The Emergence of On-line Trading and its Effects
All the enthusiasm in the brokerage industry no longer centers on mutual funds as it did before internet became an everyday household word. Now, much attention surrounds on-line investing in the brokerage industry. On-line investing has only recently begun to expand at astronomical rates. As personal computers become nearly an essential part of life, consumers are beginning to manage their portfolios on-line. Full-service brokerages may now be facing competition from their cyberspace counterparts as these Internet firms expand into their market. With the proliferation of new firms in the industry, consumers are becoming exposed to increasingly lower trade prices. As in any industry, the growing role of technology will lead to many changes. The structure of the industry as well as the conduct and performance of the firms within it will give an idea of where this industry may be moving. From my research and analysis, it seems evident that the industry is growing due to the emergence of on-line investing. Also, on-line brokers and full-service brokers are converging towards a middle ground as the industry adapts to this new technology. First, it is necessary to give some background information on this industry. A
The Internet has not forgotten the mutual fund industry. Product differentiation on-line seems to have no limits. With daily on-line trades averaging 253,000 in the third quarter of 1998 and a 33% increase from the first quarter of the year, according to Credit Suisse First Boston, the importance of an on-line presence can no longer be ignored. On-line brokerages are expanding into this market to compete amongst themselves as well as with full-service brokerages. Almost $1 trillion poured into the funds between 1994 and 1997 according to Smartmoney magazine. Growth opportunities, customer demand, and competitive pressures will ultimately bring mutual funds to all on-line brokerages. Mutual funds themselves have started to move in on the Internet. These sites typically only provide financial information and track records though. Investors will choose a brokerage to buy these funds. With an increasingly amount of information on the web, an investor looking for a mutual fund may need to only look on the internet to find the right mutual fund for him. The investor then can buy it using the cheapest online broker. This action is contingent on the fact that the investor can translate all the technical jargon involved with researching mutual funds. If the investor is uneducated with investing vocabulary or does not understand the significance of a mutual fund's financial information, he may be better off with a full-service broker. Competition amongst themselves may be keeping full-service brokerages from effectively competing with on-line brokerages also. Smartmoney magazine recently ranked the full-service brokerages in its fifth survey. They were ranked on the criteria of stock research, range of services, breadth of products, commissions and fees, mutual funds, account information, and staying out of trouble. The first three criteria mentioned were double weighted because of their importance. The amount of stock research done by each firm depends much on the labor force of the brokerage. The more researchers and analysts, the more effective research tends to be. Also, the range of services offered by the full-service firms is extremely important. This is what consumers look for when they choose a full service broker. To attract consumers, full-service brokers have to offer the most services as possible. The full-service brokerage industry is much older than the on-line industry, so new advancements are not as frequent. When they arise though, full-service brokerages need to acquire the service quickly to avoid losing customers. Since the price is so much higher then discount brokerages and on-line brokerages, the firm must justify their prices with these services. One reason many full-service firms may not offer on-line trading is perhaps the fear of traditional investors becoming comfortable with Internet trading. If these traditional investors who have consulted a broker over every transaction in the past start to trade on-line, the need for full-service brokerages may dissipate. Some full-service firms have opted for a different approach that will be discussed later. It consists of leveraging their research and many analysts to serve the Internet based investors through subsidiary firms. In addition, full-service brokerages have recently increased their advisory services with estate planning and tax counseling. Most of these firms also have brokers assigned to specific accounts. The breadth of products is much broader in the full-service sector than in the on-line and discount sectors. Full service accounts offer initial public offerings, futures and commodities, and mortgage financing. Discount and on-line brokerages keep their prices down by limiting what they offer. As full-service firms began to expand on the Internet and discount brokerages and on-line brokerages expand their services, a new model of competition may evolve to encompass the entire securities industry. s of Se
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Approximate Word count = 4894
Approximate Pages = 20 (250 words per page double spaced)
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