Online investing and trading (OT in short) has been a new phenomenon enabled
by the Internet. In a nutshell, it has helped to radically lower barriers of
entry into investment processes by decentralizing and atomizing them, that is
moving them away from large institutionalized exchanges and brokerages and into
the hands of practically any individual with the access to the internet. As
such, OT revolutionizes investment processes by making them much more responsive
to competitive market forces on a global scale. However, possessing adequate
knowledge has never been more important to achieving success in this area. This
report provides the critical knowledge that makes all the difference between
success and failure in online trading at the dawn of the new era.
Online trading assets are expected to grow from $415 billion in 1998 to more than $3 trillion by the end of 2003, according to Jupiter Communications. As trading on the web speeds toward mass acceptance, traditional financial institutions are scrapping with Internet brokerage firms and start-ups over the biggest piece of the online investing pie. The growth of online brokerages is forcing traditional "brick and mortar" financial institutions a run for their money. Competition and growth are increasing in the brokerage business.
Without a doubt, the Internet is creating sweeping changes in the stock brokerage and trading landscape. To begin with, the cost of making a trade has plummeted. Many on-line brokers offer trades for less than $10, and even stalwart traditional brokers like Merrill Lynch and Morgan Stanley Dean Witter & Co. have found themselves forced, during 1999, to announce on-line trades for as little as $29.95.
As solid proof that the cost of creating an additional on-line line trade is next to nothing, and support to the theory that on-line trading fees will continue to plummet, American Express has announced that customers keeping at least $100,000 in their brokerage accounts will be able to execute trades on-line for free via Amex's on-line brokerage. At the same time, American Express's aggressive new reach into no-cost trading proves up another irrefutable trend: the most viable way for stock brokerage firms to make money is through the control of substantial assets in their customers' accounts, not through fees charged for executing trades.
While there has always been a somewhat limited number of individual investors who trade stocks over the very short term, buying and selling a security in the same day or even in the same hour, the Internet has created an entirely new category of investors who attempt to make their fortunes through extremely rapid buying and selling: the daytraders. This has not only increased the total volume of stocks traded on U.S. exchanges, it has also vastly decreased the average amount of time that a typical common stock is held by an investor. Over 75% of the shares of the average U.S.-based firm listed on the NYSE changed hands last year. That is, if a company has 10 million shares outstanding, 7.5 million of them were bought and sold last year alone, on average. That percentage has soared from 46% in 1990, and 12% in 1960. While the average time that a share of stock is owned in traditional, old-line companies remains relatively long, the time line for the average ownership of a new Internet company is amazingly short. For example, the average investment in General Electric, Exxon or Johnson & Johnson is held for about 30 to 33 months. The average investment in Wal-Mart is held about 18 months. In contrast, the average investment in Microsoft is held only 6 months, and the average investment in Yahoo, Amazon.com, Doubleclick or Priceline.com is held for eight days or less.
Simply put, the Internet is an absolutely revolutionary catalyst in the financial services arena. It lowers the cost of saving, borrowing and processing funds transfers. It enables individuals working at their PCs at home to act like global financiers. The Internet has put so much money into action from so many new players that it is directly responsible for an immense increase in the pool of investment capital and the availability of venture capital. That venture capital is fueling the creation of new products, new services and new technologies that further fuel the investment fire. The Internet provides near-perfect, real-time market data and research to those willing to go to the trouble to dig it out of the hundreds of millions of web pages posted to the World Wide Web. The Internet is rapidly making markets of all types much more liquid and efficient.
On-line investors are using the Internet to their advantage, and the entire structure of Wall Street is changing as a result. The cost of trading stocks on-line has plummeted since the practice's inception, thanks to the low overhead achieved when an Internet-enabled brokerage cuts the amount of costly office space and support staff required to execute trades. Most on-line investors are not seeking personal investment advice - they know what they want, when they want it and how much of it they want. Consequently, they do not need to interact with an individual stock broker. Furthermore, an increasing number of investors are turning to the Internet to make an entrance into the investment community. Advisory material is readily available and easily located on the Internet.
One in every three individual investors' equity trades is now being made on-line, and nearly 15% of all individual investor brokerage accounts are Internet-based. By 2005, nearly all investors with access to personal computers will use the Internet for their stock and mutual fund investments - if not to enter trades and orders, then at least to gather information about the status of their accounts. As the Internet becomes a required distribution channel, the distinction between "on-line" and "regular" trading will disappear. Analysts at Jupiter Communications expect on-line trading at home to grow from fewer than 5 million households in the U.S. to 20 million households with $3 trillion in assets by 2003.
Global Digital Economy(TM)
The Internet is creating a more truly global economy than has ever existed. For example, if a company wishes to conduct a business meeting between its American, Japanese and German subsidiaries, it can now do so via on-line video conferencing, instantly and at any hour of the day. International finance, arbitrage, trading and currency exchange can now be practiced 24 hours a day from any location on the planet.
Equally as important, the Web provides a seemingly endless plethora of the latest global financial news with a great deal more expedience than the morning paper (though you can usually read that on-line as well).
Several sites have surfaced that place an increased emphasis on international, as opposed to domestic, finance. For example, Worldlyinvestor.com focuses on international investing for individual investors. Original content from columnists and correspondents peppers the site, which has its own rankings that enable country and sector-divided individual screenings.
Statistics
30% Jump in Online Trading 13 March 2000: Between the first half of 1999 and the beginning of 2000, online trading by US households took a 30% jump, according to JD Powers and Associates.
