An Online Bourse Without Borders

OM and Morgan Stanley make a big bet on individual investors

Managers at Stockholm's OM Group are known for bucking the financial Establishment. Two years ago, the developers of securities-trading technology turned the tables on the staid Swedish investment community by acquiring the Stockholm Stock Exchange. Now they are attempting an even bigger rout. In September, OM and Morgan Stanley Dean Witter will launch an electronic cross-border stock exchange aimed at retail brokers. If the venture catches on, it could leave other European bourses racing to catch up.

Jiway, as the new venture is called, is a big bet on Europe's individual investors. They have begun to embrace share trading as never before: The euro's introduction last year has increased interest in foreign stocks, and pension funds are gradually allowing individuals more control over their retirement accounts. "We think that online trading could grow to 10% to 30% of the market in the next few years, and that cross-border and retail trading will grow even faster than that," says Jerker M. Johansson, deputy head of European equity trading at Morgan Stanley.

But for all that, the markets are still geared to institutions. Commissions for retail clients are 5 to 10 times what they are for professional investors, who are linked directly to the trading systems of various exchanges. Individuals don't have access to research from brokerage houses, either. And other online trading systems, such as Tradepoint, still cater only to the professionals.

PROFIT CENTER? Enter Jiway. OM Chief Executive Per E. Larsson claims the new exchange, which will be based in London, will at least halve trading costs. Brokers who sign up with Jiway will have access to quotes from Morgan Stanley at first, and other market makers within a couple of years. Those trading through the Jiway system will receive prices equal to or better than other exchanges, according to Larsson. Jiway will initially list 6,000 stocks. While most will be European, 150--including Cisco Systems, Dell Computer, and 3Com--will be U.S. stocks. At the launch, Jiway trading will be available in Sweden, Britain, and Germany. Next year, France, Holland, Italy, and Switzerland will come online.

Jiway, in which OM has a 60% share, will make money through transaction fees as well as back-office services set up by Morgan Stanley. Analysts predict revenues of $4.2 billion annually, enough to be profitable. Larsson believes OM and Morgan will recoup their $100 million investment within two years.

GOOD IDEA. Liquidity will be the key if Jiway is to honor its promise to compete by lowering costs. And that's just what makes managers at some online brokers uneasy. "If this allows retail investors greater access at an affordable cost to European exchanges, it is a very good development," says James Marler, chief executive of E*Trade U.K. Ltd. But he isn't now a Jiway client. "Investors will go to the system that has the best liquidity and is the most robust," he says.

Justin Urquhart Stewart, business development director at Barclays Stockbrokers Ltd., hasn't signed on, either--not yet, anyway. He believes Jiway has got the right idea. "The European exchanges are basically run by the brokers for their own benefit," he says. But he thinks the exchange of the future, whoever is running it, will have to facilitate global trading as well.

OM has a history of making old-line rivals obsolete. Founded in 1984, it first developed technology for electronic options trading. Then it moved into stock exchange technology and has introduced systems for a range of markets, including spot and derivatives trading. OM not only owns the Stockholm Exchange, it also controls Norex, which links the Stockholm and Copenhagen bourses.

Larsson considered a joint venture with some of the other European exchanges last year. But they weren't ready to move quickly enough for him. So he pressed on with his plan to launch Jiway--Cantonese for "wisdom." We'll soon see if he chose wisely.

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