Brokerage In Cyberspace Essay Research Paper What

Brokerage In Cyberspace Essay, Research Paper

What regulatory issues does the brokerage industry face with respect to the retail investor and the advent of online securities trading.

Introduction

The number of securities trades conducted online has taken a dramatic increase in recent years, rising from under 100,000 trades per day in 1996 to over half a million in 19991. The SEC (Securities and Exchange Commission) expects the level of online brokerage assets to rise to $3 trillion dollars by the year 2003, from a meager $415 billion in 19981. The appeal is that the Internet provides real time stock quotes, previously available only to brokers and their firms, in addition to a wealth of information on just about every company that is publicly traded. A new breed of investment firm has been born, conducting its business solely on the World Wide Web, and the average fee charged by one of these companies is now only $15.75 per trade , a fraction of the cost at a full-service firm. Online trading has given rise to a greater frequency of trades as well. While online traders only currently represent about 10 percent of the market, they tend to trade two to three times as often, making up approximately 30 percent of all trades, up from 17 percent in 1997 . Many people have given up their jobs to become full time traders, with mixed success. In fact almost all day traders lose money, and the recent market turmoil has left many gasping for breath. In its new form as the Online brokerage firm, the business is still flourishing. Despite being forced to lower their commissions and advertise more to attract new business, they are managing to adapt. DLJ Direct, for example, has posted an 82 percent increase in revenues from 1998 to 1999 , and as of July 1, 1999, online transactions accounted for 52 percent of all trades at broker Charles Schwab . With the general trend of the market moving towards computerized trading, the brokerage industry is being forced to evolve as well.

Statement of the Issue

Due to the high volume of trades conducted via the World Wide Web, several problems have been encountered regarding both the application of current trading laws to cyberspace and the integrity of internet users with regard to the brokerage industry. The Securities and Exchange Commission has recently published a report concerning on-line brokerage, which attempts to determine what the place of the brokerage firm will be in this Internet scenario, and what measures can be taken to regulate the transactions conducted on the world wide web. Many of the problems encountered with the advent of the Internet are analogous to those in conventional trading, and are addressed by existing laws and regulations. However, the Internet also presents unique situations that will require new methods of surveillance and enforcement by the regulators. First, there is the issue of computer systems: how to ensure that a firm s system has enough capacity to handle the marked increase in the number of investors that the Internet has generated. Second is a given firm s obligation to execute a customer s trade at the best monetary terms readily available(known as the Best Execution Responsibility ). Third is the application of the suitability doctrine , which requires a broker to recommend to his/her customer only those investments that are deemed suitable for that individual. Fourth is the general concern over privacy of investor s personal information, and the ability of a firm to ensure it. Last is the issue of insider trading and fraud, and the regulatory issues concerning these problems.

Discussion

First, there is the issue of systems capacities. In the past, many systems have suffered from things such as delays and outages, causing serious customer concerns over reliability. Firms will be forced to issue disclosure statements regarding the reliability of computer systems, and clients will tend to gravitate to those firms with the most dependable systems, and the systems that can handle the most customers. The SEC Report concludes the following.

The Commission should focus on methods to ensure more adequate systems capacity at all broker-dealers.

The Report recommends that the Commission consider requiring broker-dealers to:

1. Maintain and periodically test contingency plans;

2. Maintain records of significant systems outages;

3. Conduct regular systems testing and evaluation; and

4. Include plain English disclosure of the risks of systems delays or outages in new account documentation

Although occasional systems failures are inevitable, sincere effort has and will be devoted to ensure that such outages are infrequent.

Second is the question of Best Execution . This concerns a broker s responsibility to seek for their clients the most favorable terms that are readily available . Dealers must implement a regular analysis of transaction systems and investors must realize that however fast the Internet is, trades are not instantaneous. Consequently a uniform system must be developed to ensure that all orders are executed in a nearly equal and thus fair window of time. Failure to do so may be a violation of the antifraud provisions of the federal securities laws, in addition to quickly alienating customers who are now capable of quickly switching the companies with which they do business. T