In its 2000 Online Trading Investor Satisfaction Interim Tracking Study, Powers further notes that this growth is derived primarily from baby boomers with portfolios of $100,000 and over coming online. Among all online traders, Powers estimates average portfolios increased 32% to $157,000 during the 8 month period under review. The report also points out that one-stop shopping for investment services is barely being utilized by online traders. Among the 0.8 million new entrants to online trading, only 12% use their trading firm for all financial needs. Only 15% of all respondents to the study used their firms in this way. The new entrants, moreover, were evenly divided between full-service firms and those firms whose primary business is online trading. For its tracking study, Powers uses a representative sample of 6,704 online investors nationwide. For context, eMarketer notes in its eFinancial Services Report, that 3.6 million users were actively trading online in 1999 and this number will rise to 5.5 million this year. The eFinancial Services Report also examines online banking, credit and insurance. (eMarketer, 2000) http://www.emarketer.com/estats/031400_powers.html
J.D. Power and Associates Reports: 30 Percent Increase in U.S. Households Using Online Trading Services FOR IMMEDIATE RELEASE: March 2, 2000 AGOURA HILLS, Calif.--The number of U.S. households that use an online trading service has risen from 2.7 million in May 1999 to 3.5 million in January 2000--a 30 percent increase--according to the J.D. Power and Associates 2000 Online Trading Investor Satisfaction Interim Tracking Study.SM These new entrants are comprised primarily of baby boomers who have investment portfolios of $100,000 or more. The study also reveals that new online traders are evenly divided between the full-service firms that offer online trading service and the firms whose primary business is online trading. "It is virtually a 50/50 split," said Andrew March, director of financial services at J.D. Power and Associates. "These customers have numerous options, and neither type of firm has overwhelmingly captured the hearts and minds of new traders. The battle rages for an increasingly affluent investor segment." Among all online traders, average portfolio size increased 32 percent to $157,000 during the eight-month period between the original and interim reports. Another notable finding is that one-stop shopping is a service which has not yet taken hold among online investors. Only 15 percent of study respondents use their online trading firm as a source for virtually all their financial needs, and of the new entrants into the market, only 12 percent use their firm in this way. "It still comes down to dependability through providing superior service and support with market and investment education," said March. The 2000 Online Trading Investor Satisfaction Interim Tracking Study is based on direct customer feedback from a representative sample of 6,704 online investors nationwide. The study represents a continuation of the analysis of the online investment trading market by J.D. Power and Associates. It details key trends in the marketplace including the top drivers of satisfaction as well as the behavior and loyalty of customers of the largest online trading services in the U.S. market. (J.D.Power, 2000) http://www.jdpower.com/releases/Online_interim030200.htm
eMarketer Presents: The eFinance Report, A Comprehensive Look at the Online Financial Services Industry in the US
eFinance puts online financial services in perspective with the other emerging e-commerce industries as well as the financial services industry as a whole. eFinance is a valuable reference for developing business and marketing plans, creating presentations, making informed decisions about online ventures in the financial services industry and answering vital," need to know now " questions.
The eFinance Report includes statistical information about market size and growth projections, assets and revenues, profiles of the online investor and e-finance user, analyses of online investments and more including a look at: Online Investing
Like any revolutionary practice, on-line trading's rapidly growing popularity requires the industry to constantly implement change. Firms must consistently upgrade computer systems in order to prevent catastrophic crashes.
Virtually all stock industry sectors are sharpening their technology as the market-sector battles flash. For example, for the first time in history, the New York Stock Exchange is considering trading NASDAQ stocks due to frustration with its inability to nab high-tech monsters such as Microsoft, Intel and Dell. The growth of technology stocks on the NASDAQ has taken a large bite out of the NYSE's market share.
Enhanced Technology and Extended Trading Hours: Due to increasing trade volume and investor demand, NASDAQ and the NYSE are completely changing the way they operate in several essential ways. For example, 24-hour trading is approaching quickly as on-line capabilities become increasingly ready to facilitate it. Already, some companies are building systems to allow investors to indulge in after-hours trading, and others are utilizing wireless devices to let customers trade at any time from any place. Individual investors will continue to demand enhanced services. The ability to make trades after normal market hours is a logical way to serve the needs of individuals who can best make time to manage their portfolios after normal working hours.
However, existing technology has to be upgraded before promised services get too far ahead of systems. In early 1999, several of the largest on-line firms experienced difficulties when tidal waves of trades were unleashed by the heady stock market. Among firms whose systems floundered were Charles Schwab Corporation, E*Trade Group, Inc. and Toronto-Dominion Bank's Waterhouse Securities, Inc. Ameritrade hired a technology expert as its co-chief executive in an attempt to forestall systemic computer breakdowns.
