It's virtually a stock exchange

Ordinary investors could trade shares over the Internet if a new scheme gets the go-ahead, says Philip Blenkinsop

While the Government has battled over the privatisation of the post offices and now faces anger over the recent flotation of the power generators, a smaller institution is hoping to bring largely unknown and certainly less controversial names to the shareholding public. It will do so, not through one of the main exchanges, but on the Internet.

There will be no dealing rooms, but Electronic Share Information (ESI) expects that within the year its system, the Electronic Stock Interchange, will see shares traded in cyberspace.

Already in the US, Internet users can track the prices of shares on the New York Stock Exchange. One system, run by a company called Security APL, also allows users to trade. ESI will take this further, by allowing investors to trade directly in shares issued by companies anywhere in the world. The original idea was more modest.

"We first had the notion of a local stock exchange about four years ago," says the technical director, Jack Lang. "But we realised that, once on the Net, the audience would be at least national, if not international."

ESI will concentrate on small companies' stocks, which are by their nature volatile, and which therefore carry a fair degree of risk. "BT isn't going to double in size," says Lang. "A small company may. Or it may of course halve."

The advantage to companies is that they raise money by selling shares without the burdensome costs of a full-scale stock exchange - other small company exchanges (such as the Unlisted Stock Market in London) have been tried before, but this is the first wholly electronic version. Lang predicts the total cost of an initial flotation will be £10,000, with an annual listing charge of £1,000. ESI has asked 100 small to medium hi-tech companies around Cambridge what they thought of the idea and the results were modestly encouraging.

To promote trading as distinct from simple investing, ESI intends to supply its users with abundant reports and data and is already in discussion with companies such as Perfect Information that scan documents and translate them into computerised form. "The key to increasing liquidity is more information," says Lang. ESI promises to offer much free of charge, but hopes other companies will sell investor information.

One of the problems of dealing on the Internet is that it isdifficult to transfer money securely. ESI is trying to solve this by setting a "virtual bank", which will be run by Bank of Scotland. Investors transfer "real" money to their electronic account, and as they buy or sell shares on the ESI, the account is debited or credited. While the money is sitting in the account it will earn interest - ESI acknowledges that one of the hurdles will be to attract sufficient money into the system to provide the liquidity needed to make the market work.

There will also be an elaborate password system to minimise the chance that other Net-users will steal your money or your shares.

Unlike other stock markets, there will be no brokers or traders comparing supply and demand and setting prices. Instead, buyers or sellers look at the prices screen for guidance, but can bid or offer at whatever price they like. The guide price will be adjusted by the computer to reflect the transactions that have taken place.

Investors wanting to take part will probably have to pay £100, which will give them portfolio management software, access to the information database and a virtual bank account. They will then pay £10 a month plus £5 per transaction. This, Lang believes, compares favourably with other share dealing operations. "Ten pounds per month is not much for a pricing service compared with the cost, say, of a financial newspaper or magazine," he says.

There are 9 million shareholders in the UK. ESI's survey of 3,000 suggests that as many as 150,000 could take the service. It is also, in theory at least, not restricted to the UK.

Quite whether ESI can become truly international is questionable. There would probably be regulatory hurdles, and it is moot whether foreign Net- users could be induced to invest in small UK companies.

ESI may find its success lies in the opposite direction - with a regional, rather than international, focus. It has a distinct Scottish flavour. As well as the Bank of Scotland's prospective involvement, the software is being designed by Tcam Systems in Edinburgh and, says Lang, "we will physically locate some facilities in Scotland".

ESI is waiting for approval from the Securities and Investment Board, which regulates share dealing. If it is given the go-ahead, it should begin with about 10 companies. ESI intends to spend £1m on marketing and advertising, and Lang hopes this will increase to 50 companies within a year.

The history of both share trading and electronic banking is strewn with brave but unsuccessful attempts. Only time will tell whether ESI can combine both, and succeed.