Europe's online brokerages have finally waved farewell to the daytrader. The outward signs are evident - the disappearance of marketing material offering investors "the chance to trade like a pro" on platforms enhanced with research, real-time prices and other characteristics of the wholesale market.
The battleground for a sector battered by the slump in trading volumes is a realignment of their business models to maximise the efficiency of clients who have remained in the market.
The trading tools remain, and have been enhanced with technical and risk analysis functions to assist users, but the purpose has shifted from assisting trades to improving client relationships.
"There was a great temptation to spend money to improve client relationships at the front end, but (online brokerages) have seen very few returns," says Rohitha Perrera, head of the personal financial services practice at IBM.
Europe's online brokerages have recovered from the nadir of the third quarter of last year, with a rise in trading volumes and revenues accompanied by consolidation in a number of key markets to reduce pricing pressure.
However, the second wave of online investors is fundamentally different from the initial surge of investors attracted by the convenience and lower costs of online trading. The new client base wants advice, and advice is expensive to provide.
Banks such as UBS and JP Morgan, which - along with many rivals - entered the mass-affluent market with great fanfare, have shifted their focus to high net worth clients where fees are higher.
The hundreds of millions of dollars spent on marketing to lure the first wave of online traders cannot be replicated, and new account openings remain depressed.
The plunge in equity markets over the past 18 months, despite the rebound in the last quarter, has dented the confidence of investors to trade and brokerages to invest. Both groups are, above all, seeking to be smarter.
Technology spending has been pared to focus on two principal areas. "Trading and order-routing services are fast becoming a commodity," says Brian Browne at PA Consulting. "The firmer market for system suppliers is increasingly the provision of research and price information."
The primary focus is on aligning back-end systems - the execution and settlement of trades which form the core fixed-cost base - with volumes which have failed to maintain the exponential growth seen two years ago.
The main driver for generating efficiencies of scale in a more volatile trading environment is to focus on straight-through processing (STP), see report on the web at www.ft.com.ftit. The automation of the brokerage process from order capture to custody and settlement does provide the tangible monetary benefits which front-end developments have, so far, failed to generate.
Second, brokerages are seeking to broaden relationships with existing clients to capture a greater amount of their investible assets, placing greater emphasis on the provision of advice-style services.
A recent report from JP Morgan Chase and McKinsey, the management consultants, pointed to asset growth and flow aggregators - maximising volumes to capture efficiencies - as the only two sustainable strategies for retail brokerages in Europe.
"Companies have realised that they will not be able to monetise the technology they are going to invest in directly," says Jason Garveridge, head of international sales at Multex, which provides data and research to wholesale and retail brokerages.
Tools such as news and charts are now viewed less as a core competence of the online brokers, and where they have been maintained, are increasingly being outsourced.
"Brokers have stopped building their own charts and providing their own research and are increasingly falling back on a small number of suppliers to do this for them," says Mr Browne.
There is increasing demand for evaluation tools, though this is focused primarily at the small band of sophisticated investors, says Yannis Yianni, head of UK marketing at BrainPower, which provides technical analysis tools to retail brokerage.
However, many of the tools are there to monitor selections rather than to make the initial choice, and investment spending is being directed at cementing client relationships through the provision of investment advice. "In this type of market, apart from a few daytraders, investors are not very good at making their own decisions," says Mr Perrera.
Investors have, however, become more sophisticated in their knowledge of product offerings, provided they are underpinned with advice. This has allowed brokerages to cross-sell higher -margin products such as funds and even derivatives through their platforms, reducing the reliance on equity trades.
This is underpinned by the changes in pension provisions, notably in Germany, pushing European investors to rely less on state pensions and turn instead to stocks and mutual funds to help save for their retirement.
The shrinking importance of the daytrader has allowed the fortunes of the full-service brokerages such as Merrill Lynch to rebound. They suffered most from the competition from lower-cost discount providers, but are starting to leverage the vast in-house intellectual resources more effectively.
The increased demand for advice places the research and other information resources of the big houses at a premium. Technology such as XML allows existing data to be segmented quickly and targeted at client groups.
The rise in online fund sales and fund supermarkets offering products from a range of supermarkets also allows the larger banks to use their databases to identify and promote funds which, for example, mirror a client's recent equity trading.
"Data isn't going to win new business, but it can help cement a relationship," says Mr Garveridge.
The online brokers stand at a disadvantage, as the lack of a physical, branch-based presence makes the provision of advice a practical and regulatory problem. It is difficult not to not cross the line of "entreating a sale" when the advice channel is through e-mails and other prompts, rather than a registered adviser in a branch. The case for a "clicks and bricks" strategy remains strong.
