Brokers Swarm to the Internet

The thought of connecting their multi-million dollar secure systems to the chaos of the Internet had the world’s stock broker technicians react with shock and horror when the idea was raised a few years ago, but that has flipped completely today. Now the rush to capture a lead position in electronic communication with clients has turned into a stampede.

Over the past couple of decades, we have seen the transition to electronic trading systems by professionals, and indeed -- if we include ATMs and credit/debit cards, most of the rest of us. The introduction of secure, effective means of communicating transactions has moved the speed of the world’s economic markets through several warp levels such that in professional markets, software programs of great complexity now run much of the trading activity; programmed basket trades and the like.

Yes, a human is responsible somewhere along the line in every transaction, if only to assure customers and regulators of the big banks and brokerages that their money is not flowing out of control through the hands (or digits) of unthinking machines. But in reality much of the action is handled by computer processors at blinding speeds.

This is a topic unto itself, but the detail of this history is instructive as we look at what is happening with stock brokers and their kin on the Internet. In the mid-seventies banks and brokers started examining the professional trading networks, first for assured security and then for usability. Both took many years of development and acceptance.

Indeed, it wasn’t until this decade that true acceptance of stock trading came into its own at the professional level with a combination of ubiquitous and reliable communications for the appropriate distributed computing. This coupled with the surge of “Nintendo generation” traders into trading rooms transformed the scene. Now electronic trading is a fact. A third of all professional trade in US stocks and much more at certain times, is moving between computers without a handshake, a head nod, a word of caution or thanks; that is, without human contact as part of the deal. And the markets, including customers and regulators, by and large are happy.

This experience wasn’t enough for the terrified technicians and their bosses to race ahead with connections to their clients for trading, indeed there were many reasons -- like large profits -- which would tempt them to keep the technology hidden away from the average investor. But entrepreneurs were quick to change that.

Organizations like Charles Schwab and Co and Lombard International, now a part of PaineWebber, led the way with early on-line trading using dial-up direct networks initially. Today that experimental business has exploded.

Hundreds of millions of dollars worth of investment products are being sold electronically, and this is just the beginning. As the first quarter of 1997 drew to a close, for example, Schwab said it had over 750,000 on-line brokerage accounts containing more than 50 billion dollars worth of assets www.schwab.com. Such electronic accounts were being added the rate of 11,000 a week, according to a spokesman. These are merely interrogated by many users, but increasingly the account owners are trading on-line and they are happy campers.

Forester Research was quoted in Fortune magazine recently as saying it expects to see ten million on-line accounts in five years, compared to a total estimated today at 1.5 million. This could well be a low estimate, given the rate of account growth Schwab reported.

The on-line users are very happy with this turn of events for several reasons. Foremost is the fact that commissions are lower. But perhaps as important is the real addition personalized trading makes to the quality of an individual’s life. The fast-pace so many of us live with requires that we increase the efficiency of everything we need to do, providing a bit of time for those things we only want to do. If a speedy trade can be done without mailing instructions, handling a check, being put on telephone hold, automated answering systems, brokers or even bank tellers chatting us up and things like s-t-a-n-d-i-n-g in line, the answer is: YES, and right now!

Even a relative newcomer to the game. E*trade which is now just about a year old, is putting on another 500 accounts a day, according to that same Fortune article. And the benefits roll on. There are reports of commissions dropping below ten dollars a trade at electronic brokers. This compared to 80 dollars or so at the so-called discount brokers and much higher numbers for the full service brokerage trades.

How much room is there to go? Quite a lot when you get down to it. At the professional trading level the costs are measured in a few cents per share today and there are those in the industry who say the real cost may be nearly flat when folded into the overall activity at major brokerages. Overheads will kill the big boys, but with no extra services and little staff, the
small players proliferating today are changing the landscape.

This may mean quite a shift for people dealing with corporate investors, from the CEO to the Investor Relations officer. There may well be a new class of holders who matter as much or more than the huge institutions that get so much attention today. While many consumer oriented companies have big individual shareholder bases, this will be a phenomenal change for the rest of the listed companies.

As cited in my first column on these pages, the National Association of Investors Corporation (NAIC) which comprises local clubs of individuals, doubled in size in about two years and shows no sign of slowing down. The current long bull market, privatization and simple, cheap trading from any PC is fueling this growth. And while the bull may morph to another four-footed beast, the trend for individual ownership seems to be set well in motion.

Individuals can get plenty of information on line, weakening the link to the broker who has been relied upon for tips and research for the clients. Now, more and more, intermediaries of all stripes are putting information together for trading homebodies, much of it at low or no cost.

Corporations have been fairly quick to respond with IR staff leading many corporate web site developments. But many more need to heed the trend. Slapping a few pages together from the annual report and accounts or even reposting the whole thing on-line will not be sufficient. Now corporations need to think afresh about this new environment and get to know how the use its tools.

Individuals drifting onto your site for a look-see have the power to communicate with each other, even to the big institutions, and if they don’t like what they see, they may well be recommending “sell.” A scary thought as the numbers of such owners balloon and the ease of their communication to large audiences blossoms with unfolding Internet technologies.

Today it is the sell signal from large brokerage analysts that triggers a rout in your stock, tomorrow, it may well be a well-orchestrated chorus from millions of on-line voices.

[First published in Corporate Online, 1997]

© Copyrightl 1997, 2001 Hally Enterprises, Inc.