Consumer Securities Trading in United States

The following is an in depth look at the effects the Internet has had on vocation securities in the United States. Its single-valued function is to define the impact of the Internet by determining specific changes in the structure of the profession food commercialise as a sequel of the numerous online securities firm firms that drop surfaced in the prehistoric fewerer years. A design look at conventional brokerages and food market characteristics prior to the advent of the Internet provides a foundation with which to survey many of its impacts.The arrival of the online brokerage exercise has not al one(a) introduced an enti swear new vehicle with which to raft securities, but it also beginning to effect the way traditional brokerages view their own argument models. Specifi bellowy, it appears that both(prenominal) the online/ send packing model and adept helping model of brokerages forget both succeed in the following(a) few years, with the top firms exhibit ing characteristics somewhere between the two extremes. New Ameritrade television commercials debuted early this year with a twenty-some intimacy-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 to a greater extent notable. These commercials atomic number 18 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 panoptic-of-the-moon- dish up firms making it possible for more and more people to coiffe portfolios. Unti l 1995 there was still a fundamental restraint for many consumers entree to timely and accu station info 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 investigate, and to initiate their own trades all at considerably dissolveed fees.According to Deutsche Banc, as of 2Q00, online brokerage accounts delineated approximately 25% of all accounts in the United States. Furthermore, by 2003, online brokerage accounts argon estimated to delay 50% of the brokerage market. The online model has already attracted nearly 20 million investors, initiating an increase in general trading studyity. An brief examination of the brokerage industry pre-arrival of the Internet and an in depth look at the brokerage industry today illuminates the many differences and possible implications for the future of consumer securities trading in the United States. handed-down br okerages have been operating freely since 1975. The deregulation of brokerage fees at this time allowed new firms to enter the market, score the first study alteration in the way Wall Street traditionally offered its operate. Before 1975, the market consisted solely of climb help firms, those firms who offer trading, research, and financial advice through brokers or financial advisors at a considerable fee. After fees were deregulated, sack firms began to appear, offering consumers smaller fees, but at the cost of slight research and financial advice.The market slowly split between these two types of business models, but they were fundamentally confusable for 20 years generate revenue by providing consumers the ability to trade and receive financial advice establish upon firm research. The concept of having a broker, or financial advisor who acts as an agent for consumers, was the prevailing nous of blood line trading in between 1975 and 1995. Many of those who had portfoli os 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 contrasting 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 steerer of extremely discounted prices and quick trade execution. Without the brick and mortar presence typical of the traditional brokerages and a significantly little extensive network of research and financial advice, online brokerages can off er transactions at fractions of the costs of traditional brokerages, even of the traditional discounters. The first online investors were, and still are, preponderantly a mix of young, first-time investors and older, more experience ones, harmonise 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 has changed however over the past couple of years. Traditional full-service brokerages are beginning to adopt their own online components.The two most frequently cited reasons for the stupefy of full service firms to enter the online market were customer pressure, and the fear of asset flight to online brokerages, according to a Deloitte & Touche Survey. The ability to distinguish these early online brokerages f rom full service firms is no longer a matter of whether or not they offer online services.The distinguishing feature now is between the cost of their services, segregating firms into a classification again of discount or full service. In a sense, the online model has redefined discount, moving the discount brokerage to a a good deal further extreme. Indeed, it is true that most of the firms that are classified today simply as discount are founded on an online business model or have quickly adopted online capabilities, but many of the full service firms, as mentioned, are turning to the online channel in hopes of competing with the discounters. Therefore, when an online brokerage is referred to, it implies both the discount firms and the few full service firms with online capabilities.The evolution of the online brokerage market has been explosive in growth, catapulting from salutary one online brokerage in 1995 to an estimated 170 in 2000, totaling 19. 5 million online accounts (r efer to Figure 1 below). The first online brokerages to emerge were predominantly deep discount, followed by mid discount firms, and finally some of the traditional discount incumbents adopted an online outline and are now classified as mid-tier firms. To illustrate this trend, consider the emergence of 5 of todays top 6 online brokerages In 1996, two major deep discount firms emerged, Datek and Ameritrade.Over the coterminous two years, two major mid-discount firms appeared, E*trade and DLJdirect. In 1998, Charles Schwab make their presence felt in the online market which was one of the few traditional discount firms before the online model developed. Fidelity quickly followed suit. This upsurge of online brokerages and the trend for some of the traditional brokerages to go online has had some lasting effects on the securities trading market, which lead be explored in the next two sections. The impact of online brokerages is manifested in nearly every aspect of the securities tr ading market today.Trading intensity level increase is one of the largest impacts, as a result of the ease and availability of trading that online accounts bring to consumers. It is outlay examining the numbers to determine if the large increases in trading volume are actually a result of online accounts, or merely pure correlation with a booming bull market. Over the past decade, the volume of shares traded on the NASDAQ stock market has grown at a compound annual rate of 26%, but since the arrival of online brokerages in 1995, it has grown at a rate of 30%.Although this is not an capacious increase, it is certainly quite significant. To look at it in another light, online accounts represented 15% of all brokerage accounts in the US, but more than 37% of the trading volume. Based upon past experience in the stock market, it may seem that this increase in trading volume is an entirely productive result. However, much of the trading volume from online accounts is a result of day t rading, which raises concerns with the SEC. Day trading was not possible before online brokerages made it possible to quickly and effectively trade securities multiple times