InvestorSoftware.com specializes in MetaStock Day Trading software for stocks, options and futures solutions for trading systems, charting, technical analysis and portfolio management
One of the most remarkable developments to spring from the on-line movement is the Electronic Communications Network, or ECN. These privately-organized networks of investors allow buyers and sellers of securities to post notice of their desire to trade directly to each other, via the network, bypassing stock brokers and traditional stock exchanges completely. These ECNs create highly efficient markets that lower transaction costs for participating investors. The cost of trading on an ECN may run from a fraction of one cent up to four cents per share, which may be as little as 99% lower than the cost of trading through a traditional market maker. While these networks are a relatively new development, there are already at least eight ECNs. Leaders include Instinet, The Island, MarketXT, REDIBook, Archipelago, Bloomberg Tradebook and The Brass Utility. These firms made a September 1999 announcement that they intend to create a joint, transparent network to make trading data and buy or sell orders available to members for extended hours and with enhanced accessibility. However, both the NYSE and the NASDAQ must be keenly aware of the competition from ECNs. Extended hours, enhanced services and even direct connection services identical to those offered by upstart ECNs could easily be offered by the major, traditional exchanges, rendering ECNs essentially superfluous. But that would only happen if the major exchanges created systems that could make trades at the vastly reduced costs offered by ECNs. Otherwise, the market share of these ECNs will continue to climb rapidly.
ECNs: Archipelago Attain BRUT Instinet Island NexTrade REDIBook Strike Tradebook ALTERNATIVE TRADING SYSTEMS Bernard Madoff Knight/Trimark OptiMark
The ECN Dilemma: Blasting Fragmentation, Wall Street Calls For a Centralized Market Structure That Threatens the Upstarts
The ECN Dilemma : Blasting fragmentation, Wall Street calls for a centralized market structure that threatens the upstarts Springsteel, Ian : Celarier, Michelle The Investment Dealers' Digest : IDD (New York) Mar 6, 2000 SOURCE TYPE: PERIODICAL PM_ID: 12398 ISSN: 00210080
Competition is something Wall Street always favors-at least until it starts to cut into profit margins. And these days there's a hue and cry from a wide variety of brokerages and investment banks against something that sounds a lot like competition. They call it "fragmentation."
In today's debate, that term refers to the plethora of equity trading markets that exist, thanks largely to a small group of electronic communications networks (ECNs) that have taken more and more business away from the traditional players.
The upstarts-Island ECN, RediBook ECN, The Brass Utility (BRUT) ECN, and Archipelago LLC, as well as the more seasoned Instinet Corp., to name a few-have started a revolution that has wound its way through the major marketplaces, such as the Nasdaq and the New York Stock Exchange, not to mention the major Wall Street houses. Now, apparently prodded by the Wall Street heavyweights, the Securities and Exchange Commission has jumped on board, promising to institute new market trading rules to get rid of "fragmentation." The question for the ECNs is an important one: Will they live or die?
There's little argument that in recent years, the bulge-bracket firms have been losing control of trading order flow to the ECNs, as well as online brokers like *E-Trade and Charles Schwab & Co. "These institutional firms have a huge interest in bringing the market back to them by centralizing it and placing controls on it," says Lon Gorman, vice chairman and president of capital markets and trading at Schwab, which is one of the most vocal opponents of such moves.
Calling fragmentation a "myth" and a "straw man," Gorman argues that the term "is really just the ability of market centers [ECNs, market makers and exchanges] to compete on different terms- execution, transparency, commitment of capital, speed, whatever. If we centralize that, we monopolize it, taking away consumer choice and the incentive for the remaining market center to innovate."
But others, including the SEC, fear that investors are being hurt by the competing markets. As a result, the SEC is currently considering a wholesale change to the market structure that, at the extreme, could force all orders to go through a central limit order book-called CLOB-with price-time priority. That means that orders from every exchange, ECN and broker-dealer would go into one place, where the first order received would be the first executed. Such a move has been endorsed by a number of major Wall Street firms. Indeed, five of them-Merrill Lynch & Co., Goldman, Sachs & Co., Morgan Stanley Dean Witter, Edward Jones and ABN Amro-joined together to present a 29-page "white paper" last month to the SEC outlining such a proposal.
These Wall Street players aren't the only critics of the current system. "With this much fragmentation, it's the smaller investors that get hurt," says Denis Kelleher, chief executive officer and co- founder of Wall Street Access, a brokerage firm that services wealthy individuals. "It's getting more and more difficult and complicated to get that extra sixteenth for our clients. Currently, the markets are so fragmented that you have to be looking in several places at once to get the best price, and even then there's no guarantees," he says. That's because to get the best price, one has to look simultaneously at the order books of several ECNs, Nasdaq's quote montage and elsewhere. It's a level of service, he claims, that only institutions and large retail clients can generally afford.
Can more competition actually be bad for investors? Annette Nazareth, director of the SEC's division of market regulation, explains that, "We have more market participation and more competing market centers than ever before, but we have to ask the question: How many competing centers is enough. We also need to ask whether we should require price competition, and how [to do so], especially if orders can't interact across market centers."
That's the problem the SEC is hoping to redress formally, after a year-long period of informal discussions with full-service institutions, ECNs, issuers, discount brokers, institutional investors and others by SEC Chairman Arthur Levitt and the commission staff. The SEC released its own white paper on market fragmentation and reform, known as a "concept release," on February 23, which reflected the issues layed out in the Wall Street proposal. Last week, at a Senate banking committee hearing on the "financial marketplace of the future" held in New York, the issues were, for the first time, debated publicly by several of Wall Street's most prominent executives and the leaders of the Nasdaq and the NYSE. The argument was over the need for a centrally linked equity market structure, something that is clearly in the interest of the Wall Street firms, but not the exchanges, or the ECNs.
Acknowledging that the ECNs are a phenomenon of the "new economy," Philip Purcell, chairman and CEO of Morgan Stanley Dean Witter, noted that "these developments have not been all positive. These alternative trading venues, while clearly responsive to the needs of end-users, are diverting significant liquidity away from the primary exchanges and Nasdaq, and consequently the stock market' is becoming increasingly fragmented."
