PaineWebber Inc. said it has agreed to purchase a 25% stake in an on- line trading software company.

The move would position the fifth-largest retail brokerage firm for a September entry into full Internet trading.

PaineWebber would pay $13.5 million for the investment in Kingland Cos., Mason City, Iowa, and plans to offer fee-based trading to the high end of the market.

"We recognize the growing importance of the Internet," said Donald B. Marron, PaineWebber's chairman and chief executive officer.

Just days earlier Merrill Lynch & Co. made a similar move to bolster its on-line capabilities. Merrill said it would acquire D.E. Shaw Financial Technology LP, a unit of D.E. Shaw & Co. of New York.

PaineWebber, which has emphasized the fundamentals of full-service brokerage and consultation, "is one of the last few brokers lining up some sort of a strategy" for the Internet, said Scott Smith, an analyst at Current Analysis, Sterling, Va.

Like Merrill Lynch, PaineWebber does not plan to compete directly with deep discount brokerages on the Internet. This new breed of competitor now executes about one in seven equity trades, according to Credit Suisse First Boston.

"We believe our target audience is the affluent individual," said Robert H. Silver, PaineWebber's director of operations, service, and systems.

Clients want "to marry human interaction with on-line capabilities," Mr. Silver said. "We see the on-line capabilities as an extension of this advice channel."

PaineWebber worked with Kingland in 1997 to develop a wholesale back- office system that let broker-dealers connect to PaineWebber's securities clearing systems.

In September, PaineWebber developed an Internet-based nontransactional service for retail customers called Edge.

It provides access to account information, stock quotes, and proprietary research reports.

"We are a customer" of Kingland, Mr. Silver said. "We liked the product and thought it was a good investment opportunity."

Mr. Silver said he will join Kingland's board to gain insights into the "fast-moving on-line financial world."

Other Kingland customers include BankAmerica Corp., Wachovia Corp., and the Internet-based investment bank Wit Capital Corp.

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