The Coming Week in Asia: A Tale of Two Online Brokers in Japan

TOKYO -- The city's week is starting off on a cautionary note, with 71,000 home defense members, the military and the police taking part in a natural-disaster drill today.

Dubbed Big Rescue 2000, the exercise is intended to ease the minds of Tokyo-area residents, who have suffered through a number of earthquakes in the past two months.

But the government isn't thinking only of natural disasters. Last week, it took what is hoped will be a step to prevent any financial disasters that could stem from increased bankruptcies. To do so, it allocated nearly 15 trillion yen ($140 billion) in public funds to the Deposit Insurance Corp., an agency that bails out troubled banks.

The DIC was active in 1997 and 1998 (and therefore almost out of cash) when numerous regional banks folded under a mountain of bad debt. Although pumping new funds into the agency suggests that more bankruptcies are on the way, at least reserve funds will be on hand to deal with any mess.

But the government isn't alone in thinking of the future. Online brokers are also positioning themselves for what they expect will be a surge in activity over the next two or three years. To do so they're going public and raising funds to offer more services.

On Friday, E*Trade Japan, a leading online broker here, plans to offer 19,000 shares at 1.5 million yen ($14,063) each on Nasdaq Japan. It hopes to raise about 28.5 billion yen ($267.4 million) to update its computer systems and offer additional services such as margin trading and executions via mobile phones. But E*Trade Japan isn't the only online broker thinking ahead via the market. It will be the second online broker to go public -- Monex floated last month.

Given that they're the only games in town for investors who want to tap into online demand, which is the better play?

First, both share some similarities in style and background. Each has a major financial backer that is not a securities house. Monex is backed by Sony (SNE Quote), which owns a 36.62% stake. E*Trade Japan is 58% owned by Internet incubator Softbank and 42% by E*Trade(EGRP Quote). Profitability is one area, though, where they are very different. For the year to March 2000, E*Trade posted a net profit of 1.37 billion yen, while Monex reported a net loss of 807 million yen.

"It's hard to say which is a better buy, since the market is still developing," says Taku Kumazawa, an analyst at WitCapital. "However, one way to analyze online brokers is to look at their total cost of capturing each customer."

In that sense, Kumazawa recommends Monex over E*Trade, since the former spends only about 2,500 yen per customer, while its competitor forks out a hefty 18,000 yen. Part of this massive difference is attributable to the companies' owners. Because Sony has been in business decades longer than Softbank, it already has a huge client base from which to draw.

That's not to say Monex is an easy play. It's extremely volatile. While it's up 75% from its IPO price of 45,000 yen as of Friday's close, its stock has fallen 34% from record highs posted only weeks ago.

That said, there's good news down the line. Even though a paltry 1.9% of all stock transactions were executed online as of March, Daiwa Institute of Research estimates that about 30% of all stocks traded will be via online brokers by 2003. And with 71 brokers looking to have online trading services by the end of the year, the quicker E*Trade raises cash and upgrades its service, the better.