To solve that problem, he spoke in favor of a system that would ensure that customer limit orders represented on the various market centers be collected, prioritized and displayed-in other words, a CLOB. In addition, he said, "a price-time priority rule is needed so that customer-limit orders displayed in this network will be executed on a first come, first served basis. Purcell called for competition among "orders," not "order-handlers"-customers, not market participants. Others speaking in favor of such a centralized system included Goldman Sachs Chairman and CEO Henry Paulson, Merrill Lynch Chairman and CEO David Komansky and CSFB Chairman and CEO Allen Wheat.
But brokerages with growing order flow and the ECNs support more disclosures and linkages among markets without routing all bids and offers through a central book. Such a system would affect these parties adversely, though in different ways. For the broker/market makers, a CLOB would essentially end their ability to cross their trades internally, which opens their client trades up to matches at other firms. For ECNs, more dramatically, a well-designed and mandated CLOB could duplicate and undermine the service they provide.
The future of ECNs
As the battle over market structure wages, it appears that the very existence of the ECNs are at stake. "I'm not sure many will survive if some type of central book system is mandated by the SEC," says Andrew Cader, co-CEO at Spear, Leeds & Kellogg, a specialist firm of the New York Stock Exchange that also is the biggest investor in RediBook. RediBook is now the third-largest ECN in terms of trading volume, after Instinet and Island.
On the other hand, there's little doubt that the trouble that the ECNs are creating for the institutional firms these days could only increase if some change in the structure of markets doesn't occur. James Marks, an electronic commerce analyst with CSFB, notes that the largest ECN, Island, currently offers executions at $0.0035 per share for market orders and will pay 40% of that for limit orders. That compares with institutional rates of six cents per share through traditional channels and three cents through Instinet, the granddaddy of the ECNs.
Marks predicts that institutions will move more of their easy trades through the ECNs-that is, the stocks in which they have the most liquidity, which tend to be the most liquid tech names also traded through Nasdaq's market maker structure. Market makers, as a result, will have to handle the rest of the less liquid Nasdaq stocks themselves, by providing liquidity as they have always done. "The result is that brokers [who are Nasdaq's market makers] will have to put up the same amount of capital for a decreasing share of volume," he explains. And that translates into a lower risk-adjusted rate of return.
If that sounds like dismal mathematics for the major Wall Street houses, consider what's going on at the ECNs. All that price-cutting means that "the underlying economics of the ECNs are fairly miserable," adds Marks. Given their low rates, he calculates that an ECN would have to generate volume of 300 million shares a day to have annual revenues of $75 million, and with NASDAQ trading over a billion shares a day, that would require a much bigger market share than any currently have. Instinet, the largest, had a 16.4% market share during the fourth quarter of 1999, and Island had a 7.3% market share during the same period, according to figures supplied by Chase H&Q.
Together, the ECNs have about 36-39% of Nasdaq's market share, according to Gregory Smith, electronic brokerage analyst at Chase H&Q. He believes that 40-45% is their natural limit "because they are order display facilities for limit orders and only a certain percentage of the market will ever be limit orders."
"It hardly needs mentioning that there can't be multiple ECNs generating 200 million or 300 million shares of volume," adds Marks. He suggests that the ECNs have two choices: "Either they generate enough order flow and liquidity to become exchanges with considerable value or they don't."
Some are trying just that. To date, Island, Archipelago and NexTrade ECN have filed exchange registration papers with the SEC. And while several ECNS, such as Island, RediBook and BRUT, claim to be profitable, consolidation is in the air. Last month BRUT and Strike agreed to merge, and alliances of different owners of ECNs may seek order flow agreements or combinations with rivals. "There needs to be more consolidation among the ECNs," says Brian Hyndman, CEO of BRUT. "It's true that investors are having to look too many places these days to see trading interest."
The failure of ECNs would be good news for Wall Street firms- despite the fact that they've invested tens of millions of dollars in the various ECNs and other electronic trading systems. Archipelago, for instance, is owned by multiple partners, including Merrill Lynch, Instinet, Goldman Sachs, J.P. Morgan, and Institutional Investor American Century Companies, among others. In addition to founder Spear, Leeds, other investors in RediBook include Donaldson, Lufkin & Jenrette, Fidelity Investments and Charles Schwab. And BRUT, still a subsidiary of Sun Gard Data System, includes more than 30 Wall Street names among its equity holders, including Merrill, Goldman, Bear, Stearns & Co., and Citigroup's Salomon Smith Barney unit.
"They would be quite happy to write off their investments in the ECNs," says CSFB's Marks. He quotes "one particularly savvy high- ranking trading executive at a major firm" as saying that "investing in an ECN is like purchasing an option against your worst rival controlling your business. If the ECN blossoms into something substantial, you've got the double payoff of a great return and control of a portion of the market. If the ECN fails and the option expires worthless, you're actually happy and the investment was just the cost of insurance."
If the option does expire worthless, as Marks believes may occur, some firms indicate they aren't too worried. For example, because of Spear, Leeds' position as a well-positioned intermediary in all of the equities markets, Cader isn't overly concerned with the future of RediBook. "RediBook is a money making business for us because we capitalized on existing inhouse technology and talent, and didn't have to start from scratch," he says.
"Maybe the primary markets won't get their acts together, but if they do, ECNs may very well be relegated to the role of order delivery tools rather than separate pools of liquidity," he says. "Either way, we like having chips all around."
