a leader in the consolidation."
E*Trade is also looking beyond Hong Kong to focus on the two other parts of Greater China -- Taiwan and the Middle Kingdom itself. "We're talking to a number of parties now," says Lilien, who predicts another Greater China deal for E*Trade sometime in the new year. "It could be soon, or it could be 12 months from now," he adds.
While E*Trade looks to do deals, local rival Boom is looking to retrench. Boom Managing Director Mark B. Duff won't reveal how many employees the privately held company has let go, but says "it's a substantial reduction. It's not 50% -- but close enough." The company has eliminated its marketing department and made cuts in other sections.
NO DISCOUNTS. Duff says he's focused on the future. "We finished a massive development cycle," he says to explain the layoffs. "It's no different than taking the scaffolding off a building when it's finished."
His game plan is to avoid taking on the E*Trades of the world head on. Duff isn't about to start offering steep discounts in commissions once full liberalization arrives. "In Hong Kong, most price-sensitive customers are holding multiple accounts already," he says. "There are only a million potential investors in Hong Kong, maybe only 100,000 to 200,000 of whom are really active. If they have multiple accounts, whichever broker has the cheapest rate that month, they'll use."
Instead of playing the discount game, he's looking for a niche. For Boom, that's regional investing. Rather than focus on one market, he says, Boom offers customers the choice of a dozen Asian markets, as well as the U.S. "Hold steady on the price, and add value. Add markets. Keep adding value, but don't lower the price."
Duff says the financial outlook is good, notwithstanding the layoffs. Investors include Singapore's Oversea-Chinese Banking Corp. and Australia New Zealand Banking Corp., and Duff states flatly that "funding is not an issue," for Boom. If so, then maybe the company will be able to test whether Duff's strategy or E*Trade's works best for Hong Kong. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online