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E-broking : Dividends for the software sector - Views on News from Equitymaster
 
 
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  • Nov 25, 2000

    E-broking : Dividends for the software sector

    Traditionally, the stock markets have always been looked upon as yet another way to gamble. Not any more. Enter the Internet and stock trading suddenly acquires a new found respectability. Armed with the power of information available, the stock markets are no longer the privilege of a select few. Taking informed decisions, thatís what it is all about.

    The electronic nature of the stock trading transactions has therefore, opened huge opportunities for the software companies. Letís take a look.

    Trading actually can be divided into two legs. The first is client to broker (C2B), which traditionally has been done over the phone and now can also be done over the Internet. The second leg is broker to exchange (B2E), which was traditionally done on the floor of the exchange. But today this is done electronically. Initially, the B2E system (also known as front office systems) was provided by the exchanges (BOLT is provided by the Bombay Stock Exchange and National Stock Exchange provides NEAT). But now, independent vendors have started providing systems parallel to these.

    Front office systems are very technology intensive, as they have to be scalable (can handle a huge amount of transactions). Therefore, very few software companies have been able to develop front office systems.

    Projections for online accounts
    Year Global online
    accounts (m nos)
    % Growth
    1998 5.3
    1999 8.4 58.5%
    2000 10.5 25.0%
    2001 12.6 20.0%
    2002 15.2 20.6%
    Source : Forrester, Credit Suisse. Jupiter,

    After the trade has been executed a lot of routine activities have to be carried out which are basically known as back office operations. Unlike front office, the back office systems are not technology intensive but they need to talk well with the former. This is known as CTCL (computer to computer link). Due to the integration issues, companies tend to get both, the front office and back office systems from the same vendor.

    Another opportunity that has opened for the software community is e-broking. Here the C2B transaction takes place through the Internet. The market potential for the securities industry has suddenly burgeoned with the advent of e-broking and everybody wants a slice of this. In India, over 10 organisations are already offering these services and more than two dozen are expected to go live.

    Expenditure for going online
    (Rs m)  
    Hardware 30
    Software 30
    Running cost* 50
    Brand building variable
    source : Business world
    * Salaries, maintenance, content acquisition etc.

    But there is a very interesting point to note. For e-broking, there has to be convergence with banks, depositories and consistent information feeds. The e-broking software, when working on the Internet has to use bandwidth very intelligently. Since money changes hands, there are also security issues. All this means higher billing rates for software companies.

    We have global biggies like IBM and at the domestic level we have companies like Tata Consultancy, Software Solutions and PSI Data Systems, all eyeing this market. All of these companies have been active in this business in small roles since inception. But what makes this market so lucrative is that nobody has a complete solution. It is a nascent market and hence offers long-term relationship opportunities and an assured revenue stream as financial markets integrate.

    Revenue estimation for online trading
    (Rs m)
    Trading volume at NSE (daily) 40000
    Online trading volume
    (assuming 0.6 % of total volume)
    240
    Brokerage charge 0.50%
    Revenues 2
    Number of players 20

    What will determine the success for companies will be the ability to deliver straight thorough processing (STP), which means seamless solutions across global markets. It also implies integration across different instruments in the market such as equity, foreign exchange, money, commodities and derivatives.

    As the market develops, the power will shift to the individual investor who at his will, can take decisions with information available on the Internet. Organisations who want to move up the value chain will not only have to provide technology but also solutions that will simplify trade. With such unending opportunities, the market is flooded with new entrants who want to make quick bucks. But survival requires only one skill: ability to deliver on time, consistently.

     

     

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