RediBook's link to market maker Spear, Leeds gives it an advantage in the survival of the fittest battle. Instinet and Island, however, are the ECNs most widely expected to make it, according to analysts. Instinet has been around before the term ECN was coined, and Island is considered the technological visionary of the ECN world. Both have managed to amass considerable liquidity, Marks notes, adding that "liquidity is the only measure stick worth anything in gauging the value of a market."
Certainly Island seems unfazed by the unfolding events. "We look forward to competing with all systems, including any that might be put forward by our regulators," says Matthew Andresen, president and co-founder of Island. "We will compete based on speed, reliability, price and liquidity."
If it's not broke. . .
With their futures at stake, perhaps it's not surprising that the executives at ECNs aren't convinced that the so-called fragmentation is weakening the market system or even, in fact, that it has occurred to any great extent. "Order flow in Nasdaq is actually consolidating now, not fragmenting," says Andresen. He says that the top four market centers (either market makers or ECNs) now execute 60% of Nasdaq trades, up from 40% five years ago. The only thing that has changed, he says, is that Wall Street firms no longer control that order flow.
Andresen says the main problem of efforts to further centralize and rationalize order flow is that such a system would slow the market too much. "By trying to ensure price-time priority, my concern is that you actually destroy it because you will always be dependent on the slowest common denominator." That's bad news for Island, where it takes much less time to make a trade than it does on Nasdaq.
NYSE specialist Spear, Leeds also argues the markets don't need a centralized book. "Unless you go to full price-time priority, you have an unleveled playing field. If you have full price-time, then you're requiring customer orders to be filled in a certain way, which precludes competition on various attributes," says Cader.
Today's competition, or fragmentation if you wish, came about as the result of the SEC's allegations of price-fixing against the major Wall Street firms and wholesale dealers that control Nasdaq. The firms settled a civil class action on the matter in 1996 for more than $1 billion. As part of the reform that ensued, the new order handling rules that the SEC introduced opened the door to ECNs by requiring limit orders be displayed on the Nasdaq system and that the best prices be matched by market makers.
One might expect that progress has occurred. "Is the market fragmented in a bad way?" asks Chase H&Q's Smith. "I would say not. Look at the total volumes and the spreads compared to five years ago before the ECNs and the new order handling rules. It's a more efficient market than ever." Indeed, a study of the Nasdaq after the new rules went into effect shows a narrowing of spreads by an average of 30% and dramatic reductions in other trading costs.
Moreover, Cader argues that fragmentation "seems to have crested." One sign is that ECNs' share of Nasdaq volume did decline marginally during the fourth quarter of 1999, compared with the third quarter, to 37.6% from 39.1%, according to Chase H&Q.
An actual CLOB, at this point, says Cader, "would stifle competition and inhibit both full transparency and liquidity on demand at an institutional size from coexisting. The market wants and needs choice in how orders should be executed."
Adds Chase H&Q's Smith: "Theoretically a CLOB is absolutely the most efficient market-one place for interests to interact, one system, one set of expenses, one regulatory body and so on. But not in practice." He notes that people are already frustrated with Nasdaq, saying it is too slow, unreliable, and lacking in information. "You can get faster, more reliable, execution on Island, in the right liquid stocks."
Mandating full linkage of the various market centers, especially with full price-time priority, would essentially commoditize liquidity. According to analysts like Marks, and participants like Schwab's Gorman, this would devalue the creation of customer relationships and networks with differing characteristics, and likely inhibit innovation.
Will retail investors lose?
The real loser would be retail investors, according to Charles Schwab, testifying for his firm at the Senate hearing. That's because the big Wall Street firms want an exception to the CLOB for large block trades, given their ability to move the market. Indeed, Merrill Lynch's Komansky, in his written testimony for the hearing, supported the exemption for block trades, noting that "size trumps time." Allowing brokers to hold back those trades, he said, would "appropriately reward broker-dealers that have been able to garner sufficient customer order flow to find the other side of a large order."
Schwab, which obviously has his firm's own interest in the debate, claimed that professional traders would be able to closely monitor trading activity and "pick off retail orders just as the market starts moving against them, to step ahead of retail orders when the market starts moving in their direction." As a result, he noted, "forcing retail orders into a black box will put the ordinary investor at a further disadvantage to the institutions and professionals who hold back the bulk of their trading interests upstairs."
The SEC's main concern remains that markets aren't sufficiently linked to create full transparency, particularly in the on and off- exchange trading of listed stocks, and that they operate at dramatically different speeds resulting in price movements at one market center while another is still waiting for confirmation of a given trade. This is particularly true for listed shares traded over the Intermarket Trading System, or ITS, which connects the NYSE with the regional exchanges and the Nasdaq. Nearly all market participants are dissatisfied with it and its current government structure, and indications are that the SEC will recommend it be replaced completely, with support from Wall Street's main players, the ECNs and discount brokers.
But the major Wall Street firms argue that any new system should encompass all stocks, not just listed shares, possibly eclipsing, or at least encompassing, both the Nasdaq system and the NYSE. "We believe fragmentation of trading interest among competing market centers does have the potential to inappropriately isolate orders, interfere with vigorous price competition, public price discovery, best execution of investor orders and market liquidity," said Goldman's Paulson in his Senate hearing testimony. As a result, Paulson advocates "as our ideal model, an electronically driven central market-a single network, linked to every market and trading venue."
