The imminent introduction by the Irish Stock Exchange of its electronic trading service based on the German Xetra platform will probably prove to be one of the most significant developments for the Irish private investor in many years.
Already, Davy stockbrokers has announced that it will be introducing a full electronic dealing service over the Internet by the fourth quarter. In advance of this, it has slashed its minimum commission rate to £20 (from £60) and an even lower minimum is likely for its Internet dealing service.
Other brokers are planning to follow suit and it is certain that, by the end of the year, the costs of dealing for retail investors will be a fraction of current levels.
Even with high commission charges, the volume of dealing by private clients exploded from the fourth quarter of last year through the first quarter of 2000 - largely due to the boom in the technology, media and telecoms (TMT) stocks. Since then trading volumes have reverted to more normal levels as share prices have declined and daily volatility in share prices has risen dramatically.
This rise in volatility has been most readily seen in daily price swings of in excess of 10 per cent in the share prices of even the large telecom stocks. Even larger swings are now commonplace in the more risky Internet start-up companies.
Clearly such high volatility will act as a disincentive to private investors as it indicates that the risk of investing in shares has risen.
As the Irish stockbroking industry gears up to cope with rapidly rising dealing volumes, there must be some concerns that this extra capacity will arrive just as the demand for such services tapers off.
As well as higher share price volatility, another factor that could reduce the public's appetite for share dealing is the relatively poor performance of the Irish stock market over the past two years. Despite some good periods the overall ISEQ index is still below the peak of over two years ago.
This has mirrored the performance of the British stock market, with one important difference. Many private investors in overseas markets have reaped handsome returns from investing in privatised telecom stocks. In sharp contrast the 500,000 private investors in Eircom have had a miserable experience and are now sitting on substantial paper losses. This experience will surely discourage many of these novice private investors from further investment in the market.
Despite this negative recent experience, there are several longterm forces at work that will almost certainly lead to a large and sustained increase in share dealing by private investors.
A supportive financial and economic environment of low interest rates and strong productivity gains provides a favourable medium-term backdrop. Long-term demographic factors are creating pressures for greater investment in equities as ageing populations seek to save and invest for their retirement.
The information technology revolution will continue to generate new business opportunities and high growth investment opportunities in the TMT sectors will continue to generate interest in the stock market on a sustained basis.
This potential interest in investing in shares is likely to be fuelled by marketing campaigns from governments and large companies to the retail sector.
Deutsche Telekom is currently the subject of a global campaign, which includes Ireland, in which a third tranche of shares is being sold by the German government. KPN is likely to engage in an expensive marketing campaign to sell some of its stake in Eircom to Irish private investors.
Lower dealing costs and more efficient settlement systems point to a sustained increase in the efforts of governments and large companies to market their shares direct to the public.
Despite current unsettled market conditions, the fundamental forces that are generating interest in investing in the stock market are likely to ensure that the advent of cheaper electronic share dealing will be greeted enthusiastically by Irish private investors.
