.jpg)
Stockbroking in the UK has witnessed dramatic changes in the past five years. A new report* from independent market analyst Datamonitor finds that investors have regained confidence in the stock market but are turning away from traditional trading methods and their focus has shifted from equities to other asset classes. Internet share dealing has now overtaken traditional trading methods such as telephone or face-to-face trading, and an increasing number of investors are seeking their luck in spread betting and contracts for difference (CFDs). “Spread betting and CFDs are proving very attractive to anyone interested in investment because of their apparent simplicity and the prospects of high gains, but the bottom line is that both involve higher risk than direct equity trading due to the investors’ ability to leverage their investments,” comments Ingo Nachbaur, Financial Services Analyst at Datamonitor and author of the report. The market has yet to fully recover – it is still almost 30% below its 2000 level but Datamonitor forecasts that the retail equity market will continue to recover to 2010 growing almost 8% annually.
Regaining confidence
The slump in UK, and global, equity markets at the turn of the century has seen the retail direct equity market lose a major part of its share of the total UK savings & investment market. In the peak year of 2000, retail direct equity accounted for GBP558.3bn, nearly 39% of all retail assets, totalling GBP1,451.2bn. In 2001, total retail direct equity holdings fell to GBP399.7bn and slumped below GBP300bn the following year. 2003 marked the turning point, but Datamonitor research quite clearly shows that recovery is very different from past ones of the 80s and early 90s. The share of retail assets held in direct equity has remained constant at around 25% since 2002 as there are increased investment flows into other asset classes. These include deposits, national savings, corporate bonds, government bonds, foreign bonds, Unit trusts/OEICS** and investment trusts.
Online trading
Internet share dealing has finally overtaken traditional trading methods such as telephone or face-to-face trading. While in 2001 only 28% of traders placed their execution-only deals via the Internet, this figure almost doubled by 2005, reaching 54%. “The advantages of online stockbroking are obvious. Anyone with access to the Internet can benefit from the service. There is no more waiting in telephone queues, immediate access to one’s portfolio is given and trades can be executed at the click of a button,” comments Nachbaur. Most importantly, online stockbroking is cheaper than traditional trading methods such as telephone share dealing. A GBP1,000 trade over the telephone costs, on average, 40% more than the same trade over the Internet while a GBP2,500 trade costs 80% more. Only few stockbrokers charge the same flat fee for Internet and telephone trades. Only HSBC’s subsidiary first direct, Jarvis’ Sharedeal Active and Boursorama’s selftrade charge the same flat fee for either method***.
Spread betting and CFDs are carving a chunk
In the past few years spread betting and contracts for difference (CFDs) have taken off as an alternative to direct equity investment. Both spread betting and CFDs have been around for many years, but it has taken until a few years ago for both products to capture the imagination of the wider public, eventually enjoying increased popularity. It is believed that CFDs already account for about 20% of the London Stock Exchange trading volume while the number of spread betters in the UK is estimated to be around 100,000, a figure growing by about 25% a year. Traders are lured to these alternative products because of their stamp duty exemption, the flexibility of going ‘short’ and ‘long’ and increased return of investment.
There is concern among some investment experts that the rise of spread betting and CFDs comes at the expense of investment in direct equities, especially as the client base has widened from professionals to private investors. However, Datamonitor predicts that, despite the competition, traditional equity brokers will not be made redundant as investors use different investments for different strategies, e.g. equities for the longer term and spread bets and CFDs for short-term investments. Datamonitor recommends traditional brokers extend their product range if they want to stay competitive. But, CFDs and spread betting attract increased attention from the FSA and will be strongly affected by new European regulation, known as Market in Financial Instruments Directive (MiFID). Under the new regulation, providers of spread betting, CFDs and other ‘complex’ financial products will have to “ask the client or potential client to provide information regarding his knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded so as to enable the investment firm to assess whether the investment service or product envisaged is appropriate for the client”. Hence, it is expected that spread betting and CFD firms will incur additional administration and costs and potential loss of clients.
Datamonitor expects that the spread betting and CFD market will continue to grow over the next couple of months. However, considering future trends, especially in terms of new regulation, a stagnation of the market is predicted for autumn 2007 at the latest, when MiFID comes into effect. Nevertheless, providers that do not currently offer spread betting and/or CFDs, might consider jumping on the bandwagon in order to avoid losing clients to their competitors.
* The UK Retail Equities Market 2006 sizes and forecasts UK retail direct equity holdings from 2001-10, assesses demographic share ownership, trends including growth of competing products, fees and commissions, regulatory changes, online stockbroking and competition.
**Open Ended Investment Companies*** as of May 2006.