daily.It is a speculative business, more so than the traditional brokerage business. As Deloitte & Touche describes it, Customers usually trade in and out of several securities positions every day hoping to lay down a positive spread on their transactions. The SEC is responsible for maintaining fair and orderly markets, to protect investors, and to compel securities laws that were established upon principles that day trading discards. According to a Deloitte & Touche survey, 62% of discount firms said they would offer services to day traders versus 0% at full service firms.Most online brokerages recognize that day traders make up an integral portion of their customer base, and do not wish to sacrifice the relationship. Day trading is one negative result of the advent of online brokerages that will remain a ch allenge for some time to come. some other notable consequence of online brokerages is the further development of after hours trading. The New York Stock Exchange first spread out its hours to off hours trading in 1991. The NYSE added a modest extension extending the after hours from 4pm to 515pm. It is now possible, with an online account to trade at any time.This can be valueous to many investors in adult them more flexibility regarding time availability and for investors overseas who have holdings in US securities and cannot trade at regularly scheduled hours. After hours trading in 1999 represented 50% of all online transactions. Online brokerages have meliorate execution time quite dramatically to an median(a) of 20 seconds per trade versus nearly 60 seconds for full service firms. In addition to improved execution time, the dependableness and accuracy of online executions at discount firms is mainly considered to be far superior to full service firms online counterparts .The reasons most frequently cited for this are two-fold. First, most discount firms are built upon an online model, it is their core competency, allowing them to devote all of their efforts to perfect the core of their business model. Discount firms rely on trade volume for revenue, not asset accumulation, so it is imperative that their trade execution is the best that it can be. The second reason for superior trade execution at discount firms is that full service firms simply do not devote the same technological resources to their online channel.Full service firms focus generally on performing cutting edge research, and providing sound financial advice through its network of brokers. The speed and reliability in execution at discount firms has been one of the top attractions of investors, along with largely discounted prices. The online brokerage market has also greatly impacted the availability of brokerage services to those who were previously unreachable. This hinges upon Int ernet penetration in the US, which is approaching 120 million active adult Internet users, or a penetration rate of 50%.As was mentioned previously, the first investors to move online were mainly those who were brand new to securities trading, or those who were experienced generous to feel confident trading with little or no professional advice. Most of them brought below average asset values online. In fact, in mid-1999, although online accounts represented 15% of all brokerage accounts, they only represented 5% of the total assets. As stated previously, these accounts also accounted 37% of the trading volume. That would indicate that the online brokerages do not focus on producing revenue through asset accumulation, but through trading volume.This has some major implications to be discussed in the next session. The majority of discount firms rely on trading volume to bring forth revenue through their online offerings. This means they depend on accumulating customers who trade fr equently in order to ask fees for trades made. Trade volume has been increasing quite dramatically over the past few, as the percentage of online trades increases as a proportion of total. This bodes well for the online brokerages who are accumulating customers, although those players who are at the bottom of the pack will plausibly fall out soon.The market is remarkably consolidated after just 4 years in existence. In fact, the top ten online brokerages comprise 90% of the online assets and accounts, and the top 4 comprise 86%. Those brokerages who are having a tough time accumulating customers and trade volume even spell the online brokerage market is hot, will likely fall out soon. Referring back to Figure 1, it can be seen that the number of online brokerage firms is expect to decrease over the next few years while the number of online accounts increases. The online industry is consolidating quickly while continuing to grow.Although there is still a large disparity between di scount firms and full service firms in terms of how they operate and what they offer, this is likely to change in the coming years. Already, the trend for full service firms to go online is in motion, and there are even some discount firms that are beginning to complement their trading services with plans for banking, insurance, and bill payment services. Currently, discount firms have approximately 74% of their transactions online versus 18% online at full service firms.In a Deloitte & Touche survey, 100% of full service firms said they mean to use online trading to enter new businesses, create alliances, or shift the business model, and 74% of discount firms said they planned to add additional services that are typically offered only by full service firms. It appears that the two extremes in brokerage services are headed towards a common middle ground. As the author of the Deloitte & Touche study put it, the distinction between discount brokers and full service firms is becoming less evident.There is distinct evidence that the brokerages that will prevail in the next decade will have features of both a discount brokerage and a full service brokerage. A 50/50 hybrid model of online and full service could prevail, but it is more likely that the future constituents will be based on one core competency (online vs. full service) and have significant characteristics of its counterpart. This is because each business model solicitations to different segments of the population.It is generally agreed that full service firms have a distinct advantage in advertising dollars and brand equity, and appeal to investors with more money and/or less knowledge of investing. Online brokerages appeal generally to investors with less money and/or more knowledge of investing. At this point in time, they are quite distinct, but the gap is closing. Another salient example of this phenomenon is that the top focus of current trade strategies for 18% of online brokerages is to build brand equity, a la the full service firms. Each model, discount and full service, is moving to a common ground.The question that now stands is, who will win out? It is not an indulgent task to predict the future, or the future of brokerage services in the United States for that matter. One thing is for sure the online channel will succeed. The top brokerages of the future will certainly incorporate online components very significantly. Those that will continue to succeed will be able to be flexible and adjust to the changing demands of consumers and technology, just as the top firms today are able to embrace the online channel. As Deloitte & Touche put it, firms that cannot be forward-looking will find themselves niche players or acquisition targets.