Brokerage Nomura's Low Trading Volume Should Ramp Up Soon (NMR)

Jan.20.06 | About: Nomura Holdings, (NMR)

Nomura Securities (subsidiary of Nomura Holdings (NMR)) is an old school brick-and-mortar outfit. Although it is in the process of a make over and expansion, in the age of Internet stock trading -- and in Japan the popularity of wireless mobile stock trading -- Nomura is missing out on the increased trading volume. And especially so this past week as the investigation of livedoor Co. (a popular web portal) and its president Takafumi Horie has caused quite an uproar and surge in trading that overwhelmed the order handling capacity of the Tokyo Stock Exchange. Brick-and-mortar brokers are facing fierce competition from banks and also from small but rapidly growing net brokerages. Don't despair however, because Nomura plans to open its own on-line brokerage this April.

Nomura is late to the game but fortunately the game has really just gotten started in Japan. E*Trade Japan is the nation's leading on-line brokerage. As of last October it had 800,000 accounts. That's an impressive number considering the relatively slow pace of development and use of the Internet for stock trading/investing in Japan. However, I don't think adding up the top 5 on-line brokerages' number of accounts will exceed 2-million. Remember the country of Japan has a population of over 120-million and among them nearly 100-million have a cell phone. A potentially high source of growth is the strong increase in new-graduate hires, set to surpass 700k this year up from the 500k level last year.

With that said, Nomura will begin operating an on-line broker dedicated to those who use their PCs and cell phones to invest and trade from this April. Nomura has chosen to name the firm Joy Invest and is targeting the younger generation and the techie types that might be unwilling to consult with a human broker but feel comfortable trading via a web browser. I share Nomura's optimism on its two expansive fronts in targeting the young new workers of the society and the aging soon-to-be retiring baby-boomers. **By the way, please refer to my post covering Nomura's expansion plans that I translated from the Japanese business press and that I haven't seen covered in English.

During this week the livedoor-Horiemon debacle and subsequent sell off of stocks has shed some light on where individual investors have been putting a good chunk of their money and that being in smaller-cap high growth prospect companies. Shares of such companies were hardest hit the first three-days this week with the Mothers Index of the Tokyo Stock Exchange losing over 20% compared to the Nikkei 225 losing just under 7%. The good news is Japanese retail investors are back in the stock market. My concern now, although a minor one, is how many will shy away or completely leave the market after getting burned by livedoor (which now has less than half the market cap it had at the end of trading last Friday) and similar high-growth stocks that got slammed.

The phrase "high risk, high return" is commonly heard among Japanese investors and traders. I think the phrase and its mentality applies even more to Japanese than to Americans because the domestic market for income paying investments is disgusting with rates closer to zero than being anywhere near the rates seen for instance in U.S. bonds, of any kind. For this reason I think the livedoor induced sell off doesn't hurt the willingness to be in the market for most retail investors. In fact, the theme this week ought to be the lessons learned: you can get burned even in a very bullish market. Also, it necessitates learning or re-learning the fundamentals of investing such as buy-low, sell-high, and being diversified. I will throw in "buy quality stocks that sink on irrational panic selling" as another possible lesson from this week keeping in mind a correction of some sorts was expected after the run-up in Japanese stocks since last August.

Nomura Holdings' ADRs (NMR) closed at $18.85 on Thursday, down nearly 8% from their 52-wk high of $20.46.

NMR 1-yr chart: