Merrill Lynch and Charles Schwab are jockeying for position to capture the small but growing share of the U.K. retail market.

Although neither firm is officially discussing its plans, both have strategies in place that are intended to reach into Great Britain, and perhaps continental Europe as well.

"We see tremendous potential in the U.K. market amidst a growing appetite for share dealing," says a senior Merrill executive in London.

For now, retail activity overseas is mostly confined to the wealthy. While a significant number of Brits may technically be shareholders--15 million, according to Fletchers Ltd., a London-based consultant--most acquire their holdings through employee plans. The actual number of active market participants is closer to one million. British investors have placed their money almost exclusively in savings accounts or conservatively managed unit investment trusts.

"In the U.K., you don't just come in and sell your firm as the best place to handle retail trades. You have to first sell the idea of investing," says a senior Schwab official in London. "Our goal, since we opened shop in the early 1990s, was not to sell Charles Schwab but to sell the idea that stocks were something everyone could participate in."

The Schwab model for the U.K. is similar to its U.S. strategy: offer lower cost trading and online access, but build a name-brand presence through physical locations.

In addition to its co-headquarters in London and Birmingham, Schwab is planning on opening offices in the cities of Bristol, Nottingham and Leceister, as well as three new sites within London. The idea is to feature offices that are dedicated brokerage facilities--a contrast to the in-bank facilities that most U.K. retail investors are used to.

"The idea of trying to institute a paradigm shift away from savings to stock investing by locating brokers in bank branches wasn't quite right," the Schwab official says. "We want to introduce new retail investors to a brokerage-specific facility."

Merrill runs a private client group in London for high-net-worth individuals with U.S. holdings, but is determined to expand its presence in the U.K., according to a senior official in London. The firm, he says, has already signed a deal with the U.K. subsidiary of DLJ's Pershing division to build a platform to handle U.K. products and services, a key component to expanding domestic business there.

"There is greater interest now in both the U.K. and Europe among people who perhaps never owned stock investments before," he says. "Clearly this is a growth market."