E-Trade Japan, a joint venture between Softbank Finance, a subsidiary of Japan's largest Net investor, and E-Trade Group in the U.S., made its debut Friday on Nasdaq Japan, ratcheting up what promises to be fierce price competition among Japan's online financial-services companies.
Nomura Securities and Daiwa Securities lead the pack, with a combined market share of about 50 percent. Having transferred their customers' accounts onto the Net, they reported more than 460,000 online accounts in early June. E-Trade Japan, currently No. 3, said it has more than 90,000 active accounts, while its new competitor, Monex, an online discount brokerage backed by Sony Corp. (SNE) , reported 87,100 accounts on Sept. 1.
On its first day of trading a month ago, Monex went up 40 percent, from $413 to $579 a share. E-Trade Japan saw its price drop slightly Friday, from an opening of $14,151 to $13,207. The difference in share price relates to the different strategy each company is pursuing.
Monex priced its shares cheaply, in an attempt to lure more individual investors and to increase the stock's liquidity. E-Trade Japan, on the other hand, took a more traditional approach to the market to appeal to slightly older and wealthier investors than Monex. Monex managed to issue 1.43 million shares - an exceptionally large number for a Japanese startup - and set the IPO price low. Monex sold 150,000 new shares at the IPO price, raising $58 million after fees. But E-Trade Japan only issued 19,000 shares through its IPO and raised about $93.3 million after brokerage fees.
E-Trade Japan said it is setting its brokerage fees between those of traditional firms, such as Nomura, and the pure online discount brokerages, such as Monex, to attract wealthier investors who would otherwise go with Nomura or Daiwa.
E-Trade Japan said it plans to use about $33 million to develop a computer system that is capable of trading via Net-enabled cellular phones.
Industry sources estimated that there were more than 900,000 online trading accounts in Japan earlier this year. The number is growing as more people gain access to the Net and demand inexpensive ways to trade stocks and buy other financial products.
Bucking a dot-com trend, many of the companies in which Softbank Finance has invested, including E-Trade Japan, Morningstar Japan and Softbank Investments, are profitable. Softbank Finance, a medium holding company of Masayoshi Son's Softbank, also reported a net profit of about $12.9 million for the fiscal year ended in March.
"There's still this notion in Japan and in the U.S. that if you are a dot-com company, it's not so important to post a profit," says Yoshitaka Kitao, chairman of E-Trade Japan and president and CEO of Softbank Finance.
"But those companies' shares will be sold sooner or later," says Kitao. "In the world of the Internet, where you cannot see the faces of your clients, what can you offer them as the basis to win their trust? It's an absolute necessity for any financial-services company, whether it's a bank or a securities firm, to start in the black and stay in the black."
Prior to the listing, E-Trade Japan sold 19,000 shares through its IPO. Of those, 7,000 shares are newly issued, while 12,000 are privately held existing shares. Kitao decided to float 20 percent of the company's existing shares publicly to increase liquidity - a tough lesson he says he learned from the June IPO of Morningstar Japan. Morningstar Japan still suffers from incredibly low trading volume. On Friday, only 9 of its shares were traded, ending at about $37,693, down about $471 from Thursday's closing price.
Kitao also announced a plan to establish one-stop brick-and-mortar service centers, where customers can gain access to Softbank Finance's products and services.
"I don't believe in the pure dot-com business model," says Kitao. "We need to fuse real and virtual businesses."
Taro Izuchi, president of E-Trade Japan, said in an interview that the company has succeeded because of its ability to diversify its revenue sources, deriving them not only from brokerage commissions but also from underwriting fees and investment-trust business. Taking advantage of its relationship with Softbank, the company recently launched a trust fund that invests in pre-IPO companies.
So far 15 Internet companies, including Japan's popular virtual mall Rakuten, have asked E-Trade Japan to underwrite them. Six of those companies were Softbank-related companies such as UTStarcom, Morningstar Japan and Softbank Technology.
The revenue from underwriting and investment-trust businesses each comprise about 25 percent of E-Trade Japan's total revenue, Izuchi added.
On Friday, shares of E-Trade Japan began trading at an initial offering price of $14,151 and closed slightly down at $13,207 on Nasdaq Japan. Monex traded down $32.08, or 4.15 percent, ending at $741.51 on the Tokyo Stock Exchange's Mother's market, from its Thursday closing price of $773.58. Nomura traded up 90 cents to close at $22.92 on Tokyo Stock Exchange's first section. Daiwa ended at $12.47 on the same bourse, unchanged from its Thursday closing price.