Online trading is a relatively new phenomenon. Traditionally stocks had been bought and sold through a representative of a firm, called a broker. The investor, or trader, would ask their broker to buy or sell a certain number of shares at a certain price, and the broker would enter the information into the system and thus execute the order. The broker would also advise the client on market trends, decisions to buy or sell certain commodities, general investment strategies based on detailed market information received from the main office. These communications between the broker and investor would take place over the phone or in person. For such services the investor would be charged a certain quantity according to the amount of the transaction taking place and, more often than not, a processing fee would also be included in the final receipt.
1995 has been chosen by most analysts as the year that investors began taking trading into their own hands online. Investors saw many distinct advantages to performing their trades online, without an intermediary from a firm. Perhaps the greatest advantage came in the form of economic savings for investors. For example, trades performed through full-service brokers on average sized trades usually amount to around $90. Online trading websites, however, charge approximately $15.75 for an average sized trade. Firms claim that higher prices are justified because of the advantages of going through a trained professional. Yet, the large discrepancy between the two prices all but made the choice easy for most investors: trading online meant a cheaper way to make money.
Full-service brokers, companies claimed, were the key distinction between trading online or through a broker. A full-service broker offered invaluable tips on market trends and sometimes took an active role in managing the portfolio of a customer. This, in turn, translated into better, more informed decisions for investors, and the knowledge that they had the smarts of an entire firm backing their decisions. However, brokers "have routinely provided this information routinely only to high net worth individuals and institutional investors, such as the firms that manage mutual funds and state pension funds"(On-line). Thus, the casual middle-class investor, arguably the one most in need of such information, was left with the short end of the rope.
Once investors began to learn about the online trading the power began to shift. Websites offered investors the ability to trade on their own time, not having to worry about the office hours of their broker. Being online also gave investors the opportunity to research specific stocks whenever they wished. Unlike brokers, websites offered market data, company and industry reports, historical charts, analyst recommendations to any and all customers for free. And as the internet became faster, ticker tape information became available at an almost real-time rate, offering investors the opportunity to make "easy" short-term gains.
The growth rates of online trading are phenomenal. From its minor beginnings, this area of securities industry has become an important factor for many brokerage firms. Many large firms are, or have already, opened up websites allowing investors to trade with well established companies. On the other hand, many new firms have sprung up as well, hoping to take part in a very bright market. Since 1997, there has been high overall growth in this sector, although it has dwindled in size from its highs in 2000. The millions of trades, accounts, and customers are demanding large scale efforts on the part of these companies to offer competitive service. All the information within this section has been collected from records kept by industry analysts, the Securities and Exchange Commission (SEC), and the Nastional Association of Secuirites Dealers (NASD).
Possibly the most indicative number relating the extreme growth of the industry, is the number of companies that are now taking part in the online-trading market. From the last quarter of 1997 until mid-1999, the number of brokerage firms offering online trading systems has more than doubled to 160. The SEC, in their 2001 report, estimated the number of companies offering the option of online trading to be at about 200. The report also concluded that this number has probably grown larger since their report was published. These companies formed at an opportune moment to take advantage of the ever increasing number of accounts that were being created.
Account numbers have been even more drastic in their increase. In 1997, the number of online accounts was held to be at 4.1 million, and by 1999 this number had increased to nearly 10.5 million by the last quarter of the fiscal year. From the beginning of 1999 to the second quarter of 2000, the number of online accounts continually increased at a rate of 10% per year. Quarterly growth then slowed to just under 6 percent since that time. The large numbers of accounts being opened represents the necessity to monitor online brokerage websites to ensure their correct functioning and proper service.
The daily volume of trades, however, has not followed the same general trend seen both in account and company number growth. Trading actively sharply increased through the first quarter of 2000, but then declined by the fourth quarter. In the first quarter of 1997 the average volume of online trades was measured to be at about 455,000 a day. By the first quarter of 2000, this number had almost tripled to 1,242,500 online trades per day. As the year continued, the number of trades decreased to an average of 900,000, which, though lower than first quarter numbers, was still much higher than the 1997 volume.