Internet trading in India made its debut in April 2000. Through this means of trading, investors can buy and sell shares on-line through the internet.
To start Internet trading, an investor has to register himself with a broker offering on-line service. He has to open a bank account as well as a demat account with the broker. The broker is responsible for the risk management of his client. The orders get logged directly on the trading platforms within the assigned limits designated by the broker to the clients. Even if the client order exceeds the assigned limits, the order gets rerouted to the broker’s server for authorization. The broker can change the parameters on-line. His software allows real time market information display, client information display, bank account management, and a transaction history display.
In April 2000, the market was bullish and a large number of players ventured into on-line (Internet) trading, as many as 79 members took permission for Internet trading. However, after the Ketan Parekh scam, barely 10 members remained on-line. The market is dominated by OCOCI Direct.com with a market share of about 50 per cent and India Bulls.com with a market share of 26 per cent.
ICICI has emerged as a market leader because it can provide strong connectivity between the trading account, demat account and bank accounts. Moreover, ICICI’s huge off line presence in various financial services segments and penetration aids in drawing as well as servicing customers ICICI Direct leads the pack with 170,000 trading customers. It executes an average of 1600 trades a day; this puts it in same league as the largest on-line brokerage in the US. Sharekhan.com and 5 paise.com faded away while Kotak Street.com and HDFC Securities are hanging on.
Around 2.15 lakh investors have registered to trade on-line. There has been a share increase in volumes after the rolling settlement was introduced. The average daily on-line trading volumes rise from Rs 10 crore in June 2001 to the National Sock Exchange to Rs 60 crore in December 2001. This increase of 600 percent was in the midst of bearish market conditions.
On-line trading has driven down the transaction costs substantially and increased the liquidity options available to an investor to enter or exit from the stock at his own wish. The Internet has provided a wide range of information to the investor which has enabled him to take calculated risks.
The US had the largest number of cyber investors approximately 15 million. On-line trading has grown tremendously in the US where roughly 40 percent of retail stock brokerage business is conducted through the internet. According to the SEC Report in the United States in less than two years, the estimated 3.7 million on-line accounts in 1997 almost tripled to 9.7 million by the second quarter of 1999. Schwab, a US based company is the world’s largest discount and web brokerage firm with 5.8 million investor accounts holding more than $500 billion in assets.
Compare this Indian on-line trading statistics. Even though Rs 40-60 crore worth of volumes are traded on-line currently, these are quite meager when compared to trading volumes of Rs 3,000 to Rs 3,500 crore on the exchanges. On-line trading represents about per net of the total traded volumes on the NSE and BSE. In the year 2001-02 the online securities trade amounted to over Rs 10,000 crore out of a total trade of Rs 1 lakh crore on the NSE.
The stumbling blocks for such low on-line trading volumes are as follows:
1. Erratic bandwidth and erratic net connectivity coupled with low personal computer (PC) penetration.
2. Low security and inadequate cyber laws.
3. Lack of automation in the banking sector especially among public sector banks. Not many banks offer on-line transaction of money.
4. Incremental and ongoing investment in technology and brand building are required. This is due to lack of funding for Internet based business.
5. Stipulation from SEBI – Know our Customer (KYC) – which requires that the companies actually meet their customers before allowing them to trade on the site. This requires a large off line structure which most of the companies do not have.
6. Big time lag of 5-10 minutes between pacing the order and its execution. The high volatility prevailing in the markets leads to fluctuations in process.
7. High cost of transaction as online brokers charge brokerage as steep as 0.20-0.25 percent for non-delivery based transaction and between 0.50-0.75 per cent for delivery based transaction.
8. Absence of streaming data on the investor’s computer. The broker gets streaming data on his computer while the client does not. Clients get a browser based web applications which worked on a request rely model, most suited for document presentation.
9. An on-line investor pays more margin for trading than the off line investor and his funds are also tied up for more trading days.
There is great potential or the growth of Internet Trading in India. As the stock markets have now mobbed from the T+5 and T+2 settlement cycle, the velocity of funds is expected to increase. What is required is a regulatory authority to control this market; availability of high bandwidth, an on line infrastructure. Investor interest in Internet trading has to be sustained and this requires innovations and new products. Broking firms should distinct marketing and service strategies.