The Emergence of Online Brokers

The New York Stock Exchange (NYSE) was established about the same time as the LSE. The NYSE members charged for their services on the basis of a commission rate set by the Securities and Exchange Commission (SEC). The NYSE had the authority based on SEC´s permission to set the minimum commission rate.

This fixed commission rate limited the competition among brokers and consequently led to high rates and an oversupply of services1. At some large volume trades, the broker’s share of the commission could be as high as 90 %. This non-fierce price competition led to over-pricing where commission alone often paid for the entire package of products such as order handling, advisory service and research.

By 1968, occurred something that should prove to be the turning point for this artificially regulated market. The NYSE appealed to SEC for a routine increase in the commission rate. However an unexpected intervention from the U.S Justice department questioned the need for price increase and even more the need for the fixed commission structure.

By May 1st, 1975 SEC eliminated the fixed commission structure. Today that day is widely known as “May Day”. The effects of the intervention were dramatic, as brokers started to compete on prices cutting commission down to half within short time. However, these breaks did not affect the individual investors until the discount brokers like Charles Schwab and TD Waterhouse emerged.

The traditional brokers sought to lure customers, with a wide service offerings opposed to the discount brokers who focused on inexpensive and simple trading. Accompanied with aggressive marketing did the discount brokers manage to create a niche. In the 1980s the first online brokers were introduced through networks like General Electrics Network for Information Exchange. The Internet trading however did not take off until the 1990s, but when it finally did it radically changed the industry.

This was mainly due to two technological advantages the Internet offered; First, online brokers could provide less expensive trade execution than their offline counterparts. Placing orders online allowed investors to circumvent personal brokers and thereby reducing transaction costs.

Secondly, the Internet contributed to the emergence of online trading by becoming a medium of information. Large groups of consumers became increasingly sophisticated and more able to direct their own financial affairs without the help of a broker through the transparency the Internet facilitated. Thereby the Internet eroded the personal brokers main advantage: access to superior information.

History of the Financial Service Industry and Online Trading click here to read

Online Trading during the first years of the new millennium click here to read

Uriel

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