Online Stock Broking

Impact of e-Business on stock broking

Ganesh.D.Shankar Dated: 26 Jan 2002

Ganesh.D.Shankar

1 of 8

Online Stock Broking

Impact of e-Business on stock broking............................................................................... 1 Introduction:................................................................................................................ 3 History of Stock Exchanges to Evolution of online Broking: .................................... 3 Major players: ............................................................................................................. 4 Impact of e-Business on Stock Broking: .................................................................... 5 Major Challenges and Issues faced by online stock brokers: ..................................... 6 Future Trends:............................................................................................................. 7 References:.................................................................................................................. 8

Ganesh.D.Shankar

2 of 8

Online Stock Broking

Introduction:
In this report, Ive attempted to analyze the impact of Internet and eBusiness on the stock broking industry. The report is organized in the following sequence: Firstly, there is a brief introduction of stock exchanges and the evolution of online broking. The next section discusses the major players worldwide and in Australia. The third section discusses the impact of e-Business on stock trading. The following section analyzes the major challenges and issues faced by the industry. Ive then discussed a few of the players in a greater detail and the way they cope with the challenges. Lastly, there is a discussion on the future trends of the stock broking sector. Buying and selling stocks on the Internet is one huge success story. Stocks are impersonal and stocks bought from Broker A is as good as that from Broker B so long as the prices are comparable. The motivation behind choosing this sector has been due to my active involvement in stock trading for the last 5 years.

History of Stock Exchanges to Evolution of online Broking:

The first publicly issued security can be tracked back to the fourteenth century in Venice where the government made the first known issue of bonds. These government securities were purchased by merchants and landowners as investments. In and around 1750s in England, traders in the shares of early companies would commonly meet in Jonathans Coffee House to trade shares and make business deals. Early share bids and offers were written on the Coffee House walls and the trading process was highly unregulated, with insider trading forming the basis for most investment decisions. By 1773, Trading Clubs had formed, and in 1801 a group of traders raised 20,000 pounds to build the London Stock Exchange in Capel Court. A similar process was occurring in America. By the early 1790s many merchants had begun trading shares. Just as in London, these early traders often met at coffeehouses in an informal environment. In 1792, 24 Brokers who each paid $400 for a "trading seat" signed the Buttonwood Tree Agreement. This agreement outlined the regulations under which shares could be bought and sold. These regulations formed the basis for trading rules that still exist today and led to the formation in 1817 of the New York Stock Exchange. Much water has passed under the bridge since then and we forward all the way to late 1990s. By late 1990s, most of the stock exchanges had been automated, and the open outcry method of trading was the thing of the past. Most stock exchanges began to use computers to replace floor traders. Floor traders take phone and computer orders from brokers, and negotiate a trade with stock specialists at trading stations on the trading floor. The internet orders placed by clients are first processed and authorized through the stock brokers computer system before being automatically placed on the stock exchanges computer systems. This period saw the rise in popularity and acceptance of online stock broking.

Ganesh.D.Shankar

3 of 8

Online Stock Broking

Major players:
The modern stock exchanges have grown to have an unprecedented number of stock brokers. This is understandable considering the market capitalization and trading volumes of the major stock exchanges. The entire wealth of the world is managed in these stock exchanges, so it is little surprise that so many dominant players can be spotted in addition to the thousands of small timers. Merrill Lynch HSBC, UBS Paine Webber, Charles Schwab, TD Waterhouse, Morgan Stanley Dean Witter, Wells Fargo, Credit Suisse First Boston , BNP Paribas, Citibank and American Express are a few of the major players world wide. These are a few of the bricks-and-mortars which have kept up with the e-Business wave to provide financial services, investments advice, market research, analysis and stock broking on the Internet. This sector is an excellent example of how some of these 100 year old companies and a few less than 10 year olds (born on the net) compete with each other and co-exist side by side. In addition to these world wide players, a few regional or country level players dominate the markets in many countries. For example in Australia, Commonwealth Securities (www.comsec.com.au),the stock broking arm of the commonwealth bank of Australia is the market leader. Likewise, In Germany, comdirect of commerzbank has the largest client base and capitalization. An interesting trend is that in every country, the major banks now have a stock broking arm and thus attempt to provide an integrated single window for banking and broking. They have successfully leveraged the brand names and trust to expand into investment services. From a purely Australian perspective, Commsec, TD Waterhouse Australia (now with Charles Schwab customers), E-Trade, Westpac Broking, Merrill Lynch-HSBC Australia are the major internet stock brokers. This list is by no means exhaustive; various investment houses like Salomon Smith Barney offer exclusive stock broking services for private clients. Most of these offer internet financial summary in addition to personalized investment services.