In his testimony, CSFB's Wheat added that such a model also has "the best chance to be the basis of a global capital market," an issue of concern to Wall Street, which fears losing more order flow overseas.
And now for the Nasdaq. . .
In addition to market changes that may be forthcoming from the SEC, the Nasdaq is also getting ready to change its system in ways that many believe could hurt the ECNs. Today trading in Nasdaq stocks are split between market makers and the ECNs over two separate systems, Selectnet and the Small Order Execution System (SOES). The management of Nasdaq has been trying to introduce an improvement to these systems through some sort of centralized display and execution system for more than a year. It finally filed a notice of a proposed change for a new system last December.
The Super Montage, as it is called, would create a voluntary CLOB for national market stocks, allowing display of trading interest at different sizes and prices, and providing individual dealer quotes at different prices and sizes. The system would also incorporate automatic execution capability, using both time and price priority.
Nasdaq is quite blatant about its plans to recoup the trading flow it has lost. "Our intent, by improving trading interest information and enabling more automatic execution, is to reconsolidate some of the trading and liquidity that has been flowing to ECNs lately," says Robert Bannon, director of institutional services at Nasdaq. "Super Montage would commoditize that information and ability, and will require ECNs to compete on a different issue, such as their user- interface."
Not surprisingly, many ECNs have opposed Nasdaq's plan, saying it exposes them to double executions due to the inherent delays of routing interest through the external system. This has been partly resolved by making auto execution an option rather than a requirement for such firms.
Meanwhile, for NYSE stocks, fragmentation is likely to accelerate over the coming year, as traders explore the possibility of moving many highly liquid stocks through ECNs, and trading among broker- dealers picks up. This effect will only be exaggerated if, as many expect, one or more of the ECNs that have applied for exchange status are granted it, and they become linked to the ITS. If so, they will be fully able to interact with the regional and New York exchanges.
Many observers believe that the upshot of the current debate is likely to be some middle ground. That would mean continued competition of market centers organized like CLOBs, with transparent books, automatic execution and substantial linkages to other centers.
So far, the SEC has been careful to insist that it will take pains, no matter what it decides to require, to allow and encourage competition among market centers for all stocks. "It is competition, above all else, that produces efficiency in our markets over time, and efficiency is a core element of the protection of investors," Levitt told senators at the recent hearing. "This truth defines our mandate: ensuring that competitive forces continue to shape our marketplace so the market's natural genius is permitted to unfold."
That would suit the folks at Schwab and the ECNs just fine. "The market should decide whether ECNs survive; they shouldn't be decreed out of business," says Schwab's Gorman. Island's Andresen is convinced that won't be the case, at least for his company. "The SEC won't deliberately stifle competition. As a result, whatever the new system is, we'll be part of it as a competitor, working on speed, service, reliability, cost-whatever it takes, we'll be ready."
Despite all the hurdles ahead, Chase H&Q's Smith is also bullish on the ECNs. "ECNs aren't just order matching engines, as many think, but technology companies," he explains. "No matter what happens in the markets, they will remain as gateways to accessing liquidity through their matching and order routing technology."
Copyright Securities Data Publishing Mar 6, 2000
Brokerages, Exchanges
[Summary]
The number of online brokerage firms has grown rapidly in the last several years. Some of the most popular online brokerage firms include:
Ameritrade - Features super-low, $8 trades. Charles Schwab - Rated best online broker for 1999 by Money Magazine. Datek - Also offers low trading rates. E*TRADE - One of the early pioneers. Selected as PC Magazine's Editor's Choice for Online Investing.
Other large online discount brokerages include:
Fidelity Investments - Fidelity now offers more competitive trading rates and many investing resources.
Brokerage Direct
DLJ Direct - No minimum account balance required.
Quick & Reilly
Key things to look for when choosing an online brokerage include their fee per trade, minimum account required, and performance parameters such as how fast they execute their trades. Obviously the reputation of the firm and overall reliability are key considerations.
Cyberinvest.com offers a nice comparison of more than 15 of the top online brokerages, comparing them on eight different dimensions. This should give you enough information to narrow down your choices for a new online broker. Cyberinvest.com also features several in-depth guides to choosing an online broker, including a comparison of the investing tools provided by each brokerage.
Apr. 2 (The Boston Globe/KRTBN)--If you like to trade stocks on the Web, there's a maniacal race underway for your business.
It's not only the specialty online brokers like ETrade and the discount brokerage pioneers like Charles Schwab who are vying for your dollars. It's also the mutual fund companies, such as Fidelity Investments, the traditional Wall Street investment houses, including Merrill Lynch, and the banks and insurance companies.
Cerulli Associates, a Boston financial research firm, says in its new Internet report that no fewer than 160 US companies are doing battle in the online brokerage business.
Half are discount brokers, companies like Schwab that were the first to provide advice-free stock transactions, for less money than the full-service Wall Street brokers would do it.
One-third are the new Internet-based brokers that have sprung up over the past few years.
The rest are day-trading firms, old-line brokers, and banks.
The rush into this business has spurred what Cerulli dubs the
"Internet effect": There are now 21 million discount brokerage accounts, more than half of them online. Without the Internet, Cerulli estimates, there would be only 12 million.
Since 1995, the value of assets in online accounts has surged, from $27.7 billion to $754.4 billion. Cerulli predicts $2.2 trillion by the end of 2004, as the number of online accounts rises to about 34 million. As many as 85 percent of all brokerage accounts could be online by then.
What's behind this stampede to Web investing?
