UPDATE 2-Monex and Orix Securities in merger talks - source

* Merger would create Japan's No. 2 online securities firm

* Aimed at building scale to cope with tough market -source

* Monex to issue shares, Orix become top shareholder -Nikkei (Adds industry background, share prices)

TOKYO, Oct 28 - Monex Group Inc and the securities unit of Orix Corp are in talks to merge, a deal that would create Japan's second-largest online broker, a source familiar with the matter said on Wednesday.

The talks may signal the start of consolidation in Japan's decade-old online brokerage industry as the stock trading boom among individual investors has cooled, triggering fierce price competition among brokers.

The turnover of trading by retail investors fell by a third to 178 trillion yen ($1,943 billion) in 2008, outpacing a 23 percent fall in trading by all investors.

"Amid the shrinking retail investor business, 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, Japan's third-largest online broker, and unlisted Orix Securities Corp aim to pool resources for investments in computer systems and to better weather tough industry conditions, the source said, confirming a report in the Nikkei business daily.

The source spoke on condition of anonymity because nothing has been decided or made public.

Monex said in a statement that it has not made any decision to merge operations with Orix Securities as was reported.

The Nikkei said Orix Securities and Monex planned to merge in spring 2010.

Monex and Orix Securities would have had combined operating revenues of 32 billion yen ($349 million) in the previous financial year, putting them ahead of second-ranked Matsui Securities and closer in size to industry leader SBI Securities Co, a unit of SBI Holdings, the paper said.

The Nikkei said Monex plans to issue new shares and exchange them for shares of Orix Securities and the swap is expected to make financial services conglomerate Orix Corp the top shareholder in Monex with a stake of more than 20 percent.

Shares of Monex rose 3.3 percent to 36,200 yen, while Orix Corp inched up 0.5 percent to 6,050 yen.

Their rivals were mixed, with Matsui Securities down 0.9 percent at 665 yen, while Kabu.com Securities gained 4 percent to 98,100 yen. Mitsubishi UFJ Financial Group owns a majority of Kabu.com.