Consumer Securities Trading in United States

The following is an in skill look at the effects the profits has had on art securities in the joined States. Its purpose is to define the impact of the Internet by find specific changes in the structure of the concern marketplace as a result of the numerous online securities firms that accept surfaced in the past a couple of(prenominal) years. A brief look at traditionalistic brokerages and market characteristics prior to the sexual climax of the Internet provides a foundation with which to measure many of its impacts.The stretch of the online brokerage model has non just introduced an only if new vehicle with which to deal securities, but it as well beginning to effect the way traditional brokerages assure their own phone line models. Specific totall(a)yy, it appears that both the online/ synthesis model and in ample advantage model of brokerages depart both comply in the next few years, with the top firms exhibiting characteristics aboutwhere amid the dic kens extremes. New Ameri betray television commercials debuted proterozoic this year with a twenty-something-year-old punk extolling the virtues of his new brokerage account to several(a) business men and women.Perhaps the witty E* deal commercial featuring monkeys that first off aired during the 2000 Super Bowl was to a greater extent storied. These commercials argon sort of a business to the traditional brokerage commercials of Merrill Lynch, Morgan Stanley Dean Witter, and Fidelity among others. This contrast is for good reason. Online brokerages start out uprooted the traditional model of consumer securities barter and harbor attracted a critical mass of followers. Before brokerage fees were deregulated 1975, eliminating fixed commissions, profession was something only done by the wealthy.Since then, fees have dropped considerably among the full- religious advantage firms making it manageable for much and more people to manage portfolios. Until 1995 in that respect was exc intake a wake little 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 slip ones mind of options for investors, new and old, to access an abundance of information and research, and to initiate their own merchandise ins all at considerably rebateed fees.According to Deutsche Banc, as of 2Q00, online brokerage accounts delineate almost 25% of all accounts in the United States. Furthermore, by 2003, online brokerage accounts ar estimated to control 50% of the brokerage market. The online model has already attracted n proto(prenominal) 20 million investors, initiating an increase in overall trading hoi polloi. 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(a) of consumer securities trading in the United State s. handed-down brokerages have been operating freely since 1975. The deregulating of brokerage fees at this time allowed new firms to enter the market, marking the first major alteration in the way Wall lane traditionally offered its go. Before 1975, the market consisted solely of full service of process firms, those firms who offer trading, research, and pecuniary advice by dint of brokers or financial advisors at a considerable fee. later fees were deregulated, dismiss firms began to appear, offering consumers smaller fees, but at the cost of less(prenominal) research and financial advice.The market slowly split between these devil types of business models, but they were fundamentally similar for 20 years riposte revenue by providing consumers the ability to treat and receive financial advice found upon firm research. The concept of having a broker, or financial advisor who acts as an agent for consumers, was the prevailing idea of line of merchandise trading in betwe en 1975 and 1995. Many of those who had portfolios would leave its management entirely up to their brokers, others would call sporadically for advice, and some would be actively co-managing their portfolios with the broker.The prevailing model for securities trading was remedy professionally managed, although different levels of management and cost evolved at this time. Wall Street was altered again in 1995, probably more really than in 1975, when securities trading and the Internet converged. According to the Securities Industry Association, K. Aufhasuer & Company was the first to melt down securities trading online in 1994. However, it was not until 1995 that the first online brokerages debuted their new business model. nerve impulse mounted quickly, as many investors flocked to the lure of extremely subtractioned prices and quick trade accomplishment. Without the brick and mortar comportment typical of the traditional brokerages and a significantly less extensive ne 2rk 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, preponderantly 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 totally 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 oftentimes cited reasons for the scramble of full service firms to enter the online market were customer pressure, and the consternation of asset flight to online brokerages, according to a Deloitte & Touche S urvey. The ability to distinguish these early online brokerages from 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 much get on extreme. Indeed, it is true that most of the firms that are classified to solar day 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 volatile in growth, catapulting from just one online brokerage in 1995 to an estima ted 170 in 2000, totaling 19. 5 million online accounts (refer 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 strategy 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 next two years, two major mid-discount firms appeared, E*trade and DLJdirect. In 1998, Charles Schwab made 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 will be explored in the next two sections. The impact of online brokerages is mani fested in nearly every aspect of the securities trading market today.Trading mess increase is one of the largest impacts, as a result of the ease and handiness of trading that online accounts bring to consumers. It is worth examining the figure of speechs 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 enormous increase, it is certainly quite significant. To look at it in other 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 volum e from online accounts is a result of day trading, 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 conceptional 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 earn a confirmatory spread on their transactions. The SEC is responsible for maintaining fair and orderly markets, to nurture investors, and to enforce 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 consecrate the relationship. Day trading is one negative result of the a dvent of online brokerages that will remain a challenge for some time to come. Another notable consequence of online brokerages is the further development of after hours trading. The New York Stock trade first expanded 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 advantageous to many investors in giving them more flexibility regarding time availability and for investors overseas who have holdings in US securities and cannot trade at regularly scheduled hours. by and by hours trading in 1999 represented 50% of all online transactions. Online brokerages have modify effect time quite dramatically to an average of 20 seconds per trade versus nearly 60 seconds for full service firms. In addition to modify execution time, the reliability and accuracy of online executions at discount firms is generally considered to be far superior to fu ll 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 by 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 un reachable. This hinges upon Internet penetration in the US, which is approaching 120 million active swelled 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 undergo enough 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 create revenue through their online offerings. This means they depend on accumulating customers who trade frequently in order to collect fees for trades made. Trade volume has been increasing quite dramatically over the past few, as the voice 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 credibly 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 while 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 expected 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 at that place is stil l a large disparity between discount 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 backup their trading services with plans for banking, insurance, and bill payment services. Currently, discount firms have almost 74% of their transactions online versus 18% online at full service firms.In a Deloitte & Touche survey, 100% of full service firms said they planned 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 shopping centre ground. As the author of the Deloitte & Touche study put it, the distinction between discount brokers an d full service firms is becoming less evident.There is distinct indorse 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 ground on one core competency (online vs. full service) and have significant characteristics of its counterpart. This is because each business model appeals to different segments of the population.It is generally agreed that full service firms have a distinct advantage in announce dollars and brand equity, and appeal to investors with more money and/or less experience of investing. Online brokerages appeal generally to investors with less money and/or more companionship of investing. At this point in time, they are quite distinct, but the go 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 skepticism that now stands is, who will win out? It is not an easy working class 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 ever-changing demands of consumers and technology, just as the top firms today are able to stuff the online channel. As Deloitte & Touche put it, firms that cannot be innovative will find themselves corner players or acquisition targets.