The bull market has helped, specialists say, by making it appear easy
to profit from stocks.
But people also seem to like the do-it-yourself factor.
Observed John Payne, a Cerulli consultant who coauthored the report:
"Psychologically, there's a freedom there, that nobody's really watching you. You don't have to have any human contact at all."
The big traditional brokers, such as Merrill Lynch and Donaldson, Lufkin & Jenrette, like to think their advice is worth having -- and paying for. Indeed, as investors accumulate substantial assets before retirement, many turn to brokers or financial advisers for help.
But even those old-economy giants have taken the plunge into online investing. Some wealthy customers like to trade a portion of their money on their own, and young investors are more likely to use DLJdirect, Donaldson Lufkin's online brokerage, than to pay full fees to a human broker when their account holds only $15,000.
Different players are tackling this market in a variety of ways.
Fidelity hopes its mutual fund investors will open brokerage
accounts, even as it works to attract new brokerage business from outside its current customer ranks.
ETrade does direct marketing to bring in business and offers incentives, such as $75 in cash for opening a new account.
All the spending to bring in new clients has diverted attention from customer service, Payne said. As a result, the online brokers have been scrambling to add staff and phone lines to deal with the crush of investors who call on volatile market days or when Web sites crash.
"In the rush to grab market share, online brokerage firms are allocating lots of money to advertising to attract business, instead of upping their service to keep up," Payne said. But with so many people trading online, he noted, expectations for good service are rising: Firms " can never sit back and say, `OK, we've got it now.'"
So who's winning the battle?
San Francisco-based Schwab is still the undisputed king, according to
Cerulli's research.
"Schwab has just done a phenomenal job of scaring the pants off everyone," Cerulli consultant Kelly O'Donnell said. "They're a force to be reckoned with."
At the end of last year, Schwab boasted a 46 percent share of the online brokerage market, Cerulli found. Fidelity placed second, at 19 percent, having lost a few points last year. TD Waterhouse was third, with a 12 percent share, up from 7 percent two years ago. The other top online players are ETrade, Ameritrade, DLJdirect, Suretrade, Discover, Datek, and NDB.
The key is finding the best broker for your needs. Many analysts and financial magazines rate the brokers on price, Web site quality, customer service, and investment offerings.
Here are a few independent sites to check before you sign up, or if you want to shop around:
Gomez.com
TheStreet.com
SmartMoney.com
As online investing accelerates, service will become more important,
Payne said. Investors may like to trade with no human interference. But if they have a problem or need advice, they will want a lifeline. Firms that are able to offer both will be the winners.
"We think the human element is going to be the big differentiating factor," he said.
By Beth Healy The Boston Globe http://www.boston.com/globe
(c) 2000, The Boston Globe. Distributed by Knight Ridder/Tribune Business News.
FOREIGN BROKERAGES AND TRADING
The Irish Times
Buying stocks online is taking off in Europe. According to Forrester Research, online brokerage accounts are expected to rise from 1.3 million in 2000 to 14 million in 2004. At present, it is estimated that only 18 per cent of Europeans hold stocks compared to 40 per cent of US citizens.
Germany has the most active online trading market in Europe with 550,000 accounts. Forrester predicts a rise to 3.5 million German accounts by 2004.
Along with technical problems and changes, organizations in charge of regulatory practices have been forced to pick up the pace. Securities regulators are taking long, hard looks at day trading firms and those who promote rapid-fire trading designed to capture minuscule stock price differentials, as opposed to benefiting from long-term securities holdings. Firms offering investors a pie-in-the-sky picture of quick wealth gained through rapid trading are being thoroughly scrutinized by state and federal officials.
Television commercials aired by such firms often feature what are supposed to be average people getting rich quickly through Internet trading. These ads are being eyed by regulators as the distinction between humorous irony and false advertising blurs. Regulators may decide to target these messages, subjecting firms to fines or pre-airing clearance. In a June 1999 speech by Securities and Exchange Commission Chairman Arthur Levitt, allusions were made to the potential danger of humorous ads such as one of Morgan Stanley Dean Witter & Co.'s. In the ad, a truck driving on-line trader accumulates enough wealth to buy his own private island. Levitt apparently didn't find it funny.
Crack-downs on stock fraud are intensifying as well, with the implementation of cyber-cops and Internet patrollers. On-line message boards and newsletters shouldn't be a safe place for those engaging in fraudulent behavior. Newsletters that tout stocks but fail to give supportive data and proper disclosures are a target for these regulators, as are hucksters promoting stocks on-line to boost prices and then dumping the stocks.
The oldest international organizationdevoted to investor protection, the North American SecuritiesAdministrators Association (NASAA) consists of state/provincial securitiesagencies in the United States, Canada, andMexico.
To this end, we require that the firms and individuals who trade futures with the public become Members of NFA and that they adhere to the highest standards of professional and financial responsibility.
Learn About National Futures Association, Organizational Structure ... NFA Online News
National Association of Investment Professionals NEW!!! NAIP Requests FTC to review Online Brokerage Advertising NEW!!! Letter from NASD re: Qualified Immunity Contact Congressmembers Mission Statement What Does NAIP Do? Who Should Join NAIP? Application to Join the NAIP Code of Ethics Rules of Conduct Testimonials
The Bond Market Association represents securities firms and banks that underwrite, trade and sell debt securities both domestically and internationally. This site offers research information, legislative, regulatory and legal news on the markets, standard documentation, conference and publication information, and links to other industry resources.
