Stock Brokerages

Overview

Intermediation Needs

1) Discount online brokers like E-trade who offer deep discounts and market analysis.

2) Online websites of the traditional brokerage firms like Merrill Lynch that offer discount transaction fees and market analysis

3) Online websites of the traditional brokerage firms like PaineWebber that utilize the Internet to foster communication between brokers and clients but do not offer discount trading.

Risk Management

The stock market by its very nature is risky. Individuals who participate in the markets invest with different strategies depending upon how risk tolerant or adverse they are. Investing through a cybermediary or an offline broker offers no assurance that a profit will be made. The advantage of the offline broker however, is that they can serve as a sounding board for the investor's ideas and can offer investment advice.

With the heavy flow of data on the Internet, it is sometimes difficult to differentiate between high quality information and "noise." By lowering the barriers to entry, the Internet makes it easy to perpetrate the same old frauds through a new medium. The Internet allows fraudulent misstatements to be disseminated more broadly, quickly, and cheaply than other media. For example, it only costs $300 to buy 12 million e-mail addresses to send mass e-mails, or "spam," that hype a particular stock. It also is increasingly possible to affect markets in particular securities through anonymous chat room discussions, regardless of whether the information is accurate. As one famous New Yorker cartoon put it, from one dog sitting at a computer terminal to another dog, "on the Internet, nobody knows that you are a dog." Thus, the brokers may be able to steer the investor away from high-risk investments based on their knowledge of the market or industry trends.

Another area of concern related to investor risk is security that remains a strong concern with companies that allow trading over the Internet. In spite of the increasingly sophisticated security systems built into the browsers offered by Microsoft and Netscape, they are not infallible. Internet security is not perfect. Some hacker somewhere in the world might be able to intercept passwords and account information and place unauthorized orders to buy or sell. This is a risk, although small, that investors should take into consideration as they buy or sell stocks through a direct Internet connection.

Services such as buying and selling stock and obtaining prospectuses are typically accessed directly though brokerage houses. These can be either obtained through an offline broker or at the website of the brokerage house.

Depending on the level of customer support investors require, the buying or selling of stocks can be conducted through the website of a large offline investment house or a pure online firm. The two differ in the amount of customer support and research offered and the size of the transaction fee levied. A higher amount of services is directly proportional to the transaction fee imposed.

Trends and Generalizations

Because it is so easy to compare financial products online, consumers' power is growing. Brokerages have responded by adding features and services on their websites to compete for investors. Competition for this exploding consumer demand is fierce. Internet-only brokerages are shaking up the business models of traditional full-service brokerages. The bargain-basement shopper can now execute a trade for less than $10 at online brokerages such as ETrade and Ameritrade whereas traditional brokers can charge as high as $70 or more per trade. As more companies match Internet services, Web financial products may become commodities, and companies will have to find ways to differentiate themselves and retain customers.

In the end, offline brokers will not be disintermediated however. They will continue to provide sound investment advice and services to investors who can benefit from their knowledge like the novice and those who prefer a hands-off approach. Merrill Lynch managers even go so far as to encourage our clients to go online. "Informed clients ask better questions. Online-enhanced dialogues are more in-depth and to the point. Clients are empowered." according to John Steffens, Executive Vice President. The Internet-only brokerages will also survive, providing an outlet for the knowledgeable investor and keeping the transaction fees of the big guys in check.

Reference List