Consumer Securities Trading Essay Research Paper The

Consumer Securities Trading Essay, Research Paper

The following is an in depth look at the effects the Internet has had on trading securities in the United States. Its purpose is to define the impact of the Internet by determining specific changes in the structure of the trading market as a result of the numerous online brokerages that have surfaced in the past few years. A brief look at traditional brokerages and market characteristics prior to the advent of the Internet provides a foundation with which to measure many of its impacts. The arrival of the online brokerage model has not only introduced an entirely new vehicle with which to trade securities, but it also beginning to effect the way traditional brokerages view their own business models. Specifically, it appears that both the online/discount model and full service model of brokerages will both succeed in the next few years, with the top firms exhibiting characteristics somewhere between the two extremes.

New Ameritrade television commercials debuted early this year with a twenty-something-year-old punk extolling the virtues of his new brokerage account to various business men and women. Perhaps the witty E*trade commercial featuring monkeys that first aired during the 2000 Super Bowl was more notable. These commercials are quite a contrast to the traditional brokerage commercials of Merrill Lynch, Morgan Stanley Dean Witter, and Fidelity among others. This contrast is for good reason.

Online brokerages have uprooted the traditional model of consumer securities trading and have attracted a critical mass of followers. Before brokerage fees were deregulated 1975, eliminating fixed commissions, trading was something only done by the wealthy. Since then, fees have dropped considerably among the full-service firms making it possible for more and more people to manage portfolios. Until 1995 there was still a fundamental restraint for many consumers: access to timely and accurate information at any time from their own computer.

With the arrival of online brokerages in 1995 came a slew of options for investors, new and old, to access an abundance of information and research, and to initiate their own trades all at considerably discounted fees. According to Deutsche Banc, as of 2Q00, online brokerage accounts represented approximately 25% of all accounts in the United States. Furthermore, by 2003, online brokerage accounts are estimated to control 50% of the brokerage market. The online model has already attracted nearly 20 million investors, initiating an increase in overall trading volume. An brief examination of the brokerage industry pre-arrival of the Internet and an in depth look at the brokerage industry now illuminates the many differences and possible implications for the future of consumer securities trading in the United States.

Traditional brokerages have been operating freely since 1975. The deregulation of brokerage fees at this time allowed new firms to enter the market, marking the first major alteration in the way Wall Street traditionally offered its services. Before 1975, the market consisted solely of “full service” firms, those firms who offer trading, research, and financial advice through brokers or financial advisors at a considerable fee. After fees were deregulated, “discount” firms began to appear, offering consumers smaller fees, but at the cost of less research and financial advice. The market slowly split between these two types of business models, but they were fundamentally similar for 20 years: generate revenue by providing consumers the ability to trade and receive financial advice based upon firm research. The concept of having a broker, or financial advisor who acts as an agent for consumers, was the prevailing idea of stock trading in between 1975 and 1995. Many of those who had portfolios would leave its management entirely up to their brokers, others would call periodically for advice, and some would be actively co-managing their portfolios with the broker. The prevailing model for securities trading was still professionally managed, although different levels of management and cost evolved at this time. Wall Street was altered again in 1995, probably more significantly than in 1975, when securities trading and the Internet converged.

According to the Securities Industry Association, K. Aufhasuer & Company was the first to execute securities trading online in 1994. However, it was not until 1995 that the first online brokerages debuted their new business model. Momentum mounted quickly, as many investors flocked to the lure of extremely discounted prices and quick trade execution. Without the “brick and mortar” presence typical of the traditional brokerages and a significantly less extensive network of research and financial advice, online brokerages can offer transactions at fractions of the costs of traditional brokerages, even of the traditional discounters. The first online investors were, and still are, predominantly “a mix of young, first-time investors and older, more experience ones,” according to a McKinsey & Company study.

When online brokerages first surfaced, they introduced an entirely unique channel for delivering securities trading to consumers. No other brokerage firms offered the ability to trade securities over the Internet; it was exclusively reserved for those companies referred to as “online brokerages.” This