Through programs of investment education, information, and research, AAII assists individuals in becoming effective managers of their own assets. AAII.com contains informative, educational and practical articles on various investment topics. AAII is a not-for-profit organization.
Phone Books Public Companies Annual Reports SEC Filings Private Companies Associations Non-Profit Organizations Other Corporate Resources
PUBLIC COMPANY STARTING POINTS Wall Street Research Network ssLists not only U.S. public companies, but also Canadian companies whose shares trade on the Toronto, Vancouver, Montreal, and Alberta exchanges. This appears to be one of the most comprehensive company sites on the Net. Data presented for each company includes links to the company home page and SEC filings, links to company news ( courtesy of Yahoo), and lots of data about the company's stock. Yahoo! Company Information ss Very easy to use.
Public Register's Annual Report Service Investor Relations Information Network Global Corporate Information Services: Japanese Company Reports Global Corporate Information provides annual reports for over 100 companies, short profiles of more than 800 companies, and links to 285 company home pages. The site can be viewed in English or Japanese.
Plunkett's On-Line Trading, Finance & Investment Web Sites Almanac: This book and diskette package will enable you to save countless hours in your on-line research and trading. Covers brokerage, investments, insurance, banking, economic data and much more..
The company information page links to approximately 14,000 companies for which Hoover's Online provides FREE information, including a corporate description, financial information, key officers, competitors and more.
Online Investor is the first investing magazine developed specifically for the digital age. An authoritative new force in the investing community, it separates hype from reality, empowering individual investors with the information necessary to make the Internet work for them.
About Our 90-Day FREE Trial Offer We think you'll enjoy Online Investor Magazine. If you're not 100% satisfied with your choice, simply contact our customer care center any time within 90 days of placing your order and your credit card will not be charged.
Arts & Entertainment Automotive Bridal Business & Finance Computers & Internet Education Fashion & Style Gay & Lesbian Gourmet Government Health & Fitness Hobby & Games Home & Garden International Kids & Family Lifestyles & Cultures Local & Regional Music News Pets Science & Nature Sex & Erotica Social Sciences Sports & Leisure Travel
Safe Shopping enews. com provides a safe & secure shopping experience.
NEW YORK , NY, Apr 08, 2000 (INTERNET WIRE via COMTEX) -- Internet investing has been lucrative beyond our wildest dreams. The tremendous returns are driving major changes in the traditional ways of doing business. Many investors have shifted their focus toward Internet deals to catch a ride on the Internet wave of opportunity. This conference will bring together investors with companies seeking capital. Topics to be address include: How deals are being structured; different approaches to investing in Internet companies; doing deals in a time of capital oversupply; investor diversity--who the players are and what kinds of deals they are doing; the competition for deals; screening deals; early stage and angel investing on the rise; different models of incubators; evaluating e-commerce deals; wireless deals; types of corporate investing and corporate venture capital; joint venturing; co-investing; strategic investing and alliances; syndications; valuations and exit strategies.
The presentations at this event will be given by: Acer Technology Ventures, AOL Investments, Arthur Andersen, Baker Capital, Barrington Partners, CrossFire Ventures, Draper Fisher Jurvetson, Euclid Partners, Exodus Communications, garage.com, GM Investment Management Corporation, i-Hatch Ventures, Impact Venture Partners, Infinity Capital, Intel Corporation, Legg Mason, Luminant Worldwide, Milestone Venture Partners, Morgan Stanley Dean Witter Venture Partners, NYNMA Angel Investor Program, Panasonic Internet- Incubator, RCW Mirus, RED HERRING, Ridgewood Capital, SOFTBANK Capital, StarVest Partners, THCG, Updata Venture Partners, VantagePoint Venture Partners, Venture Economics, Winthrop Stimson Putnam & Roberts, Wit Capital and Woodside Fund.
Keynote presentations scheduled for the morning of April 11 & 12 will cover:"Investment Challenges in the Internet Millennium", B.V. Jagadeesh, Co-Founder/CTO Exodus Communications, Inc.
"Will the Internet Bubble Burst", Anthony B. Perkins, Chairman, RED HERRING Author of: "The Internet Bubble"
The Conference is sponsored by: Arthur Andersen, Commonwealth Associates, IMCOR, Legg Mason, RCW Mirus, THCG, Updata Venture Partners, Valuation Counselors, Venture Economics and Winthrop Stimpson, Putnam & Roberts. Media sponsors include: Red Herring, Digital South and PR Newswire.
Copyright 2000 Internet Wire, All rights reserved.
-0-
CONTACT: Craig Simak EVP International Business Forum 516-594-3000 ext. 17
Omega Research presents OmegaWorld 2000 NY, a conference featuring a full agenda of keynote sessions, interactive special events, networking opportunities and a variety of comprehensive breakout sessions all focused around system trading and development.
globefund.com. Canada'sNational Mutual Fund Site. Track, analyze and compare performance ofany Canadian mutual fund. Read expert commentary and articles from TheGlobe and Mail, produce customized reports and charts, or track yourpersonal funds with Globe Portfolio.
The Complete Idiot's Guide to Online Investing provides an easy to understand book on the basics of investing and computing, researching your options online and using the Internet for your portfolio management
If mutual funds marked one of the first steps in the democratization of investing, online stock trading surely represents another. But while mutual funds were revolutionary- letting the middle class invest small amounts of money safely in companies throughout the world- online trading is devolutionary.