Ganesh.D.Shankar

4 of 8

Online Stock Broking

Impact of e-Business on Stock Broking:

The following are the major impacts of e-Business on stock broking industry: Internet made the securities market as transparent for Main Street customers as it was for sophisticated professionals and investment gurus in the wall street. The biggest impact of Internet was that it made a large amount of information available out there. Gone are the days when the key financial data that investors needed to make informed and profitable decisions was available only to the lucky few ``on the inside''. Now the turnover and profit figures, brokers' forecasts, details of how and why company directors buy shares and all the rest of it are just a few mouse clicks away for everybody. Small trades could be executed at a fraction of the cost that was previously charged to customers for similar trades. This encouraged a number of small investors to invest the money they can spare from the banks into share market. The investment community grew at an exponential rate when it became certain that investing is for everyone. A popular slogan summarizes it all You dont have to be rich to be an investor. But have to be an investor to be rich. Quality research and stock analysis could be disseminated to a number of people by e-mails and alerts. Investment tips and news scoops found themselves a more efficient medium to spread. This improves market activity and trading volumes, benefiting brokers with their commissions. Investment houses could provide these services, at a price, to investors who were interested, in an efficient and orderly way. e-Business didnt come alone, it came along with automated stock exchanges, electronic document holding services and efficient banking systems. Together these empowered a retail investor to provide a cheaper, more fun, more convenient and more reliable way of trading in shares than the old-fashioned way of using a bank or a broker.

Ganesh.D.Shankar

5 of 8

Online Stock Broking

Major Challenges and Issues faced by online stock brokers:

In order to address this issue comprehensively I distinguish the issues faced based on whether the organization is a click-only, born on the net organization or bricks-andmortars organization. In the end Ive summarized the issues faced by the industry in general. Issues faced by Born on the net Organization: Lack a global brand name, trust and reputation. Have to build these from scratch. When a known brand offers the same broking service at a comparable cost, these organizations lose out. Lack of well established branches puts these companies at a disadvantage when compared to players like the local banks which have a presence in every corner of the country. This spreads the reach of the brick-and-mortar players. Inability to provide a range of financial services discourages people whod rather see all their different investments and banking needs consolidated. Lack of an umbrella service encourages people to look for brokers who provide complete financial services. The bulk of their client base is made up of retail investors. Institutional investors and other high value and high volume customers prefer the traditional and blue chip brokers. Retail investors are typically easy come easy go and might prove to be inconsistent in trading habits. Retail investors have gained the confidence to trade shares independently, without the help of a professional broker during the recent Bull Run. But in a correction, many will get burned and lose confidence and thus affect the revenues of brokers. Hiring highly skilled personnel, analysts, researchers and business experts turns out to be too expensive for these newer firms.

Issues faced by Bricks-And-Mortars Organizations: The newer organizations do not carry the excess baggage of outdated legacy systems and infrastructure over capacity. Usually, the older bricks and mortar firms have a legacy system to integrate to and the technological advances are constrained by the ability of the legacy systems. An excessive manpower that desperately needs retraining, antique work cultures, hierarchies and attitudes are serious inertial forces to innovation in these bricksand-mortars organizations. They are slow moving, stirring when the smaller and newer ones are already on their toes. A significant portion of the business process needs to be reengineered around the e-Business model. Established brokers stall on the e-Business initiatives primarily because of channel conflicts with their own infrastructure of retail brokers. Companies now offer e-services services which directly compete with their retail client broking and investment services. Most of the bricks-and-mortars have successfully converted this competing medium as a value addition for existing and new investment customers. 6 of 8

Ganesh.D.Shankar

Online Stock Broking

Common Issues: The spread of PCs and telephony infrastructure determines the growth eBusiness. This might be a non issue in developed countries, but in developing countries, it is still the availability of PC, download speeds and reliability of telephony services that determines the success of e-Business and hence online stock broking. High competition among stock brokers has put significant pressure on the prices. With brokerages as low as AUD $15 per trade, a significant volume of trades is needed to break even, leave alone make a profit on it. Market consolidation and mergers are expected to keep the broking industry viable in the long run. Efficient Comparison Shopping is now available for retail customers who always look out for faster and cheaper alternatives. Demanding customers expect 24/7/365 transaction capability, instant access to information, immediate delivery, and customer service. Providing all these with minimum overheads requires innovative ways to cut costs.

Future Trends:
Mergers and acquisitions: In the highly competitive and over crowded market, shakeouts and bankruptcies of online brokers can be anticipated. The trend is towards a gradual consolidation of retail investors to a few dominant players or partnerships. Stock broking applications that provided services in various delivery modes, ie., internet, WAP, palm pilots, pocket PCs etc will get more common as more and more people start using these gadgets. Online broking would have a completely new meaning in this scenario. In a crowded stock broking industry, differentiation becomes the key to higher revenues. Better service, straight through processing (STP), immediate execution, portfolio services, investment advisors and telephone call centers or branch investment offices are needed to retain customers and to increase the revenue base.

Ganesh.D.Shankar

7 of 8

Online Stock Broking

References:
This assignment has used references extensively from the Internet and various books, magazines. In addition to all these sites below a number of sites were visited which formed the central idea behind this paper. A few of the web sites which were visited, in addition to the materials and articles supplied by the ACS, to understand the impact of e-business are as follows: a) www.CFO.com b) www.ml.com c) www.eBusinessForum.com d) www.TDWaterhouse.com e) www.brw.com.au f) www.pwcglobal.com g) www.sharechat.co.nz/education h) www.business-minds.com i) www.ibm.com/ebusiness/resource/

Ganesh.D.Shankar

8 of 8