UPDATE 5-Monex buys Orix unit to form No.2 Japan online broker

* Deal priced at estimated $246 million

* Aimed at cutting systems, other costs

* Orix to replace Citi as top stockholder of Monex

* Monex shares drop 4.6 pct, Orix falls 2.5 pct (Updates value based on closing share price)

By Yumiko Nishitani and Nathan Layne

TOKYO, Oct 28 (Reuters) - Monex Group Inc (8698.T), Japan's No. 3 online broker, will buy the securities unit of Orix Corp (8591.T) for about $246 million in stock, in a deal that will create the country's second-largest online broker.

By forming a broker with more than 2.1 trillion yen ($23 billion) in client assets in over 1.3 million securities accounts, the two will be able to cut systems and other costs and beef up product and service line-ups, they said in a statement.

The move may signal the start of consolidation in Japan's decade-old online brokerage industry after the global economic crisis poured cold water on a stock trading boom among individual investors, triggering fierce price competition.

"With the retail investor business shrinking, even online brokers are now seeking to achieve economies of scale and offer better services through expensive system upgrades, so that they can win a larger share of the market," said Katsuhiko Hiroshige, general manager of equities at Bansei Securities.

Monex will issue 673,0002 new shares to leasing and real estate giant Orix, giving it a 22.5 percent stake and making it the broker's top shareholder ahead of Citigroup (C.N), whose ownership will drop to 20.6 percent from 26.3 percent.

The deal would be worth 22.5 billion yen based on Monex's closing stock price of 33,450 yen.

Retail investors' trading turnover on Japan's three major exchanges, the Tokyo, Osaka and Nagoya bourses, fell by a third to 178 trillion yen in 2008, outpacing a 23 percent fall in trading by all investors.

"Day trading by individuals has calmed down substantially, because of a slump in new listings, especially for start-ups, since 2006... and also due to the recent market crash and the economic slowdown," said Yuri Yoshida, an analyst at Standard & Poor's.

Price cuts remain a key way for online brokers to remain competitive.

Matsui Securities (8628.T), Japan's second-largest online brokerage, currently does not charge for cash trading up to 100,000 yen per day for stocks and mutual funds. Monex charges 1,050 yen and Orix Securities charges 200 yen.

Shares of Monex Group tumbled 4.6 percent to 33,450 yen, while those of Orix Corp fell 2.5 percent to 5,870 yen.

Matsui fell 1.6 percent to 660 yen, while Kabu.com Securities (8703.T), majority-owned by Mitsubishi UFJ Financial Group (8306.T), gained 2.6 percent to 96,700 yen.

Softbank (9984.T), whose online brokerage unit SBI Securities is expected to keep the top spot in the industry after the Monex-Orix deal, fell 3.5 percent to 2,100 yen. (Editing by Edwina Gibbs)